FORM 10-Q

TABLE OF CONTENTS

				PAGE NO.
PART I.	FINANCIAL INFORMATION			3
	Item 1.	Financial Statements		3
		Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008 (unaudited)		3
		Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)		5
		Notes to Consolidated Financial Statements		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
	Item 4.	Controls and Procedures		32
PART II.	OTHER INFORMATION			33
	Item 1.	Legal Proceedings		33
	Item 1A.	Risk Factors		33
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		33
	Item 3.	Defaults Upon Senior Securities		33
	Item 4.	Submission of Matters to a Vote of Security Holders		34
	Item 5.	Other Information		34
	Item 6.	Exhibits		35
	SIGNATURES			36

 

 

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Consolidated Balance Sheets

(unaudited and in thousands, except for share data)

			June 30, 2009			December 31, 2008
Assets
Investment in real estate:
	Land	$	835,407		$	900,213
	Buildings and improvements		5,013,389			5,528,567
	Tenant improvements and lease intangibles		513,836			552,536
			6,362,632			6,981,316
	Less: accumulated depreciation		(578,594)			(490,125)
Net investment in real estate			5,784,038			6,491,191
	Cash and cash equivalents		43,261			8,655
	Tenant receivables, net		1,215			2,427
	Deferred rent receivables, net		35,858			33,039
	Interest rate contracts		139,015			176,255
	Acquired lease intangible assets, net		14,240			18,163
	Investment in unconsolidated real estate fund		102,168			-
	Other assets		26,034			31,304
Total assets		$	6,145,829		$	6,761,034
Liabilities
	Secured notes payable, including loan premium	$	3,276,009		$	3,692,785
	Accounts payable and accrued expenses		65,420			69,445
	Security deposits		31,928			35,890
	Acquired lease intangible liabilities, net		156,418			195,036
	Interest rate contracts		297,152			407,492
	Dividends payable		12,140			22,856
	Other liabilities		-			57,316
Total liabilities			3,839,067			4,480,820
Equity
Douglas Emmett, Inc. stockholders' equity:
	Common stock, $0.01 par value 750,000,000 authorized, 121,399,341 and 121,897,388 outstanding at June 30, 2009 and December 31, 2008, respectively.		1,214			1,219
	Additional paid-in capital		2,285,551			2,284,429
	Accumulated other comprehensive income (loss)		(216,874)			(274,111)
	Accumulated deficit		(269,987)			(236,348)
	Total Douglas Emmett, Inc. stockholders' equity		1,799,904			1,775,189
Noncontrolling interests			506,858			505,025
	Total equity		2,306,762			2,280,214
Total liabilities and equity		$	6,145,829		$	6,761,034

See notes to consolidated financial statements.

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Douglas Emmett, Inc.

Consolidated Statements of Operations

(unaudited and in thousands, except for share data)

 

				Three Months Ended June 30,						Six Months Ended June 30,
				2009			2008			2009			2008
Revenues:
Office rental
		Rental revenues	$	99,210		$	111,213		$	207,756		$	210,229
		Tenant recoveries		7,134			8,179			15,100			14,188
		Parking and other income		16,404			18,229			34,038			34,805
Total office revenues				122,748			137,621			256,894			259,222
Multifamily rental
		Rental revenues		16,007			16,423			32,194			33,647
		Parking and other income		1,040			1,019			2,124			2,002
Total multifamily revenues				17,047			17,442			34,318			35,649
Total revenues				139,795			155,063			291,212			294,871
Operating Expenses
		Office expense		36,665			41,802			76,977			77,723
		Multifamily expense		4,286			4,219			8,803			8,519
		General and administrative		5,959			5,729			12,310			11,014
		Depreciation and amortization		55,729			63,858			116,803			120,607
Total operating expenses				102,639			115,608			214,893			217,863
Operating income				37,156			39,455			76,319			77,008
		Gain on disposition of interest in unconsolidated   real estate fund		-			-			5,573			-
		Interest and other income		60			123			2,974			532
		Loss, including depreciation, from unconsolidated real estate fund		(2,128)			-			(2,806)			-
		Interest expense		(44,606)			(51,791)			(93,828)			(92,994)
Net loss				(9,518)			(12,213)			(11,768)			(15,454)
		Less:  Net loss attributable to noncontrolling interests		2,036			2,785			2,419			3,526
Net loss attributable to common stockholders			$	(7,482)		$	(9,428)		$	(9,349)		$	(11,928)
Net loss attributable to common  stockholders
	per share – basic and diluted		$	(0.06)		$	(0.08)		$	(0.08)		$	(0.10)
Dividends declared per common share			$	0.1000		$	0.1875		$	0.2000		$	0.3750
Weighted average shares of common stock
	outstanding – basic and diluted			121,319,121			121,313,515			121,579,011			119,798,547

See notes to consolidated financial statements.

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Douglas Emmett, Inc.

Consolidated Statements of Cash Flows

(unaudited and in thousands)

			Six Months Ended June 30,
			2009			2008
Operating Activities
Net loss		$	(11,768)		$	(15,454)
Adjustments to reconcile net loss to net cash provided by operating activities:
	Non-cash profit sharing allocation to consolidated real estate fund		660			─
	Loss, including depreciation, from unconsolidated real estate fund		2,806			─
	Depreciation and amortization		116,803			120,607
	Net accretion of acquired lease intangibles		(17,940)			(21,690)
	Gain on disposition of interest in unconsolidated real estate fund		(5,573)			─
	Amortization of deferred loan costs		1,090			840
	Amortization of loan premium		(2,476)			(2,336)
	Non-cash market value adjustments on interest rate contracts		9,989			7,339
	Non-cash amortization of stock-based compensation		2,333			2,144
Change in working capital components:
	Tenant receivables		1,068			402
	Deferred rent receivables		(4,425)			(7,642)
	Accounts payable, accrued expenses and security deposits		4,076			(1,576)
	Other assets		(979)			8,145
Net cash provided by operating activities			95,664			90,779
Investing Activities
Capital expenditures and property acquisitions			(21,339)			(642,750)
Deconsolidation of Douglas Emmett Fund X, LLC			(6,625)			─
Net cash used in investing activities			(27,964)			(642,750)
Financing Activities
Proceeds from long-term borrowings			82,640			1,052,700
Deferred loan costs			(18)			(3,225)
Repayment of borrowings			(106,665)			(383,600)
Net change in short-term borrowings			(25,275)			(37,500)
Contributions by Douglas Emmett Fund X, LLC investors			66,074			─
Contributions by noncontrolling interests			450			319
Distributions to noncontrolling interests			(9,957)			(14,753)
Redemption of noncontrolling interests			─			(23,758)
Issuance of common stock			─			667
Repurchase of common stock			(5,338)			─
Cash dividends			(35,005)			(41,958)
Net cash (used in) provided by financing activities			(33,094)			548,892
Increase (decrease) in cash and cash equivalents			34,606			(3,079)
Cash and cash equivalents at beginning of period			8,655			5,843
Cash and cash equivalents at end of period		$	43,261		$	2,764
Noncash transactions:
Investing activity related to contribution of properties to unconsolidated
	real estate fund	$	476,852		$	─
Financing activity related to contribution of debt and noncontrolling interest
	to unconsolidated real estate fund	$	(483,477)		$	─

See notes to consolidated financial statements.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements

(in thousands, except shares and per share data)

1. Overview

Organization and Description of Business

Douglas Emmett, Inc., a Maryland corporation incorporated on June 28, 2005, is a fully integrated, self-administered and self-managed Real Estate Investment Trust (REIT).  Through our interest in Douglas Emmett Properties, LP (our operating partnership) and our subsidiaries, we own, manage, lease, acquire and develop real estate.  As of June 30, 2009, we owned a portfolio of 49 office properties (including ancillary retail space) and nine multifamily properties, as well as the fee interests in two parcels of land that we lease to third parties. All of our properties are 100% owned except Honolulu Club (78,000 square feet) which is owned by a joint venture in which we own a 66.7% interest. We also own an interest in six additional properties totaling 1.4 million square feet owned by an unconsolidated real estate fund, Douglas Emmett Fund X, LLC (Fund X) in which we own an equity interest.  All of these properties are located in Los Angeles County, California and Honolulu, Hawaii.  We qualified as a REIT for federal income tax purposes beginning with our initial taxable year ending December 31, 2006 and expect to maintain such qualification.

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.  Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of identifying submarkets that are supply constrained, have high barriers to entry and typically exhibit strong economic characteristics such as population and job growth and a diverse economic base.  In our office portfolio, we focus primarily on owning and acquiring a substantial share of top-tier office properties within submarkets located near high-end executive housing and key lifestyle amenities. In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same submarkets.  Our properties are concentrated in nine premier Los Angeles County submarkets—Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbank—as well as in Honolulu, Hawaii.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Basis of Presentation

The accompanying consolidated financial statements as of June 30, 2009 and December 31, 2008 and for the three and six months ended June 30, 2009 and 2008 are the consolidated financial statements of Douglas Emmett, Inc. and our subsidiaries including our operating partnership.  As described in Note 2 below, the results of the six properties acquired in March 2008 were included in our consolidated results until the end of February 2009, when we completed the transaction to contribute these properties to Fund X in return for an equity interest.  All significant intercompany balances and transactions have been eliminated in our consolidated financial statements.  Certain prior period amounts have been reclassified to conform with current period presentation.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading.  The accompanying unaudited financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.  The interim financial statements should be read in conjunction with the consolidated financial statements in our 2008 Annual Report on Form 10-K and notes thereto.  Any reference to the number of properties and square footage are unaudited and outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the United States Public Company Accounting Oversight Board.

The preparation of financial statements in conformity with GAAP requires us to make certain estimates and assumptions, for example with respect to the allocation of the purchase price of acquisitions among land, buildings, improvements, equipment and any related intangible assets and liabilities.  These estimates and assumptions are subjective and affect the reported amounts in the consolidated financial statements and accompanying notes.  Actual results could differ materially from those estimates.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

2. Acquisitions, Dispositions and Other Transfers

We did not make any acquisitions during the six months ended June 30, 2009.

On February 13, 2008, we acquired a two-thirds interest in a 78,298 square-foot office building located in Honolulu, Hawaii.  As part of the same transaction, we also acquired all of the assets of The Honolulu Club, a private membership athletic and social club, which is located in the building.  The aggregate contract price was approximately $18 million and the purchase was made through a consolidated joint venture with our local partner.  The joint venture financed the acquisition with an $18 million loan.  See Note 7 for a description of the debt.  On May 1, 2008, the operations of the athletic club were sold to a third party for a nominal cost.  Simultaneously, the acquirer leased from us the space occupied by the athletic club.  The results of operations and loss on sale of the assets of the athletic club were not material.

On March 26, 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class A buildings all located in our core Los Angeles submarkets – Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland Hills – for a contract price of approximately $610 million.  Subsequent to acquiring the properties, we entered into a non-recourse $365 million term loan secured by the six-property portfolio.

In connection with the initial closing of Fund X in October 2008, (i) we contributed to Fund X the portfolio of six Class A office properties that we acquired in March 2008 and (ii) we transferred to Fund X the related $365 million term loan.  In exchange, we received an interest in the common equity of Fund X.  As the net value of the contributed properties (as valued under the Fund X operating agreement) exceeded our required capital contribution, the Fund was obligated to distribute cash to us for the excess. We received part of the cash in October 2008 and the remainder at the end of February 2009, at which point Fund X became an unconsolidated real estate fund in which we retained an equity investment and recognized a gain of $5,573 on the disposition of the interest in Fund X we did not retain.

The results of operations for each of the acquired properties are included in our consolidated statements of operations only from the date of each acquisition, and in the case of the properties contributed to Fund X, only until the end of February 2009, when the properties were deconsolidated from our financial statements.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

3. Segment Reporting

Financial Accounting Standard (FAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, established standards for disclosure about operating segments and related disclosures about products and services, geographic areas and major customers. Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes. We operate in two business segments: (i) the acquisition, redevelopment, ownership and management of office real estate and (ii) the acquisition, redevelopment, ownership and management of multifamily real estate.  The products for our office segment primarily include rental of office space and other tenant services including parking and storage space rental. The products for our multifamily segment include rental of apartments and other tenant services including parking and storage space rental.

Asset information by segment is not reported because we do not use this measure to assess performance and make decisions to allocate resources.  Therefore, depreciation and amortization expense is not allocated among segments.  Interest and other income, management services, general and administrative expenses, interest expense, depreciation and amortization expense and net derivative gains and losses are not included in rental revenues less rental expenses as our internal reporting addresses these items on a corporate level.

Rental revenues less rental expenses is not a measure of operating results or cash flows from operating activities as measured by GAAP, and it is not indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Not all companies may calculate rental revenues less rental expenses in the same manner. We consider rental revenues less rental expenses to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our properties.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

The following table represents operating activity within our reportable segments:

		Three Months Ended June 30, 2009										Three Months Ended June 30, 2008
		Office			Multifamily			Total				Office			Multifamily			Total
Rental revenues	$	122,748		$	17,047		$	139,795			$	137,621		$	17,442		$	155,063
Percentage of total		88	%		12	%		100	%			89	%		11	%		100	%
Rental expenses	$	36,665		$	4,286		$	40,951			$	41,802		$	4,219		$	46,021
Percentage of total		90	%		10	%		100	%			91	%		9	%		100	%
Rental revenues    less rental expenses	$	86,083		$	12,761		$	98,844			$	95,819		$	13,223		$	109,042
Percentage of total		87	%		13	%		100	%			88	%		12	%		100	%
		Six Months Ended June 30, 2009										Six Months Ended June 30, 2008
		Office			Multifamily			Total				Office			Multifamily			Total
Rental revenues	$	256,894		$	34,318		$	291,212			$	259,222		$	35,649		$	294,871
Percentage of total		88	%		12	%		100	%			88	%		12	%		100	%
Rental expenses	$	76,977		$	8,803		$	85,780			$	77,723		$	8,519		$	86,242
Percentage of total		90	%		10	%		100	%			90	%		10	%		100	%
Rental revenues    less rental expenses	$	179,917		$	25,515		$	205,432			$	181,499		$	27,130		$	208,629
Percentage of total		88	%		12	%		100	%			87	%		13	%		100	%

The following is a reconciliation of rental revenues less rental expenses to net loss:

			Three Months Ended June 30,						Six Months Ended June 30,
			2009			2008			2009			2008
Rental revenues less rental expenses		$	98,844		$	109,042		$	205,432		$	208,629
	General and administrative expenses		(5,959)			(5,729)			(12,310)			(11,014)
	Depreciation and amortization		(55,729)			(63,858)			(116,803)			(120,607)
	Gain on disposition of interest in
	unconsolidated real estate fund		-			-			5,573			-
	Interest and other income		60			123			2,974			532
	Loss, including depreciation, from unconsolidated
	real estate fund		(2,128)			-			(2,806)			-
	Interest expense		(44,606)			(51,791)			(93,828)			(92,994)
Net loss			(9,518)			(12,213)			(11,768)			(15,454)
	Less: Net loss attributable to noncontrolling   interests		2,036			2,785			2,419			3,526
Net loss attributable to common stockholders		$	(7,482)		$	(9,428)		$	(9,349)		$	(11,928)

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

4. Other Assets

Other assets consist of the following at:

		June 30, 2009			December 31, 2008
Deferred loan costs, net of accumulated amortization of $4,061 and  $3,336 at June 30, 2009 and December 31, 2008, respectively	$	5,319		$	9,714
Restricted cash		2,939			2,934
Prepaid interest		670			4,360
Prepaid expenses		1,109			3,845
Interest receivable		9,587			5,938
Other indefinite-lived intangible		1,988			1,988
Other		4,422			2,525
Total other assets	$	26,034		$	31,304

We incurred deferred loan cost amortization expense of $483 and $478 for the three months ended June 30, 2009 and 2008, and $1,090 and $840 for the six months ended June 30, 2009 and 2008, respectively.  Deferred loan cost amortization is included as a component of interest expense in the consolidated statements of operations.

5. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of:

		June 30, 2009			December 31, 2008
Accounts payable	$	26,420		$	30,429
Accrued interest payable		26,088			22,982
Deferred revenue		12,912			16,034
Total accounts payable and accrued expenses	$	65,420		$	69,445

6. Acquired Lease Intangibles

The following summarizes our acquired lease intangibles related to above/below-market leases as of:

		June 30, 2009			December 31, 2008
Above-market tenant leases	$	32,770		$	34,227
Accumulated amortization		(21,522)			(19,094)
Below-market ground leases		3,198			3,198
Accumulated amortization		(206)			(168)
Acquired lease intangible assets, net	$	14,240		$	18,163
Below-market tenant leases	$	261,523		$	288,437
Accumulated accretion		(118,554)			(106,950)
Above-market ground leases		16,200			16,200
Accumulated accretion		(2,751)			(2,651)
Acquired lease intangible liabilities, net	$	156,418		$	195,036

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

7. Secured Notes Payable

The following summarizes our secured notes payable at:

Type of Debt		Maturity Date (1)			June 30, 2009			December 31, 2008		Variable Rate		Effective Annual Fixed Rate (2)		Swap Maturity Date (1)
Variable Rate Swapped to Fixed Rate:
Fannie Mae Loan I (3)		06/01/12		$	293,000		$	293,000		DMBS + 0.60%		4.70%		08/01/11
Fannie Mae Loan II (3)		06/01/12			95,080			95,080		DMBS + 0.60%		5.78		08/01/11
Modified Term Loan (4)(5)		08/31/12			2,300,000			2,300,000		LIBOR + 0.85%		5.13		08/01/10-08/01/12
Term Loan (6)		08/18/13			-			365,000		--		--		--
Fannie Mae Loan III (3)		02/01/15			36,920			36,920		DMBS + 0.60%		5.78		08/01/11
Fannie Mae Loan IV (3)		02/01/15			75,000			75,000		DMBS + 0.76%		4.86		08/01/11
Term Loan (7)		04/01/15			340,000			340,000		LIBOR + 1.50%		4.77		01/02/13
Fannie Mae Loan V (3)		02/01/16			82,000			82,000		LIBOR + 0.62%		5.62		03/01/12
Fannie Mae Loan VI (3)		06/01/17			18,000			18,000		LIBOR + 0.62%		5.82		06/01/12
Subtotal					3,240,000			3,605,000				5.10%
Variable Rate:
Wells Fargo Loan (8)		03/01/10(9)			18,000			18,000		LIBOR + 1.25%		--		--
Secured Revolving Credit Facility		10/30/09(11)			-			49,300		LIBOR / Fed Funds+(12)		--		--
Subtotal					3,258,000			3,672,300
Unamortized Loan Premium (13)					18,009			20,485
Total				$	3,276,009		$	3,692,785

(1)	As of June 30, 2009, the weighted average remaining life of our total outstanding debt is 3.6 years, and the weighted average remaining life of the interest rate swaps is 1.9 years.
(2)	Includes the effect of interest rate contracts.  Based on actual/360-day basis and excludes amortization of loan fees and unused fees on credit line.  The total effective rate on an actual/365-day basis is 5.17% at June 30, 2009.
(3)	Secured by four separate collateralized pools.  Fannie Mae Discount Mortgage-Backed Security (DMBS) generally tracks 90-day LIBOR, although volatility may exist between the two rates, resulting in an immaterial amount of swap ineffectiveness.
(4)	Secured by seven separate collateralized pools.  Requires monthly payments of interest only, with outstanding principal due upon maturity.
(5)	Includes $1.11 billion swapped to 4.89% until August 1, 2010; $545.0 million swapped to 5.75% until December 1, 2010; $322.5 million swapped to 4.98% until August 1, 2011; and $322.5 million swapped to 5.02% until August 1, 2012.  Each of these rates is based on actual/360-day basis.
(6)	This loan was transferred to an unconsolidated real estate fund in which our operating partnership holds an equity interest.  Secured by six properties in a collateralized pool.  These properties were also transferred to the same unconsolidated real estate fund.
(7)	Secured by four properties in a collateralized pool.  Requires monthly payments of interest only, with outstanding principal due upon maturity.
(8)	This loan is held by a consolidated entity in which our operating partnership holds a two-thirds interest.  The loan has a one-year extension option.
(9)	Represents maturity date of March 1, 2010 which we may extend to March 1, 2011.
(10)	This $370 million secured revolving credit facility is secured by nine properties and has no borrowings outstanding.  The facility has two one-year extension options available.
(11)	Represents maturity date of October 30, 2009 which we may extend to October 30, 2011.
(12)	This revolver bears interest at either LIBOR +0.70% or Fed Funds +0.95% at our election.  If the amount outstanding exceeds $262.5 million, the credit facility bears interest at either LIBOR +0.80% or Fed Funds +1.05% at our election.
(13)	Represents non-cash mark-to-market adjustment on variable rate debt associated with office properties.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

The minimum future principal payments due on our secured notes payable at June 30, 2009, excluding the non-cash loan premium amortization were as follows:

Twelve months ending June 30:
2010	$	18,000
2011		─
2012		388,080
2013		2,300,000
2014		─
Thereafter		551,920
Total future principal payments	$	3,258,000

Secured Revolving Credit Facility

We have a revolving credit facility with a group of banks led by Bank of America, N.A. and Banc of America Securities, LLC totaling $370 million.  At June 30, 2009, there were no borrowings outstanding, so the entire balance was available to us under this credit facility.  It bears interest at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds Rate plus 95 basis points if the amount outstanding is $262.5 million or less.  However, if the amount outstanding is greater than $262.5 million, the credit facility bears interest at a rate per annum equal to either LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis points.  The credit facility bears interest at 15 basis points on the undrawn balance.  The credit facility expires during the fourth quarter of 2009, with two one-year extensions at our option.

8. Interest Rate Contracts

Risk Management Objective of Using Derivatives

We manage our interest rate risk associated with borrowings by obtaining interest rate swap and interest rate cap contracts.  The interest rate swap agreements we utilize effectively modify our exposure to interest rate risk by converting our floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense and cash flows.  These agreements involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments over the life of the agreements without an exchange of the underlying principal amount. We do not use any other derivative instruments.

Cash Flow Hedges of Interest Rate Risk

Our objective in using derivatives is to add stability to interest expense and to manage our exposure to interest rate movements or other identified risks.  To accomplish this objective, we primarily use interest rate swaps as part of our cash flow hedging strategy.  FAS No. 133, Accounting for Derivative and Hedging Activities (FAS 133), as amended and interpreted establishes accounting and reporting standards for derivative instruments. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (loss) (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings.  The ineffective portion of changes in the fair value of the derivative is recognized directly in earnings.  The ineffectiveness attributable to a mismatch in the underlying rate indices of the hedged item and the related derivative resulted in our recording a gain of $271 and $32 for the three months ended June 30, 2009 and 2008, respectively, and recording a loss of $280 and a gain of $86 for the six months ended June 30, 2009 and 2008, respectively.  We assess the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.  The fair value of these hedges is obtained through independent third-party valuation sources that use conventional valuation algorithms.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Amounts accumulated in other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. For derivatives designated as cash flow hedges, we estimate an additional $132.3 million will be reclassified within the next 12 months from accumulated other comprehensive income (loss) to interest expense as an increase to interest expense.

As of June 30, 2009, approximately 99% of our outstanding debt had interest payments designated as hedged transactions to receive-floating/pay-fixed interest rate swap agreements, which qualify as highly effective cash flow hedges under FAS 133, as summarized below:

Interest Rate Derivative	Number of Instruments (Actual)	Notional
Interest Rate Swaps	36	$3,240,000

Non-designated Hedges

Derivatives not designated as hedges are not speculative.  Our predecessor originally entered into $2.2 billion notional of pay-fixed swaps at swap rates ranging between 4.04% and 5.00%, as well as $600 million of purchased caps to manage our exposure to interest rate movements and other identified risks.  At the time of our IPO, we entered into offsetting $2.2 billion notional of receive-fixed swaps at swap rates ranging between 4.96% and 5.00%, as well as $600 million of sold caps, which were intended to largely offset the future cash flows and future change in fair value of our predecessor’s pay-fixed swaps and purchased caps to reduce the effect on our reported earnings.  Accordingly, as of June 30, 2009, we had the following outstanding interest rate derivatives that were not designated as hedging instruments under FAS 133, but were used to hedge our economic exposure to interest rate risk:

Interest Rate Derivative	Number of Instruments (Actual)	Notional
Pay-Fixed Swaps	25	$2,205,000
Receive-Fixed Swaps	25	$2,205,000
Purchased Caps	19	$600,000
Sold Caps	15	$600,000

None of the swaps or caps in the preceding table was designated as hedges under FAS 133 and as a result, the changes in fair value of these interest rate swaps have been recognized in earnings for all periods.  The aggregate net asset fair value of these swaps decreased $5.3 million and $5.5 million for the three months ended June 30, 2009 and 2008, and $9.7 million and $7.4 million for the six months ended June 30, 2009 and 2008, respectively.  The decrease in net asset fair value was recorded as additional interest expense. Included in the net $7.4 million decrease is a $1.2 million increase related to the credit value adjustment resulting from our initial application of FAS No. 157, Fair Value Measurements (FAS 157) in the first quarter of 2008.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Accounting for Interest Rate Contracts

As required by FAS 133, we record all derivatives on the balance sheet at fair value, using the framework for measuring fair value established in FAS 157.  Hedge accounting generally provides for the timing of gain or loss recognition on the hedging instrument to match the earnings effect of the hedged forecasted transactions in a cash flow hedge.  All other changes in fair value measured in accordance with FAS 157, with the exception of hedge ineffectiveness, are recorded in accumulated other comprehensive income (loss), which is a component of equity outside of earnings.  Amounts reported in accumulated other comprehensive income (loss) related to derivatives designated as hedges under FAS 133 will be reclassified to interest expense as interest payments are made on our hedged variable-rate debt.  We may enter into derivative contracts that are intended to hedge certain economic risks, even though hedge accounting does not apply, or for which we elect to not apply hedge accounting under FAS 133.

The change in net unrealized gains and losses on cash flow hedges reflects a reclassification from accumulated other comprehensive income (loss) to interest expense, which increased interest expense by $35.0 million and $17.0 million for the three months ended June 30, 2009 and 2008, respectively and $70.3 million and $26.2 million for the six months ended June 30, 2009 and 2008, respectively.

The following table represents the fair values of derivative instruments as of June 30, 2009:

Derivative fair values, disclosed as “Interest Rate Contracts”:		Assets		Liabilities
Derivatives designated as hedging instruments under FAS 133	$	─	$	191,302
Derivatives not designated as hedging instruments under FAS 133		139,015		105,850
Total derivatives	$	139,015	$	297,152

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

The following table represents the effect of derivative instruments on our consolidated statements of operations for the three and six months ended June 30, 2009:

	Interest Rate Contracts
Derivatives in FAS 133 Cash Flow Hedging Relationships:		Three months ended June 30, 2009			Six months ended June 30, 2009
Amount of gain (loss) recognized in OCI on derivatives (effective portion)	$	(9,492)		$	8,953
Amount of gain (loss) reclassified from accumulated OCI into earnings (effective portion)	$	(35,017)		$	(70,315)
Location of gain (loss) reclassification from accumulated OCI into earnings (effective portion)		Interest expense			Interest expense
Amount of gain (loss) recognized in earnings on derivatives (ineffective portion and amount excluded from effectiveness testing)	$	271		$	(280)
Location of gain (loss) recognized in earnings on derivatives (ineffective portion and amount excluded from effectiveness testing)		Interest expense			Interest expense
	Interest Rate Contracts
Derivatives Not Designated as Cash Flow Hedges Under FAS 133:		Three months ended June 30, 2009			Six months ended June 30, 2009
Amount of gain (loss) recognized in earnings on derivatives	$	(5,297)		$	(9,710)
Location of gain (loss) recognized in earnings on derivatives		Interest expense			Interest expense

Credit-risk-related Contingent Features

We have agreements with each of our derivative counterparties that contain a provision, under which we could also be declared in default on our derivative obligations if we default on any of our indebtedness, including any default where repayment of the indebtedness has not been accelerated by the lender.  We have agreements with certain of our derivative counterparties that contain a provision under which, if we fail to maintain a minimum cash and cash equivalents balance of $1 million, then the derivative counterparty would have the right to terminate the derivative.  There have been no events of default on any of our derivatives.

As of June 30, 2009, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $173.4 million.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Fair Value Measurement

FAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.  FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability.  As a basis for considering market participant assumptions in fair value measurements, FAS 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).  Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.

Currently, we use interest rate swaps and caps to manage interest rate risk resulting from variable interest payments on our floating rate debt.  The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.

To comply with the provisions of FAS 157, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements.  In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.  We have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.  We do not have any fair value measurements using significant unobservable inputs (Level 3) as of June 30, 2009.

The table below presents the derivative assets and liabilities, presented in our financial statements on a gross basis without reflecting any net settlement positions with the same counterparty.  The derivatives shown below are measured at fair value as of June 30, 2009 and aggregated by the level in the fair value hierarchy within which those measurements fall:

		Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs  (Level 2)		Significant Unobservable Inputs  (Level 3)		Balance at June 30, 2009
Assets
Interest Rate Contracts	$	─	$	139,015	$	─	$	139,015
Liabilities
Interest Rate Contracts	$	─	$	297,152	$	─	$	297,152

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

9. Stockholders’ Equity

Noncontrolling Interests

Noncontrolling interests in our operating partnership relate to interests in that partnership which are not owned by us.  Noncontrolling interests in our operating partnership amounted to approximately 22% at June 30, 2009.  A unit in our operating partnership and a share of our common stock have essentially the same economic characteristics as they share equally in the total net income or loss distributions of our operating partnership.  Investors who own units in our operating partnership have the right to cause our operating partnership to redeem any or all of their units in our operating partnership for cash equal to the then-current market value of one share of common stock, or, at our election, shares of our common stock on a one-for-one basis.  Prior to the adoption of FAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an Amendment of Accounting Research Bulletin No. 51 (FAS 160), we calculated the book value of net assets allocable to noncontrolling interests (formerly referred to as minority interests), and adjusted the balance to reflect the calculated amount with a reclass to or from the retained earnings (accumulated deficit) balance.

Noncontrolling interests also includes the interest of a minority partner in a joint venture formed during the first quarter of 2008 to purchase an office building in Honolulu, Hawaii.  The joint venture is two-thirds owned by our operating partnership and is consolidated in our financial statements as of June 30, 2009.

The table below represents our condensed consolidated statement of stockholders’ equity:

			Total Equity			Douglas Emmett, Inc. Stockholders' Equity			Noncontrolling Interests
Balance, January 1, 2009, as reported		$	2,280,214		$	1,775,189		$	505,025
Comprehensive income (loss):
	Net loss		(11,768)			(9,349)			(2,419)
	Other comprehensive income (loss)		61,362			45,347			16,015
Comprehensive income (loss)			49,594			35,998			13,596
Contributions			450			-			450
Dividends and distributions			(34,108)			(24,290)			(9,818)
Redemption of operating partnership units			(5,338)			(597)			(4,741)
Stock compensation			4,050			1,714			2,336
Deconsolidation of Douglas Emmett Fund X, LLC			11,900			11,890			10
Balance, June 30, 2009		$	2,306,762		$	1,799,904		$	506,858

The table below represents our consolidated statements of comprehensive income (loss):

			Three Months Ended June 30,						Six Months Ended June 30,
			2009			2008			2009			2008
Net loss		$	(9,518)		$	(12,213)		$	(11,768)		$	(15,454)
Cash flow hedge adjustment			40,938			103,831			59,858			12,985
Equity interest in other comprehensive income (loss)
of unconsolidated real estate fund			3,571			-			1,504			-
	Comprehensive income (loss)		34,991			91,618			49,594			(2,469)
Less: Comprehensive income (loss) attributable to
noncontrolling interests			(7,682)			2,785			(13,596)			3,526
Comprehensive income (loss) attributable to
common stockholders		$	27,309		$	94,403		$	35,998		$	1,057

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Dividends

During the first six months of 2009 and 2008, we declared quarterly dividends of $0.10 and $0.1875 per share, respectively, which equals an annualized rate of $0.40 and $0.75 per share, respectively.

Taxability of Dividends

Earnings and profits, which determine the taxability of distributions to stockholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes in the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

Equity Conversions and Repurchases

During the six months ended June 30, 2009, investors converted approximately 320,000 operating partnership units to shares of common stock.  During the six months ended June 30, 2009, we repurchased approximately 820,000 share equivalents in open market transactions for a total consideration of approximately $5.3 million.  We may make additional purchases of our share equivalents from time to time in private transactions or in the public markets, but have no commitments to do so.

The table below represents the net income attributable to common stockholders and transfers (to) from the noncontrolling interests:

			Three Months Ended June 30,						Six Months Ended June 30,
			2009			2008			2009			2008
	Net loss attributable to common stockholders	$	(7,482)		$	(9,428)		$	(9,349)		$	(11,928)
	Transfers from the noncontrolling interests:
	Increase in common stockholders paid-in capital  for redemption of operating partnership units		1,473			1,498			4,737			188,623
	Change from net income attributable to common stockholders and transfers from noncontrolling interests	$	(6,009)		$	(7,930)		$	(4,612)		$	176,695

Stock-Based Compensation

The Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan, our stock incentive plan, was adopted by our board of directors and approved by our stockholders prior to the consummation of our IPO, and was amended in 2009 to increase the maximum number of shares of our stock available for issuance under that plan by 24,080,163 shares and to make certain other amendments.  Our stock incentive plan is administered by the compensation committee of our board of directors.  All full-time and part-time officers, employees, directors and other key persons (including consultants and prospective employees) are eligible to participate in our stock incentive plan.  For more information on our stock incentive plan, please refer to the notes to the consolidated financial statements in our 2008 Annual Report on Form 10-K and our proxy statement, which was filed with the SEC on April 30, 2009.

During the first quarter of 2009, we granted approximately 3.6 million long-term incentive units and stock options with a total fair market value of $6.5 million. No additional grants were made during the first six months of 2009. Upon the vesting of equity awards, we recognized non-cash compensation expense of $1.2 million and $1.0 million for the three months ended June 30, 2009 and 2008, respectively, and $2.2 million and $2.1 million for the six months ended June 30, 2009 and 2008, respectively.  An additional $1.4 million of immediately-vested equity awards were granted during the first quarter of 2009 to satisfy a portion of the bonuses accrued during 2008 and an additional $2.2 million of immediately-vested equity awards were granted during the first quarter of 2008 to satisfy a portion of the bonuses accrued during 2007.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

10. Future Minimum Lease Receipts and Payments

Future Minimum Lease Receipts

 We lease space to tenants primarily under noncancelable operating leases that generally contain provisions for a base rent plus reimbursement for certain operating expenses. Operating expense reimbursements are reflected in our consolidated statements of operations as tenant recoveries.

We lease space to certain tenants under noncancelable leases that provide for percentage rents based upon tenant revenues. Percentage rental income for the three months ended June 30, 2009 and 2008 totaled $112 and $185, respectively, and $309 and $429 for the six months ended June 30, 2009 and 2008, respectively.

Future minimum base rentals on our non-cancelable office and ground operating leases at June 30, 2009 were as follows:

Twelve months ending June 30:

2010	$	353,141
2011		310,179
2012		261,718
2013		217,200
2014		156,741
Thereafter		417,205
Total future minimum base rentals	$	1,716,184

The above future minimum lease payments exclude residential leases, which typically have a term of one year or less, as well as tenant reimbursements, amortization of deferred rent receivables and above/below-market lease intangibles. Some leases are subject to termination options, generally upon payment of a termination fee. The preceding table assumes that these options are not exercised.

Future Minimum Lease Payments

We currently lease portions of the land underlying two of our office properties after acquiring, in December 2008, the fee title to a third parcel of land that we leased during 2008 as more fully described in the notes to consolidated financial statements contained in our 2008 Annual Report on Form 10-K. We expensed ground lease payments in the amount of $543 and $805 for the three months ended June 30, 2009 and 2008, respectively, and $1,056 and $1,591 for the six months ended June 30, 2009 and 2008, respectively.

The following is a schedule of our minimum ground lease payments as of June 30, 2009:

Twelve months ending June 30:
2010	$	733
2011		733
2012		733
2013		733
2014		733
Thereafter		3,421
Total future minimum lease payments	$	7,086

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

11. Fair Value of Financial Instruments

FAS No. 107, Disclosures about Fair Value of Financial Instruments (FAS 107), requires us to disclose fair value information about all financial instruments, whether or not recognized in the balance sheets, for which it is practicable to estimate fair value.

Our estimates of the fair value of financial instruments at June 30, 2009 were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop estimated fair value. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

The carrying amounts for cash and cash equivalents, restricted cash, rents and other receivables, due from affiliates, accounts payable and other liabilities approximate fair value because of the short-term nature of these instruments.  We calculate the fair value of our secured notes payable based on a currently available market rate; assuming the loans are outstanding through maturity and considering the collateral.  At June 30, 2009, the aggregate fair value of our secured notes payable and secured revolving credit facility is estimated to be approximately $3.2 billion, based on a credit-adjusted present value of the principal and interest payments which are at floating rates.

Currently, we use interest rate swaps and caps to manage interest rate risk resulting from variable interest payments on our floating rate debt.  These financial instruments are carried on our balance sheet at fair value as determined under FAS157, based on the assumptions that market participants would use in pricing the asset or liability.  See Note 8.

12. Related Party Transactions

On March 26, 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class A buildings.  Subsequent to acquiring the properties, we entered into a 5-year non-recourse $365 million interest-only floating rate term loan secured by the six-property portfolio. At the time we entered into the loan, we entered into an interest rate swap agreement to mitigate interest rate risk by converting the floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense and cash flows.  The swap agreement involves the receipt of floating-rate amounts in exchange for fixed-rate interest payments over the life of the agreements without an exchange of the underlying principal amount.

In October 2008, we contributed these six properties and the related $365 million term loan, and the benefits and burdens of the related swap agreement to Fund X in exchange for an interest in the common equity of Fund X as well as certain cash and the right to further cash. We received the balance of the cash in February 2009, at which point Fund X became an unconsolidated real estate fund in which we retained an equity investment.

 

In addition, if Fund X fails to perform any obligations under the related swap agreement, we remain liable to the swap counterparties.  The maximum future payments under the swap agreements was approximately $45.5 million as of June 30, 2009. As of June 30, 2009, all obligations under the swap agreements have been performed by Fund X in accordance with the terms of the agreements. 

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

13. Commitments and Contingencies

We are subject to various legal proceedings and claims that arise in the ordinary course of business. These matters are generally covered by insurance.  We believe that the ultimate outcome of these actions will not have a material adverse effect on our financial position and results of operations or cash flows.

Concentration of Credit Risk

Our properties are located in premier submarkets within Los Angeles County, California and Honolulu, Hawaii. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory and social factors affecting the markets in which the tenants operate.  We perform ongoing credit evaluations of our tenants for potential credit losses.  Financial instruments that subject us to credit risk consist primarily of cash, accounts receivable, deferred rents receivable and interest rate contracts. We maintain our cash and cash equivalents with high quality financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250 under the increased limit that the U.S. Congress has temporarily granted until December 31, 2009.  We have not experienced any losses to date on our deposited cash.  All of our deposits are maintained at banks with investment grade ratings as evaluated by the predominant rating agencies.

Asset Retirement Obligations

Financial Accounting Standards Board (FASB) Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 clarifies that the term “conditional asset retirement obligation” as used in FAS No. 143, Accounting for Asset Retirement Obligations, represents a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within a company’s control.  Under this standard, a liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated.  Environmental site assessments and investigations have identified 23 properties in our portfolio containing asbestos, which would have to be removed in compliance with applicable environmental regulations if these properties undergo major renovations or are demolished.  As of June 30, 2009, the obligations to remove the asbestos from these properties have indeterminable settlement dates, and therefore, we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligation.

Tenant Concentrations

For the six months ended June 30, 2009 and 2008, no tenant accounted for more than 10% of our total rental revenue and tenant recoveries.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

14. Summary of Significant Accounting Policies

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, we consider short-term investments with maturities of three months or less when purchased to be cash equivalents.

Income Taxes

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (IRC) commencing with our initial taxable year ending December 31, 2006.  To qualify as a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders and meet the various other requirements imposed by the IRC relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings we derive through our taxable REIT subsidiary (TRS). If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the IRC, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

In addition, we are subject to taxation by various state and local (and potentially foreign) jurisdictions, including those in which we transact business or reside.  Our non-TRS subsidiaries, including the operating partnership, are either partnerships or disregarded entities for federal income tax purposes.  Under applicable federal and state income tax rules, the allocated share of net income or loss from the limited partnerships and S-Corporation is reportable in the income tax returns of the respective partners and stockholders.  Accordingly, no income tax provision is included in the accompanying consolidated financial statements.

Earnings Per Share (EPS)

Basic EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average of common shares outstanding during the period.  Diluted EPS is calculated by dividing the net income applicable to common stockholders for the period by the weighted average number of common and dilutive instruments outstanding during the period using the treasury stock method.  Since we were in a net loss position during the three and six months ended June 30, 2009 and 2008, all potentially dilutive instruments are anti-dilutive and have been excluded from our computation of weighted average dilutive shares outstanding.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

Recently Issued Accounting Literature

On January 1, 2009, we adopted FAS No. 141 (Revised 2007), Business Combinations (FAS 141R).  FAS 141R changes the method of accounting for business combinations.  Under FAS 141R, an acquiring entity is required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  FAS 141R requires that transaction costs such as legal, accounting and advisory fees be expensed.  FAS 141R also includes a substantial number of new disclosure requirements.  The adoption of FAS 141R did not have a material effect on our financial position or results of operations.

On January 1 2009, we adopted FAS 160, which establishes new accounting and reporting standards for noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary.  Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity.  The amount of net income attributable to the noncontrolling interest is included in consolidated net income on the face of the income statement.  FAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest.  In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated.  Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date.  FAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests.  The adoption of FAS 160 did not have a material effect on our financial position or results of operations, other than presentation differences.

On January 1, 2009, we adopted FAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (FAS 161), an amendment of FAS 133, to expand disclosure requirements for an entity's derivative and hedging activities.  Under FAS 161, entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows.  In order to meet these requirements, entities must include quantitative disclosures about derivative fair values and gains/losses on derivative instruments, qualitative disclosures about objectives and strategies for using derivatives, and disclosures about credit-risk-related contingent features in derivative agreements.  The adoption of FAS 161 did not have a material effect on our financial position or results of operations as this statement only addresses disclosures.

On January 1, 2009, we adopted FASB Staff Position (FSP) No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1), which clarifies that unvested share-based payment awards which contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities, and as participating securities, they must be included in the computation of EPS pursuant to the two-class method.  The adoption of FSP EITF 03-6-1 did not have a material effect on our financial position or results of operations.

On April 1, 2009, we adopted FSP 107-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1).  FSP 107-1 amends FAS 107 which requires disclosures about fair value of financial instruments for interim reporting periods of publicly-traded companies as well as in annual financial statements.  The adoption of FSP 107-1 did not have a material effect on our financial position or results of operations as this statement only addresses disclosures.

On April 1, 2009, we adopted FAS No. 165, Subsequent Events (FAS 165).  This standard establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  The adoption of FAS 165 did not have a material effect on our financial position or results of operations as this statement only addresses disclosures.  See Note 15 for subsequent events disclosure.

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Douglas Emmett, Inc.

Notes to Consolidated Financial Statements--(continued)

(in thousands, except shares and per share data)

 

 

In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167).  This standard requires an enterprise to perform an analysis to determine whether an enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity.  Additionally, an enterprise is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. FAS 167 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2009, which for us means January 1, 2010.  We are currently evaluating the impact that FAS 167 will have on our financial statements.

 

 

In June 2009, the FASB issued FAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162 (FAS 168).  The FASB Accounting Standards Codification (Codification) will become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  Any other accounting literature issued by an entity other than the SEC will become non-authoritative.   This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009, which for us means July 1, 2009.  We do not believe adoption of FAS 168 will have a material effect on our financial position or results of operations as this statement only addresses the hierarchy of GAAP, and the manner in which we refer to and disclose the accounting principles used.

 

15. Subsequent Events

We evaluated subsequent events through August 6, 2009, the date on which these financial statements were issued, and were not aware of any which were material.

 

 

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