Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Forward Looking Statements disclaimer and our consolidated financial statements and related notes in Item 15 of this Report. During 2024, our results of operations were impacted by various transactions - see "Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions" further below.
Overview
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 Fund, 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 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.
For the purpose of reporting key operating metrics, commencing with the fourth quarter of 2024, we are focused on the properties in our In-Service Portfolio. The In-Service Portfolio in the fourth quarter of 2024 consisted of our Total Portfolio excluding our Development Portfolio. The Development Portfolio consists of one office property and one multifamily property whose operations are significantly limited by the development activity and are excluded from our In-Service Portfolio statistics and operating metrics. Our portfolio statistics and operating metrics as of December 31, 2024 were as follows:
In-Service Portfolio Development Portfolio Total
Office Portfolio
Number of Properties 69 1 70
Multifamily Portfolio
Number of Properties 13 1 14
In-Service Portfolio Leasing Statistics
Office Portfolio
Leased Rate 81.1 %
Occupancy Rate 79.2 %
Multifamily Portfolio Leased Rate 99.1 %
Revenues by Segment and Location
During 2024, revenues from our Consolidated Portfolio were derived as follows:
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Debt and Equity Transactions, Development and Repositioning Projects, and Other Transactions
Debt and Equity Transactions
During the first quarter of 2024:
•We acquired an additional 20.2% of the equity in our unconsolidated Fund, Partnership X, which increased our ownership interest in the Fund to 74.0%.
•We acquired 166 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
•We acquired 461 OP Units for $6 thousand in cash.
•In connection with the Barrington Plaza loan, we signed a construction completion guarantee. See "Development Portfolio" further below for more information about Barrington Plaza.
During the second quarter of 2024:
•We acquired 27 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
•We acquired 703 OP Units for $10 thousand in cash.
During the third quarter of 2024:
•We acquired 20 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
•We acquired 6,798 OP Units for $105 thousand in cash.
•Interest rate swaps, which fixed the interest rate on a $400 million interest-only, floating-rate loan that matures in September 2026 for one of our wholly-owned subsidiaries, expired during September 2024, and the interest rate on the respective loan is now floating. We also paid the respective loan principal down by $34.0 million in order to meet a minimum financial threshold to exercise an extension option.
During the fourth quarter of 2024:
•We acquired 17 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units.
•We acquired 872 OP Units for $17 thousand in cash.
•Interest rate swaps, which fixed the interest rate on a $200.0 million interest-only, floating-rate loan that matures in September 2026 for one of our wholly-owned subsidiaries, expired during October 2024, and the interest rate on the respective loan is now floating.
•Interest rate swaps, which fixed the interest rate on a $400.0 million interest-only, floating-rate loan that matures in November 2026 for one of our wholly-owned subsidiaries, expired during October 2024, and the interest rate on the respective loan is now floating.
•During December 2024, we closed a new $325.0 million loan for one of our JVs. The loan is secured by the JV's five office properties and matures in December 2028. The interest rate is SOFR + 2.5% and we used interest rate swaps to swap fix the rate at 6.36%. The swaps are effective on January 6, 2025. The loan requires monthly payments of principal and interest commencing on January 5, 2028 for twelve months based upon a 25-year principal amortization schedule. The loan replaced a $400.0 million loan which we paid off using proceeds from the new loan as well as cash on hand in the joint venture.
•We entered into a new consolidated JV in December 2024 that we manage and in which we own a 30% interest. The JV purchased a note receivable secured by a property. To fund the purchase of the secured note, the JV obtained a $61.8 million loan. The secured loan matures in January 2030. The interest rate is fixed at 6.0% until July 2027 and then increases to 6.25% for the remaining loan term.
During January 2025
•A consolidated JV that we manage, and in which we own a 30% interest, acquired a 17-story 247,000 square foot office property located at 10900 Wilshire Boulevard in Westwood. Title to the property was transferred following the purchase of a secured note by the respective JV. See Note 18 to our consolidated financial statements in Item 15 of this Report for more information regarding subsequent events.
See Notes 6, 8, 10 and 11 to our consolidated financial statements in Item 15 of this Report for more information regarding our unconsolidated Fund, debt, derivatives and equity, respectively.
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Development Portfolio
Studio Plaza
Studio Plaza is a 456,000 square foot office property located in Burbank. Following the move-out of a long-term single tenant, we have begun extensive redevelopment of the property to convert it into a multi-tenant building. The development process is ongoing and we have begun leasing space to be occupied when the common areas and the related floors are completed. Commencing with the fourth quarter of 2024, we classified this property as part of our Development Portfolio and exclude it from our In-Service Portfolio statistics and operating metrics.
Barrington Plaza
During the second quarter of 2023, we removed our Barrington Plaza Apartments property in Los Angeles from the rental market. A reconstruction of this property is expected to take a number of years at a cost of several hundred million dollars. As of December 31, 2024, a significant majority of the tenants have vacated. See "Legal Proceedings" in Note 17 to our consolidated financial statements in Item 15 of this Report. We accelerated and recorded additional depreciation expense of $82.1 million for the year ended December 31, 2023, which is included in Depreciation and amortization on our consolidated statements of operations. Commencing with the fourth quarter of 2024, we classified this property as part of our Development Portfolio and exclude it from our In-Service Portfolio statistics and operating metrics.
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. In addition, we may reposition properties already in our portfolio. 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. During the repositioning, the affected property may display depressed rental revenues and occupancy levels that impact our operating results and, therefore, comparisons of our performance from period to period.
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 during the respective periods. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Year Ended December 31,
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(1)These average rental rates are not directly comparable from year to year because the averages are 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. Because straight-line rent takes into account the full economic value during the full term 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.
(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, leases for tenants relocated from space at the landlord's request, and non-comparable leases, such as retail leases.
(4)Our office rental rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022, although the lower rental rates for the respective periods were partly offset by lower tenant improvement costs.
(5)Our office rental rates and lease transaction costs for the year ended December 31, 2024 were higher than historical periods as a result of a large tenant lease renewal during the three months ended March 31, 2024.
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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. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Rent Roll(1)(2)(3) Expiring Rate(2) New/Renewal Rate(2) Percentage Change
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(1)Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the year compared to the prior leases for the same space. Excludes leases with a term of twelve months or less, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated at the landlord's request, leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe the base rent reflects other off-market inducements to the tenant, and other non-comparable leases, such as retail leases.
(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)Our office cash rent and straight-line rent roll were impacted by a large tenant lease renewal during the three months ended March 31, 2024.
Multifamily Rental Rates
The table below presents the average annual rental rate per leased unit for new tenants. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
Year Ended December 31,
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(1) These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example:
(i) During 2020, the average was impacted by the addition of a significant number of units at our Bishop Place development in Honolulu, where the rental rates were higher than the average in our portfolio, and
(ii) During 2022, the average was impacted by the acquisition of 1221 Ocean Avenue, where the rental rates were higher than the average in our portfolio.
(iii) During 2023, the average was impacted by leasing of units at our newly developed West Los Angeles property, where the rental rates were higher than the average in our portfolio. Barrington Plaza was removed from this metric beginning with the third quarter of 2023.
(iv) During 2024, the average was impacted by leasing of units at our newly developed West Los Angeles property, where the rental rates were higher than the average in our portfolio.
(2) Our multifamily rental rates were adversely impacted by the COVID-19 pandemic in 2020 but improved in 2021 and 2022.
Multifamily Rent Roll
The rent on leases subject to rent change during 2024 (new tenants and existing tenants undergoing annual rent review) was 2.4% higher on average than the prior rent for the same unit after adjusting for rent concessions. Commencing with the fourth quarter of 2024, the rent change includes only our In-Service Portfolio.
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Occupancy Rates - Total Portfolio
The tables below present the occupancy rates for our total office portfolio and multifamily portfolio. Our Occupancy Rates may not be directly comparable from year to year, as they can be impacted by acquisitions, dispositions, and development and redevelopment projects. Commencing with the fourth quarter of 2024, the table below presents only our In-Service Portfolio.
December 31,
Year Ended December 31,
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(1)Our office occupancy rate for 2024 was impacted by a large tenant lease expiration during the three months ended December 31, 2024. Our office occupancy rates were adversely impacted by the COVID-19 pandemic during 2020, 2021 and 2022.
(2)Excludes units vacated as part of removing Barrington Plaza from the rental market until June of 2023 and excludes the impact of Barrington Plaza entirely starting in July 2023. Our multifamily occupancy rates were adversely impacted by the COVID-19 pandemic during 2020 but recovered during 2021 and 2022.
(3)Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.
In-Service Office Portfolio Lease Expirations
As of December 31, 2024, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage for our In-Service office portfolio as follows:
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(1) Average of the percentage of leases at December 31, 2021, 2022, and 2023 with the same remaining duration as the leases for the labeled year had at December 31, 2024. Acquisitions are included in the prior year average commencing in the quarter after the acquisition.
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Results of Operations
Comparison of 2024 to 2023
Our operating results were adversely impacted by the effects of inflation and higher interest rates during 2024 and 2023.
Year Ended December 31, Favorable (Unfavorable)
(In thousands)
Revenues
Operating expenses
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Year Ended December 31, Favorable (Unfavorable)
(In thousands)
Non-Operating Income and Expenses
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our results of operations for 2023 compared to 2022.
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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 the impact of trends in occupancy rates, rental rates and operating costs from year to year, excluding impacts from changes in the value of our real estate, and to compare our performance with other REITs. FFO is a non-GAAP financial measure for which we believe that net income (loss) 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 (loss) 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 (loss).
FFO Reconciliation to GAAP
The table below reconciles our FFO (the FFO attributable to our common stockholders and noncontrolling interests in our Operating Partnership - which includes our share of our consolidated JVs and our unconsolidated Fund's FFO) to net income (loss) attributable to common stockholders (the most directly comparable GAAP measure). Our FFO was adversely impacted by the effects of inflation and higher interest rates during 2024 and 2023.
Year Ended December 31,
Net income (loss) attributable to common stockholders(1) $ 23,517 $ (42,706)
Depreciation and amortization of real estate assets 384,048 459,949
Net loss attributable to noncontrolling interests (15,929) (33,134)
Adjustments attributable to unconsolidated Fund(1)(2) 4,579 39,194
Adjustments attributable to consolidated JVs (3) (50,687) (46,012)
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(1)Our net loss for the year ended December 31, 2023 includes a $36.2 million impairment charge related to our investment in our unconsolidated Fund. Adjustments attributable to our unconsolidated Fund include an adjustment to exclude the respective impairment loss. We excluded this impairment charge from our calculation of FFO because the impairment charge relates directly to the real estate held by the Fund.
(2)Adjusts for our share of Partnership X's depreciation and amortization of real estate assets.
(3)Adjusts for the net income (loss) and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs.
Comparison of 2024 to 2023
During 2024, FFO decreased by $31.8 million, or 8.4%, to $345.5 million, compared to $377.3 million for 2023. The decrease was primarily due to: (i) lower office occupancy and tenant recoveries, (ii) higher interest expense, and (iii) the removal of our Barrington Plaza property from service during the second quarter of 2023. The decrease was partly offset by (i) higher interest income, (ii) lower office property taxes, (iii) new units from our multifamily development projects, (iv) higher multifamily rental rates, and (v) lower general and administrative expenses.
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our FFO for 2023 compared to 2022.
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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. Same Property NOI is a non-GAAP financial measure for which we believe that net income (loss) is the most directly comparable GAAP financial measure. We report Same Property 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. Same Property 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 (loss) as a measure of our performance and should not be used as a measure of our liquidity or cash flow, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends.
Comparison of 2024 to 2023:
Our Same Properties for 2024 included 66 office properties, aggregating 17.1 million Rentable Square Feet, and 11 multifamily properties with an aggregate 3,569 units. The amounts presented below reflect 100% (not our pro-rata share). Our Same Property results were adversely impacted by the effects of inflation during 2024 and 2023.
Year Ended December 31, Favorable(Unfavorable)
(In thousands)
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Reconciliation to GAAP
The table below presents a reconciliation of Net income (loss) attributable to common stockholders (the most directly comparable GAAP measure) to NOI and Same Property NOI:
Year Ended December 31,
Net income (loss) attributable to common stockholders $ 23,517 $ (42,706)
Net loss attributable to noncontrolling interests (15,929) (33,134)
(Income) loss from unconsolidated Fund (2,593) 34,643
Same Property NOI by Segment
Same property multifamily expenses (44,894) (44,547)
Non-comparable office expenses (2,718) (3,249)
Non-comparable multifamily expenses (20,012) (22,776)
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our same property NOI for 2023 compared to 2022.
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Liquidity and Capital Resources
Short-term liquidity
Our short-term liquidity needs consist primarily of funds necessary for our operating activities, development, repositioning projects, dividends, distributions, and discretionary share repurchases. During 2024, we generated cash from operations of $408.7 million. As of December 31, 2024, we had $444.6 million of cash and cash equivalents. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt maturities and interest rate swap expirations. Excluding acquisitions and debt refinancings, we expect to meet our short-term liquidity requirements through cash on hand and cash generated by operations. With respect to our short-term debt maturities, we expect to refinance or extend them prior to maturity. We are currently in the process of negotiating an amendment and extension of a $335.0 million loan secured by a wholly-owned office property that matures on March 03, 2025. If the amendment and extension is not finalized by the due date, the holding period and carrying value for the asset encumbered by the loan may be affected.
Long-term liquidity
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, development and debt refinancings. We do not expect to have sufficient funds on hand to cover these long-term cash requirements due to REIT federal tax rules which require that we distribute at least 90% of our income on an annual basis. We plan to meet our long-term liquidity needs through long-term secured non-recourse debt, the issuance of equity securities, including common stock and OP Units, as well as property dispositions and JV transactions.
We generally only use non-recourse debt, secured by our properties. As of the date of this report, approximately 44% of our total office portfolio was unencumbered. To mitigate the impact of changing interest rates on our cash flows from operations, we generally enter into interest rate swap agreements with respect to our loans with floating interest rates. These swap agreements generally expire two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. We also enter into interest rate cap agreements from time to time to cap the interest rates on our floating rate loans. See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and derivative contracts, respectively. See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" of this Report regarding the impact of interest rate increases on our future operating results and cash flows.
Certain Contractual Obligations
See the following notes to our consolidated financial statements in Item 15 of this Report for information regarding our contractual commitments:
•Note 4 - minimum future ground lease payments;
•Note 8 - minimum future principal payments for our secured notes payable, and the interest rates that determine our future periodic interest payments; and
•Note 17 - contractual commitments and guarantees.
Off-Balance Sheet Arrangements
Unconsolidated Fund Debt
Our Fund, Partnership X, has its own secured non-recourse debt and interest rate swaps. We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve-outs related to that loan, and we have also guaranteed the interest rate swaps. Partnership X has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of December 31, 2024, all of the obligations under the respective loan and swap agreements have been performed in accordance with the terms of those agreements. See "Guarantees" in Note 17 to our consolidated financial statements in Item 15 of this Report for more information about our Fund's debt and swaps, and the respective guarantees.
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Cash Flows
Comparison of 2024 to 2023
Our operating cash flows were adversely impacted by the effects of inflation and higher interest rates during 2024 and 2023.
Year Ended December 31, Increase (Decrease)In Cash %
(In thousands)
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(1) Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of tenant receivables, the level of our operating and general and administrative expenses, and interest expense. The decrease in cash from operating activities of $18.3 million was primarily due to: (i) lower office occupancy and tenant recoveries, (ii) higher interest expense, and (iii) the removal of our Barrington Plaza property from service during the second quarter of 2023. The decrease was partly offset by (i) higher cash provided by working capital, (ii) higher interest income, (iii) lower office property taxes, (iv) new units from our multifamily development projects, (v) higher multifamily rental rates, and (vi) lower general and administrative expenses.
(2) Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The decrease in cash from investing activities of $7.2 million was primarily due to the purchase of a note receivable partly offset by a decrease in capital expenditures for improvements to real estate.
(3) Our cash flows from 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 in cash from financing activities of $307.3 million was primarily due to lower proceeds from borrowings and higher repayments of borrowings, partly offset by the repurchase of common stock during the prior period and higher contributions from noncontrolling interests in consolidated JVs during the current period.
Comparison of 2023 to 2022
See Item 7 of Part II in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on February 16, 2024 for a comparison of our cash flows for 2023 compared to 2022.
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Critical Accounting Policies and Estimates
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 US 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. Below is a discussion of our critical accounting policies, which are the policies we believe require the most estimate and judgment. See Note 2 to our consolidated financial statements included in Item 15 of this Report for the summary of our significant accounting policies.
Investment in Real Estate
Acquisitions and Initial Consolidation of VIEs
We account for property acquisitions as asset acquisitions. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases, and if applicable (v) assumed debt, based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an "as-if-vacant" basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above and below-market ground and tenant leases are recorded as an asset or liability based upon the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the leases. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates.
These estimates require judgment, involve complex calculations, and the allocations have a direct and material impact on our results of operations because, for example, (i) there would be less depreciation if we allocate more value to land (which is not depreciated), or (ii) if we allocate more value to buildings than to tenant improvements, the depreciation would be recognized over a much longer time period, because buildings are depreciated over a longer time period than tenant improvements.
Impairment of Long-Lived Assets
We assess our investment in real estate for impairment on a periodic basis, and whenever events or changes in circumstances indicate that the carrying value of our investments in real estate may not be recoverable. If the undiscounted future cash flows expected to be generated by the asset are less than the carrying value of the asset, and our evaluation indicates that we may be unable to recover the carrying value, then we would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. Our estimates of future cash flows are based in part upon assumptions regarding future occupancy, rental revenues and operating costs, and could differ materially from actual results. We record real estate held for sale at the lower of carrying value or estimated fair value, less costs to sell, and similarly recognize impairment losses if we believe that we cannot recover the carrying value. Our evaluation of market conditions for assets held for sale requires judgment, and our expectations could differ materially from actual results. Impairment losses would reduce our net income and could be material. Based upon such periodic assessments we did not record any impairment losses for our long-lived assets during 2024, 2023 or 2022.
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Revenue Recognition - Collectibility of lease payments from office tenants
In accordance with Topic 842, if collectibility of lease payments is not probable at the commencement date, then we limit the lease income to the lesser of the income recognized on a straight-line basis or cash basis. If our assessment of collectibility changes after the commencement date, we record the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to rental revenues and tenant recoveries. We adopted the Topic 842 complete impairment model. Under this model, we no longer maintain a general reserve related to our receivables, and instead analyze, on a lease-by-lease basis, whether amounts due under the operating lease are deemed probable for collection. We write off tenant and deferred rent receivables as a charge against rental revenues and tenant recoveries in the period we determine the lease payments are not probable for collection. If we subsequently collect amounts that were previously written off then the amounts collected are recorded as an increase to our rental revenues and tenant recoveries in the period they are collected.
Our assessment of the collectibility of lease payments requires judgment and could have a material impact on our results of operations. This assessment involves using a methodology that requires judgment and estimates about matters that are uncertain at the time the estimates are made, including tenant specific factors, specific industry conditions, and general economic trends and conditions.
Charges for uncollectible amounts related to tenant receivables and deferred rent receivables reduced our rental revenues and tenant recoveries by $1.0 million, $0.8 million, and $0.6 million in 2024, 2023 and 2022, respectively. We restored accrual basis accounting for certain office tenants that were previously determined to be uncollectible and accounted for on a cash basis of accounting, which increased our office revenues by $0.9 million, $4.4 million, and $3.6 million in 2024, 2023, and 2022, respectively.
Revenue Recognition for Tenant Recoveries
Our tenant recovery revenues for recoverable operating expenses are recognized as revenue in the period that the recoverable expenses are incurred. Subsequent to year-end, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. Estimating tenant recovery revenues requires an in-depth analysis of the complex terms of each underlying lease. Examples of estimates and judgments made when determining the amounts recoverable include:
•estimating the recoverable expenses;
•estimating the impact of changes to expense and occupancy during the year;
•estimating the fixed and variable components of operating expenses for each building;
•conforming recoverable expense pools to those used in the base year for the underlying lease; and
•judging whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.
These estimates require judgment and involve calculations for each of our office properties. If our estimates prove to be incorrect, then our tenant recovery revenues and net income could be materially and adversely affected in future periods when we perform our reconciliations. The impact of changing our current year tenant recovery billings by 5% would result in a change to our tenant recovery revenues and net income of $2.5 million, $2.6 million and $2.2 million during 2024, 2023 and 2022, respectively.
Stock-Based Compensation
We award stock-based compensation to certain employees and non-employee directors in the form of LTIP Units. We recognize the fair value of the awards over the requisite vesting period, which is based upon service. The fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions.
Our estimate of the discount for post-vesting restrictions requires judgment. If our estimate of the discount is too high or too low, it would result in the fair value of the awards that we make being too low or too high, respectively, which would result in an under- or over-expense of stock-based compensation, respectively, and this under- or over-expensing of stock-based compensation would result in our net income being overstated or understated, respectively. Stock-based compensation expense was $21.0 million, $19.8 million and $21.0 million for 2024, 2023 and 2022, respectively. The impact of changing the discount rate by 5% would result in a change to our stock-based compensation expense and net income of $1.1 million, $1.0 million and $1.1 million during 2024, 2023 and 2022, respectively.
54
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Fixed-Rate Borrowings and Hedged Borrowings
As of December 31, 2024, the interest rates for 58% of our consolidated borrowings were fixed or swap-fixed with interest rate swaps, and 15% were capped with interest rate caps. As of December 31, 2024, the maximum amount the interest expense on our capped-rate borrowings could increase by is $21.7 million per year. Higher interest rates would cause an increase in our future interest expense on our capped-rate debt, which would reduce our future net income, cash flows from operations and FFO. Our interest rate swap agreements generally expire two years before the maturity date of the related loan, during which time we can refinance the loan without any interest penalty. After the interest rate swap agreements expire the related debt will be floating rate. Higher interest rates, to the extent they are higher than our swap-fixed rates when our interest rate swaps expire, would cause our future interest expense on our debt to increase, which would reduce our future net income, cash flows from operations and FFO. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt maturities and our interest rate swap expirations.
Our use of interest rate swaps and caps also 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 financial counterparties with investment grade ratings. See Note 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our interest rate swaps and caps.
Unhedged Floating-Rate Borrowings
As of December 31, 2024, the interest rates for 27% of our consolidated borrowings were floating. As of December 31, 2024, the interest expense for our unhedged floating-rate borrowings would increase by $15.0 million per year for every one hundred basis point increase in the related benchmark interest rate. Higher interest rates would cause an increase in our future interest expense on our floating-rate debt, which would reduce our future net income, cash flows from operations and FFO. See Note 8 to our consolidated financial statements in Item 15 of this Report for more information regarding our floating rate debt.
Item 8. Financial Statements and Supplementary Data
See the Index to our Financial Statements in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of December 31, 2024, 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). 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 December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm thereon appear at pages F-1 and F-4, respectively, and are incorporated herein by reference.
55
Item 9B. Other Information
(a) None.
(b) During the three months ended December 31, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each such term is defined in Item 408(a) of Regulation S-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
56
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors (Proposal 1) – Information Concerning Current Directors and Nominees”, “Information About Our Executive Officers”, “Corporate Governance”, “Board Meetings and Committees” and “Delinquent Section 16(a) Reports” (to the extent required), in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2024.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the information set forth under the captions “Executive Compensation”, “Compensation Committee Report”, “Director Compensation”, and “Compensation Committee Interlocks and Insider Participation”, in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2024.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Securities Authorized for Issuance Under Stock-Based Compensation Plan
The following table presents information with respect to shares of our common stock that may be issued under our existing stock incentive plan as of December 31, 2024:
(a) (b) (c)
___________________________________________________________
(1) For a description of our 2016 Omnibus Stock Incentive Plan, see Note 13 to our consolidated financial statements in Item 15 of this Report. We did not have any other stock-based compensation plans as of December 31, 2024.
(2) Consists of 2.7 million vested and 1.9 million unvested LTIP Units.
(3) We have no outstanding options. There are no exercise prices for LTIP Units.
The remaining information required by this item is incorporated by reference to the information set forth under the caption “Voting Securities and Principal Stockholders—Security Ownership of Certain Beneficial Owners and Management”, in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2024.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the information set forth under the captions “Election of Directors (Proposal 1) – Information Concerning Current Directors and Nominees”, “Corporate Governance” and “Transactions With Related Persons”, in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2024.
Item 14. Principal Accounting Fees and Services
Our Independent Registered Public Accounting Firm is Ernst & Young LLP, Los Angeles California, PCAOB Firm ID: 42. The information required by this item is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting Firm” in our Proxy Statement for the 2025 Annual Meeting of Stockholders to be filed with the SEC within 120 days after December 31, 2024.
57
PART IV
Item 15. Exhibits and Financial Statement Schedule
(a)(1) and (2) Financial Statements and Schedules
Index
Page
Exhibits 59
Signatures 61
Report of Management on Internal Control Over Financial Reporting F- 1
Report of Independent Registered Public Accounting Firm F- 2
Consolidated Balance Sheets F- 5
Consolidated Statements of Operations F- 6
Consolidated Statements of Comprehensive Income (Loss) F- 7
Consolidated Statements of Equity F- 8
Consolidated Statements of Cash Flows F- 10
Notes to Consolidated Financial Statements F- 11
Overview F- 11
Summary of Significant Accounting Policies F- 12
Investment in Real Estate F- 19
Ground Lease F- 20
Acquired Lease Intangibles F- 21
Investments in Unconsolidated Fund F- 22
Other Assets F- 23
Secured Notes Payable, Net F- 24
Interest Payable, Accounts Payable and Deferred Revenue F- 26
Derivative Contracts F- 27
Equity F- 29
Stock-Based Compensation F- 32
Fair Value of Financial Instruments F- 34
Segment Reporting F- 36
Future Minimum Lease Receipts F- 37
Commitments, Contingencies and Guarantees F- 38
Subsequent Events F- 39
Schedule III - Consolidated Real Estate and Accumulated Depreciation F- 40
58
Table of Contents
Exhibits
(a)(3) exhibits
Number Description Footnote
3.1 Articles of Amendment and Restatement of Douglas Emmett, Inc. (1)
3.2 Bylaws of Douglas Emmett, Inc. (2)
3.4 Bylaws Amendment (4)
4.1 Form of Certificate of Common Stock of Douglas Emmett, Inc. (5)
10.4 Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan. + (9)
19.1 Insider Trading Compliance Policy and Procedures*
21.1 List of Subsidiaries of the Registrant. *
23.1 Consent of Independent Registered Public Accounting Firm. *
101.SCH Inline XBRL Taxonomy Extension Schema Document.*
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.*
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.*
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)*
* Filed with this Annual Report on Form 10-K .
+ Denotes management contract or compensatory plan, contract or arrangement.
59
Table of Contents
Exhibits (continued)
Item 16. Form 10-K Summary
None.
60
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
DOUGLAS EMMETT, INC.
Dated: By: /s/ JORDAN L. KAPLAN
February 14, 2025 Jordan L. Kaplan
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the persons below, in their respective capacities, on behalf of the registrant as of February 14, 2025.
Signature Title
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan President, CEO and Director(Principal Executive Officer)
/s/ PETER D. SEYMOUR
Peter D. Seymour CFO(Principal Financial and Accounting Officer)
/s/ DAN A. EMMETT
Dan A. Emmett Chairman of the Board
/s/ KENNETH M. PANZER
Kenneth M. Panzer COO and Director
/s/ LESLIE E. BIDER
Leslie E. Bider Director
/s/ DORENE C. DOMINGUEZ
Dorene C. Dominguez Director
/s/ RAY C. LEONARD
Ray C. Leonard Director
/s/ VIRGINIA A. MCFERRAN
Virginia A. McFerran Director
/s/ THOMAS E. O’HERN
Thomas E. O’Hern Director
/s/ WILLIAM E. SIMON, JR.
William E. Simon, Jr. Director
/s/ SHIRLEY WANG
Shirley Wang Director
61
Table of Contents
Report of Management on Internal Control over Financial Reporting
The management of Douglas Emmett, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Our system of internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of our financial statements for external reporting purposes in accordance with US GAAP. Our management, including the undersigned CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2024. In conducting its assessment, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission on Internal Control—Integrated Framework (2013 Framework). Based on this assessment, management concluded that, as of December 31, 2024, our internal control over financial reporting was effective based on those criteria.
Management, including our CEO and CFO, does not expect that our disclosure controls and procedures, or our internal controls will prevent all error and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The effectiveness of our internal control over financial reporting as of December 31, 2024, has been audited by Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this annual report, as stated in their report appearing on page F-2, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2024.
/s/ JORDAN L. KAPLAN
Jordan L. Kaplan
President and CEO
/s/ PETER D. SEYMOUR
Peter D. Seymour
CFO
February 14, 2025
F- 1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Douglas Emmett, Inc. (the Company) as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 14, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F- 2
Table of Contents
Impairment of investment in real estate
/s/ Ernst & Young LLP
We have served as the Company's auditor since 1995.
Los Angeles, California
February 14, 2025
F- 3
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Douglas Emmett, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Douglas Emmett, Inc.’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Douglas Emmett, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2024 and 2023, the related consolidated statements of operations, comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes and financial statement schedule listed in the Index at Item 15(a), and our report dated February 14, 2025 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Los Angeles, California
February 14, 2025
F- 4
Table of Contents
Douglas Emmett, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
Assets
Less: accumulated depreciation and amortization (3,916,625) (3,652,630)
Ground lease right-of-use asset 7,438 7,447
Acquired lease intangible assets, net 2,487 2,971
Liabilities
Interest payable, accounts payable and deferred revenue 131,011 131,237
Acquired lease intangible liabilities, net 11,331 19,838
Equity
Douglas Emmett, Inc. stockholders' equity:
See accompanying notes to the consolidated financial statements.
F- 5
Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended December 31,
Revenues
Office rental
Multifamily rental
Operating Expenses
Net loss attributable to noncontrolling interests 15,929 33,134 605
Net income (loss) per common share – basic and diluted $ 0.13 $ (0.26) $ 0.55
See accompanying notes to the consolidated financial statements.
F- 6
Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Year Ended December 31,
See accompanying notes to the consolidated financial statements.
F- 7
Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Equity
(In thousands, except dividend per share data)
Year Ended December 31,
Exchange of OP Units for common stock 229 468 281
Repurchases of common stock — (9,072) —
Exchange of OP Units for common stock 2 5 3
Repurchases of common stock — (91) —
Repurchases of OP Units with cash (4) 1,054 (176)
Repurchases of common stock — (109,142) —
Net income (loss) attributable to common stockholders 23,517 (42,706) 97,145
Net loss attributable to noncontrolling interests (15,929) (33,134) (605)
Exchange of OP Units for common stock (3,503) (7,741) (4,600)
Repurchases of OP Units with cash (134) (3,460) (161)
Statement continues on the following page.
F- 8
Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Equity
(In thousands, except dividend per share data)
Year Ended December 31,
Repurchases of OP Units with cash (138) (2,406) (337)
Repurchases of common stock — (109,233) —
Dividends declared per common share $ 0.76 $ 0.76 $ 1.03
See accompanying notes to the consolidated financial statements.
F- 9
Table of Contents
Douglas Emmett, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
Operating Activities
Loan premium amortized and written off (333) (460) (460)
Deferred loan costs amortized and written off 9,335 8,858 7,943
Operating distributions from unconsolidated Fund 1,224 1,288 1,224
Purchase of interest rate caps — (1,622) —
Change in working capital components:
Interest payable, accounts payable and deferred revenue (4) 6,248 (1,399)
Investing Activities
Insurance recoveries for damage to real estate 3,573 2,181 5,716
Property acquisition — — (330,470)
Acquisition of additional interest in unconsolidated Fund (5,214) (5,214) —
Capital distributions from unconsolidated Fund 269 80 1,919
Financing Activities
Purchase of interest rate caps — — (481)
Proceeds from sale of interest rate cap — — 444
Repurchases of common stock — (109,233) —
Net cash (used in) provided by financing activities (246,463) 60,871 (3,003)
Reconciliation of Ending Cash Balance
Year Ended December 31,
Supplemental Cash Flows Information
Year Ended December 31,
Non-cash Investing Transactions
Removal of fully amortized acquired lease intangible assets $ 203 $ 427 $ 1,438
Non-cash Financing Transactions
Exchange of OP Units for common stock $ 3,503 $ 7,741 $ 4,600
Seller financing of note receivable purchase $ 61,750 $ — $ —
See accompanying notes to the consolidated financial statements.
F- 10
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements
1. Overview
Organization and Business Description
Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. Through our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Fund, we focus on owning, acquiring, developing and managing a substantial 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 consolidated financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.
At December 31, 2024, our Consolidated Portfolio consisted of (i) a 17.6 million square foot office portfolio, (ii) 4,472 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 an equity interest in an unconsolidated Fund which, at December 31, 2024, owned an additional 0.4 million square feet of office space. We manage our unconsolidated Fund alongside our Consolidated Portfolio, and we therefore present the statistics for our office portfolio on a Total Portfolio basis. As of December 31, 2024, our portfolio consisted of the following (including ancillary retail space and excluding two parcels of land from which we receive rent under ground leases):
Consolidated Portfolio Total Portfolio
Office
Wholly-owned properties 52 52
Consolidated JV properties 16 16
Unconsolidated Fund properties — 2
Multifamily
Wholly-owned properties 12 12
Consolidated JV properties 2 2
Basis of Presentation
The accompanying consolidated 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.
We consolidate entities in which we are considered to be the primary beneficiary of a VIE or have a majority of the voting interest of the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of that VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove our power to direct the activities, most significantly impacting the economic performance, of that VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.
We consolidate our Operating Partnership through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets, and are obligated to repay substantially all of our liabilities. The consolidated debt, excluding our consolidated JVs, was $3.73 billion and $3.76 billion as of December 31, 2024 and December 31, 2023. See Note 8. We also consolidate five JVs through our Operating Partnership. We consolidate our Operating Partnership and our five JVs because they are VIEs and we or our Operating Partnership are the primary beneficiary for each.
F- 11
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
As of December 31, 2024, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.77 billion (of which $3.38 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.86 billion (of which $1.80 billion related to debt).
As of December 31, 2023, our consolidated VIE entities, excluding our Operating Partnership, had:
•aggregate consolidated assets of $3.83 billion (of which $3.47 billion related to investment in real estate), and
•aggregate consolidated liabilities of $1.88 billion (of which $1.81 billion related to debt).
The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC in conformity with US GAAP as established by the FASB in the ASC. The accompanying consolidated financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Any references to the number or class of properties, square footage, per square footage amounts, apartment units and geography, are unaudited and outside the scope of our independent registered public accounting firm’s audit of our consolidated financial statements in accordance with the standards of the PCAOB.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make certain estimates that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.
Investment in Real Estate
Acquisitions and Initial Consolidation of VIEs
Acquisitions of properties generally do not meet the definition of a business and are accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. We include the acquired properties' results of operations in our results of operations from the respective acquisition date. We allocate the purchase price for asset acquisitions, which includes the capitalized transaction costs, and for the properties upon the initial consolidation of VIEs not determined to be a business, on a relative fair value basis to: (i) land, (ii) buildings and improvements, (iii) tenant improvements and identifiable intangible assets such as in-place at-market leases, (iv) acquired above- and below-market ground and tenant leases (including for renewal options), and if applicable (v) assumed debt and (vi) assumed interest rate swaps. The fair values are based upon comparable sales for land, and the income approach using our estimates of expected future cash flows and other valuation techniques, which include but are not limited to, our estimates of rental rates, revenue growth rates, capitalization rates and discount rates, for other assets and liabilities. We estimate the relative fair values of the tangible assets on an "as-if-vacant" basis. The estimated relative fair value of acquired in-place at-market leases are the estimated costs to lease the property to the occupancy level at the date of acquisition, including the fair value of leasing commissions and legal costs. We evaluate the time period over which we expect such occupancy level to be achieved and include an estimate of the net operating costs (primarily real estate taxes, insurance and utilities) incurred during the lease-up period. Above- and below-market ground and tenant leases are recorded as an asset or liability based on the present value (using a discount rate which reflects the risks associated with the leases acquired) of the difference between the contractual amounts to be paid or received pursuant to the in-place ground or tenant leases, respectively, and our estimate of the fair market rental rates for the corresponding in-place leases, over the remaining non-cancelable term of the lease. Assumed debt is recorded at fair value based upon the present value of the expected future payments and current interest rates. See Note 3 for our property acquisition disclosures.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Depreciation and Amortization
The assets and liabilities listed below are carried on our consolidated balance sheets net of the related accumulated depreciation or amortization/accretion, and any impairment charges. We accelerate depreciation for affected assets when we renovate our buildings or our buildings are impacted by new developments. When assets are sold or retired, their cost and related accumulated depreciation or amortization are removed from our consolidated balance sheets with the resulting gains or losses, if any, reflected in our results of operations for the respective period.
•Buildings and improvements are depreciated on a straight-line basis using an estimated life of twenty-five to forty years for buildings and fifteen years for improvements.
•Tenant improvements are depreciated on a straight-line basis over the life of the related lease, with any remaining balance depreciated in the period of any early lease termination.
•Acquired in-place leases are amortized on a straight-line basis over the weighted average remaining term of the acquired in-place leases.
•Acquired lease intangibles are amortized on a straight-line basis over the related lease term, with any remaining balance amortized in the period of any early lease termination.
•Acquired above- and below-market tenant leases are amortized/accreted on a straight line basis over the life of the related lease and recorded as either an increase (for below-market leases) or a decrease (for above-market leases) to rental revenue.
•Acquired above- and below-market ground leases, from which we earn ground rent income, are amortized/accreted on a straight line basis over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease (for above-market leases) to rental revenue.
•Acquired above- and below-market ground leases, for which we incur ground rent expense, are accreted/ amortized over the life of the related lease and recorded either as an increase (for below-market leases) or a decrease (for above-market leases) to expense.
Real Estate Held for Sale
Properties are classified as held for sale on our consolidated balance sheets when they meet certain requirements, including the approval of the sale of the property, the marketing of the property for sale, and our expectation that the sale will likely occur within the next 12 months. Properties classified as held for sale are carried at the lower of their carrying value or fair value less costs to sell, and we also cease to depreciate the property. As of December 31, 2024 and 2023, we did not have any properties held for sale.
Dispositions
Recognition of gains or losses from sales of investments in real estate requires that we meet certain revenue recognition criteria and transfer control of the real estate to the buyer. The gain or loss recorded is measured as the difference between the sales price, less costs to sell, and the carrying value of the real estate when we sell it. We did not sell any properties during 2024, 2023 and 2022.
Cost Capitalization
Costs incurred during the period of construction of real estate are capitalized. Cost capitalization of development and redevelopment activities begins during the predevelopment period, which we define as the activities that are necessary to begin the development of the property. We cease capitalization upon substantial completion of the project, but no later than one year from cessation of major construction activity. We also cease capitalization when activities necessary to prepare the property for its intended use have been suspended. Capitalized costs are included in Investment in real estate, gross, on our consolidated balance sheets. Demolition expenses and repairs and maintenance are recorded as expense when incurred. During 2024, 2023 and 2022, we capitalized $43.2 million, $38.0 million and $59.7 million of costs related to our developments, respectively, which included $8.7 million, $1.5 million and $9.1 million of capitalized interest, respectively.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Ground Lease
We account for our ground lease, for which we are the lessee, in accordance with Topic 842 "Leases". We classify the ground lease as an operating lease, and we recognize a right-of-use asset for the land and a lease liability for the future lease payments. We recognize the lease payments as expense, which is included in Office expenses in our consolidated statements of operations. See Note 4 for more information regarding this ground lease. See Note 14 for the fair value disclosures related to the ground lease liability.
Investment in Unconsolidated Fund
As of December 31, 2024 and 2023, we managed and owned an equity interest in one unconsolidated Fund. See Note 6. We account for our investment in our unconsolidated Fund using the equity method because we have significant influence but not control over the Fund. Under the equity method, we initially recorded our investment in our Fund at cost, which includes acquisition basis difference and additional basis for capital raising costs, and subsequently adjust the investment balance for: (i) our share of the Fund's net income or losses, (ii) our share of the Fund's other comprehensive income or losses, (iii) our cash contributions to the Fund and (iv) our distributions received from the Fund. If we sell our interest in the Fund, or if the Fund qualifies for consolidation, we would remove our investment in our unconsolidated Fund from our consolidated balance sheets.
Our investment in our unconsolidated Fund is included in Investment in unconsolidated Fund on the consolidated balance sheets. Our share of our Fund's accumulated other comprehensive income or losses is included in Accumulated other comprehensive income (loss) on our consolidated balance sheets. As of December 31, 2024 and 2023, the total investment basis difference included in our investment balance in our unconsolidated Fund was $4.0 million and $4.1 million, respectively. Our share of the net income or losses from our Fund is included in Income (loss) from unconsolidated Fund in our consolidated statements of operations.
We periodically assess whether there has been any impairment that is other than temporary in our investment in our unconsolidated Fund. An impairment charge would be recorded if events or changes in circumstances indicate that a decline in the fair value below the carrying value has occurred and the decline is other-than-temporary. Based upon such periodic assessments, we recorded an impairment charge of $36.2 million during 2023. The impairment charge we recorded during 2023 is included in Income (loss) from unconsolidated Fund on our consolidated statement of operations. We did not record any impairment charges during 2024 and 2022.
On January 1, 2025, we amended the Fund's operating agreement such that the Fund became a VIE, and as the primary beneficiary of the VIE we will commence consolidating the JV on January 1, 2025. The results of the consolidated JV will be included in our operating results from January 1, 2025 and we will no longer account for this investment using the equity method.
Impairment of Long-Lived Assets
We periodically assess whether there has been any impairment in the carrying value of our properties and whenever events or changes in circumstances indicate that the carrying value of a property may not be recoverable. An impairment charge would be recorded if events or changes in circumstances indicate that a decline in the fair value below the carrying value has occurred and the carrying value is not recoverable. Recoverability of the carrying value of our properties is measured by a comparison of the carrying value to the undiscounted future cash flows expected to be generated by the property. If the carrying value exceeds the estimated undiscounted future cash flows, an impairment loss is recorded equal to the difference between the property's carrying value and its fair value based on the estimated discounted future cash flows. Based upon such periodic assessments, no impairments occurred during 2024, 2023 or 2022.
Cash and Cash Equivalents
We consider short-term investments with maturities of three months or less when purchased to be cash equivalents.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Revenue Recognition
Rental Revenues and Tenant Recoveries
We account for our rental revenues, and variable lease payments such as tenant recoveries and parking revenues, in accordance with Topic 842. We adopted a practical expedient which allows us to account for our rental revenues, tenant recoveries and certain parking revenues on a combined basis. Rental revenues and tenant recoveries from tenant leases are included in Rental revenues and tenant recoveries on our consolidated statements of operations. Parking revenues are included in office Parking and other income on our consolidated statements of operations. See "Office parking revenues" disclosure further below. All of our tenant leases are classified as operating leases. For lease terms exceeding one year, rental income is recognized on a straight-line basis over the lease term. Rental revenue from month-to-month leases or leases with no scheduled rent increases or other adjustments is recognized on a monthly basis when earned.
Estimated tenant recoveries for real estate taxes, common area maintenance and other recoverable operating expenses, which are included in Rental revenues and tenant recoveries on our consolidated statements of operations, are recognized as revenue on a gross basis in the period that the recoverable expenses are incurred. Subsequent to year-end, in accordance with our policy, we perform reconciliations on a lease-by-lease basis and bill or credit each tenant for any differences between the estimated expenses we billed to the tenant and the actual expenses incurred. The amounts billed to tenants during 2024, 2023 and 2022 were not material. Tenant recoveries were $50.1 million, $61.6 million and $58.2 million in 2024, 2023 and 2022, respectively.
Tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date exceeds the cumulative cash rents billed to date under the lease agreement.
Lease Terminations
Lease termination fees, which are included in Rental revenues and tenant recoveries on our consolidated statements of operations, are recognized on a straight line basis over the new remaining lease term when the related lease is canceled. We recognized lease termination revenue of $2.6 million, $5.2 million and $1.3 million during 2024, 2023 and 2022, respectively.
Tenant Improvements
Tenant improvements constructed, and owned by us, and reimbursed by tenants are recorded as our assets, and the related revenue, which is included in Rental revenues and tenant recoveries on our consolidated statements of operations, is recognized over the related lease term. We recognized revenue for reimbursement of tenant improvements of $7.0 million, $5.8 million and $4.8 million during 2024, 2023 and 2022, respectively.
Collectibility
In accordance with Topic 842, we perform an assessment as to whether or not substantially all of the amounts due under a tenant’s lease agreement is deemed probable of collection. This assessment involves using a methodology that requires judgment and estimates about matters that are uncertain at the time the estimates are made, including tenant specific factors, specific industry conditions, and general economic trends and conditions.
For leases where we have concluded it is probable that we will collect substantially all the lease payments due under those leases, we continue to record lease income on a straight-line basis over the lease term. For leases where we have concluded that it is not probable that we will collect substantially all the lease payments due under those leases, we limit the lease income to the lesser of the income recognized on a straight-line basis or cash basis. We write-off tenant receivables and deferred rent receivables as a charge against rental revenues and tenant recoveries in the period we conclude that substantially all of the lease payments are not probable of collection. If we subsequently collect amounts that were previously written off then the amounts collected are recorded as an increase to our rental revenues and tenant recoveries in the period they are collected. If our conclusion of collectibility changes, we will record the difference between the lease income that would have been recognized on a straight-line basis and cash basis as a current-period adjustment to rental revenues and tenant recoveries.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Parking and Other Income
Office Parking Revenues
Our lease contracts generally make a specified number of parking spaces available to the tenant, and we bill and recognize parking revenues on a monthly basis in accordance with the lease agreements, generally using the monthly parking rates in effect at the time of billing. Office parking revenues were $94.2 million, $92.2 million and $84.9 million in 2024, 2023 and 2022, respectively, and are included in office Parking and other income on our consolidated statements of operations. Office parking receivables were $1.2 million and $0.8 million as of December 31, 2024 and 2023, respectively, and are included in Tenant receivables on our consolidated balance sheets.
Ground Lease Revenues
We own two parcels of land from which we receive rent under ground leases. We account for our ground lease revenues as operating leases in accordance with Topic 842. Ground lease revenues were $3.4 million, $7.9 million and $2.1 million in 2024, 2023 and 2022, respectively, and are included in office Parking and other income on our consolidated statements of operations.
Insurance Recoveries
The amount by which insurance recoveries related to property damage exceed any losses recognized from that damage are recorded as Other income on our consolidated statements of operations when payment has been received or confirmation of the amount of proceeds has been received.
In January 2020, there was a fire in one of our residential property buildings. We carry comprehensive liability and property insurance covering all of the properties in our portfolio under blanket insurance policies to cover these kinds of losses. We recorded $1.3 million and $3.9 million of business interruption revenues during 2023 and 2022, respectively, which is included in Multifamily rental - Parking and other income on our consolidated statements of operations.
Interest Income
Interest income from our short-term money market fund investments is recognized on an accrual basis. Interest income is included in Other income on our consolidated statements of operations.
Leasing Costs
We account for our leasing costs in accordance with Topic 842. In accordance with Topic 842, we capitalize initial direct costs of a lease, which are 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 are expensed as incurred.
Loan Costs
Loan costs incurred directly with the issuance of secured notes payable are deferred and amortized to interest expense over the respective loan or credit facility term. Any unamortized amounts are written off upon early repayment of the secured notes payable, and the related cost and accumulated amortization are removed from our consolidated balance sheets.
To the extent that a refinancing is considered an exchange of debt with the same lender, we account for loan costs based upon whether the old debt is determined to be modified or extinguished for accounting purposes. If the old debt is determined to be modified then we (i) continue to defer and amortize any unamortized deferred loan costs associated with the old debt at the time of the modification over the new term of the modified debt, (ii) defer and amortize the lender costs incurred in connection with the modification over the new term of the modified debt, and (iii) expense all other costs associated with the modification. If the old debt is determined to be extinguished then we (i) write off any unamortized deferred loan costs associated with the extinguished debt at the time of the extinguishment and remove the related cost and accumulated amortization from our consolidated balance sheets, (ii) expense all lender costs associated with the extinguishment, and (iii) defer and amortize all other costs incurred directly in connection with the extinguishment over the term of the new debt.
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Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (continued)
Deferred loan costs are presented on the consolidated balance sheets as a deduction from the carrying amount of our secured notes payable. All loan costs expensed and deferred loan costs amortized are included in interest expense in our consolidated statements of operations. See Note 8 for our loan cost disclosures.
Debt Discounts and Premiums
Debt discounts and premiums related to recording debt assumed in connection with property acquisitions at fair value are generally amortized and accreted, respectively, over the remaining term of the related loan, which approximates the effective interest method. The amortization/accretion is included in interest expense in our consolidated statements of operations.
Derivative Contracts
We make use of interest rate swap and cap contracts to manage the risk associated with changes in interest rates on our floating-rate debt and to satisfy certain lender requirements. 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. We also enter into interest rate cap agreements from time to time to cap the interest rates on our floating rate loans. We may enter into derivative contracts that are intended to hedge certain economics risks, even though hedge accounting does not apply or we elect to not apply hedge accounting. We do not speculate in derivatives and we do not make use of any other derivative instruments.
When entering into derivative agreements, we generally elect to designate them as cash flow hedges for accounting purposes. Changes in fair value of hedging instruments designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) (AOCI), which is a component of equity outside of earnings. For our Fund's hedging instruments designated as cash flow hedges, we record our share of the changes in fair value of the hedging instrument in AOCI. Amounts recorded in AOCI related to our designated hedges are reclassified to Interest expense as interest payments are made on the hedged floating rate debt. Amounts reported in AOCI related to our Fund's hedges are reclassified to Income (loss) from unconsolidated Fund, as interest payments are made by our Fund on its hedged floating rate debt.
Our derivatives are included in Interest rate contract assets and Interest rate contract liabilities on our consolidated balance sheets at fair value, on a gross basis, excluding accrued interest. The accrued interest is included in Interest Payable, accounts payable and deferred revenue on our consolidated balance sheets. Our share of the fair value of our Fund's derivatives is included in Investment in unconsolidated Fund on our consolidated balance sheets. See Note 10 for our derivative disclosures.
Stock-Based Compensation
We account for stock-based compensation, which includes grants of LTIP Units to certain employees and non-employee directors, using the fair value method of accounting. The estimated fair value of the awards is based upon the market value of our common stock on the grant date and a discount for post-vesting restrictions. The estimated fair value of LTIP Units granted, net of estimated forfeitures, is amortized over the vesting period, which is based upon service. See Note 13 for our stock-based compensation disclosures.
EPS
We calculate basic EPS by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common shares outstanding during the respective period. We calculate diluted EPS by dividing the net income (loss) attributable to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the respective period using the treasury stock method. Unvested LTIP Units contain non-forfeitable rights to dividends and we account for them as participating securities and include them in the computation of basic and diluted EPS using the two-class method. See Note 12 for our EPS disclosures.
Segment Information
Segment information is prepared on the same basis that our chief operating decision maker (CODM) reviews information to assess performance and make resource allocation decisions. We operate two business segments: the acquisition, development, ownership and management of office real estate, and the acquisition, development, ownership and management of multifamily real estate. The services for our office segment include primarily rental of office space and other tenant services, including parking and storage space rental. The services for our multifamily segment include primarily rental of apartments and other tenant services, including parking and storage space rental. See Note 15 for our segment disclosures.