Document
United States
Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
 
Commission file number 001-33106
Douglas Emmett, Inc.

(Exact name of registrant as specified in its charter)
Maryland
20-3073047
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
808 Wilshire Boulevard, Suite 200, Santa Monica, California
90401
(Address of principal executive offices)
(Zip Code)
 
(310) 255-7700
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes  x No  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x     
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 Yes  ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at
July 29, 2016
Common Stock, $0.01 par value per share
 
151,034,897
shares

1

DOUGLAS EMMETT, INC.
FORM 10-Q

Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents
Glossary

Abbreviations used in this document:
ASU
Accounting Standards Updates
ATM
At-the-Market
CEO
Chief Executive Officer
CFO
Chief Financial Officer
Code
Internal Revenue Code of 1986, as amended
Company
Douglas Emmett, Inc.
EPS
Earnings Per Share
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFO
Funds from Operations
Fund X
Douglas Emmett Fund X, LLC
Funds
Unconsolidated real estate funds
GAAP
Generally Accepted Accounting Principles
LIBOR
London Interbank Offered Rate
LTIP Units
Long-Term Incentive Plan Units
NAREIT
National Association of Real Estate Investment Trusts
OP Units
Operating Partnership Units
Operating Partnership
Douglas Emmett Properties, LP
Partnership X
Douglas Emmett Partnership X, LP
PCAOB
Public Company Accounting Oversight Board (United States)
REIT
Real Estate Investment Trust
Report
Quarterly Report on Form 10-Q
SEC
Securities and Exchange Commission (United States)
Securities Act
Securities Act of 1933, as amended
TRS
Taxable REIT subsidiary(ies)
US
United States
VIE
Variable Interest Entity

Defined terms used in this document:
Annualized rent
Annualized cash base rent (excludes tenant reimbursements, parking and other income and lost rent recovered from insurance) before abatements under leases commenced as of the reporting date and expiring after the reporting date. For our triple net office properties (in Honolulu and two single tenant buildings in Los Angeles), annualized rent is calculated by adding expense reimbursements to base rent.


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Forward Looking Statements



This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.  You can find many (but not all) of these statements by looking for words such as "approximates," "believes," "expects," "anticipates," "estimates," "intends," "plans," "would," "could", "may", "future" or other similar expressions in this Report.  We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.  We caution investors that any forward-looking statements presented in this Report, or those that we may make orally or in writing from time to time, are based on our beliefs and assumptions, as well as information currently available to us.  The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.  Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect.  As a result, our actual future results can be expected to differ from our expectations, and those differences may be material.  Accordingly, investors should use caution when relying on previously reported forward-looking statements, which were based on results and trends at the time they were made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following:

•
adverse economic or real estate developments in Southern California and Honolulu, Hawaii;
•
a general downturn in the economy, such as the global financial crisis that commenced in 2008;
•
decreased rental rates or increased tenant incentive and vacancy rates;
•
defaults on, early termination of, or non-renewal of leases by tenants;
•
increased interest rates and operating costs;
•
failure to generate sufficient cash flows to service our outstanding indebtedness;
•
difficulties in raising capital for our unconsolidated Funds;
•
difficulties in identifying properties to acquire and completing acquisitions;
•
failure to successfully operate acquired properties;
•
failure to maintain our status as a REIT under federal tax laws;
•
possible adverse changes in rent control laws and regulations;
•
environmental uncertainties;
•
risks related to natural disasters;
•
lack or insufficient amount of insurance, or changes to the cost of maintaining existing insurance coverage;
•
inability to successfully expand into new markets and submarkets;
•
risks associated with property development;
•
conflicts of interest with our officers;
•
changes in real estate zoning laws and increases in real property tax rates;
•
the negative results of litigation or governmental proceedings;
•
the consequences of any possible future terrorist attacks or wars; and
•
the consequences of any possible future cyber attacks or intrusions.

For further discussion of the above risk factors, see "Item 1A. Risk Factors" in our 2015 Annual Report on Form 10-K.

This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.


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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Douglas Emmett, Inc.
Consolidated Balance Sheets
(Unaudited; in thousands, except share data)
 
June 30, 2016
 
December 31, 2015
Assets
 

 
 

Investment in real estate:
 

 
 

Land
$
993,047

 
$
897,916

Buildings and improvements
6,886,909

 
5,644,546

Tenant improvements and lease intangibles
768,864

 
696,647

Property under development
32,871

 
26,900

Investment in real estate, gross
8,681,691

 
7,266,009

Less: accumulated depreciation and amortization
(1,796,242
)
 
(1,687,998
)
Investment in real estate, net
6,885,449

 
5,578,011

Real estate held for sale, net
42,591

 
42,943

Cash and cash equivalents
77,166

 
101,798

Tenant receivables, net
2,278

 
1,907

Deferred rent receivables, net
87,473

 
79,837

Acquired lease intangible assets, net
4,394

 
4,484

Interest rate contract assets
—

 
4,830

Investment in unconsolidated real estate funds
145,999

 
164,631

Other assets
13,153

 
87,720

Total assets
$
7,258,503

 
$
6,066,161

 
 
 
 
Liabilities
 

 
 

Secured notes payable and revolving credit facility, net
$
4,280,925

 
$
3,611,276

Interest payable, accounts payable and deferred revenue
69,691

 
57,417

Security deposits
43,755

 
38,683

Acquired lease intangible liabilities, net
71,532

 
28,605

Interest rate contract liabilities
46,052

 
16,310

Dividends payable
32,827

 
32,322

Total liabilities
4,544,782

 
3,784,613

 
 
 
 
Equity
 

 
 

Douglas Emmett, Inc. stockholders' equity:
 

 
 

Common Stock, $0.01 par value, 750,000,000 authorized, 149,214,897 and 146,919,187 outstanding at June 30, 2016 and December 31, 2015, respectively
1,492

 
1,469

Additional paid-in capital
2,665,241

 
2,706,753

Accumulated other comprehensive loss
(36,992
)
 
(9,285
)
Accumulated deficit
(804,129
)
 
(772,726
)
Total Douglas Emmett, Inc. stockholders' equity
1,825,612

 
1,926,211

Noncontrolling interests
888,109

 
355,337

Total equity
2,713,721

 
2,281,548

Total liabilities and equity
$
7,258,503

 
$
6,066,161


See accompanying notes to the consolidated financial statements.

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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Revenues
 

 
 

 
 

 
 

Office rental
 

 
 

 
 

 
 

Rental revenues
$
126,650

 
$
103,808

 
$
237,656

 
$
204,459

Tenant recoveries
10,986

 
11,463

 
21,197

 
21,613

Parking and other income
25,460

 
21,520

 
48,622

 
42,175

Total office revenues
163,096

 
136,791

 
307,475

 
268,247

 
 
 
 
 
 
 
 
Multifamily rental
 

 
 

 
 

 
 

Rental revenues
22,406

 
21,975

 
44,833

 
43,619

Parking and other income
1,713

 
1,691

 
3,479

 
3,400

Total multifamily revenues
24,119

 
23,666

 
48,312

 
47,019

 
 
 
 
 
 
 
 
Total revenues
187,215

 
160,457

 
355,787

 
315,266

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 

 
 

Office expenses
53,381

 
46,542

 
101,264

 
90,741

Multifamily expenses
5,341

 
5,930

 
11,372

 
11,750

General and administrative
9,403

 
7,473

 
17,474

 
14,834

Depreciation and amortization
62,568

 
51,246

 
118,120

 
101,080

Total operating expenses
130,693

 
111,191

 
248,230

 
218,405

 
 
 
 
 
 
 
 
Operating income
56,522

 
49,266

 
107,557

 
96,861

 
 
 
 
 
 
 
 
Other income
2,143

 
2,415

 
4,232

 
10,974

Other expenses
(1,684
)
 
(1,619
)
 
(3,235
)
 
(3,191
)
Income, including depreciation, from unconsolidated real estate funds
1,644

 
1,207

 
3,230

 
2,650

Interest expense
(37,703
)
 
(35,177
)
 
(73,363
)
 
(68,816
)
Acquisition-related expenses
(224
)
 
(198
)
 
(1,677
)
 
(488
)
Income before gains
20,698

 
15,894

 
36,744

 
37,990

Gain on sale of investment in real estate
1,082

 
—

 
1,082

 
—

Net income
21,780

 
15,894

 
37,826

 
37,990

Less:  Net income attributable to noncontrolling interests
(3,298
)
 
(2,446
)
 
(3,978
)
 
(5,843
)
Net income attributable to common stockholders
$
18,482

 
$
13,448

 
$
33,848

 
$
32,147

 
 
 
 
 
 
 
 
Net income attributable to common stockholders per share – basic
$
0.124

 
$
0.092

 
$
0.228

 
$
0.220

Net income attributable to common stockholders per share – diluted
$
0.120

 
$
0.089

 
$
0.221

 
$
0.213

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.22

 
$
0.21

 
$
0.44

 
$
0.42

 
See accompanying notes to the consolidated financial statements.

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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income
$
21,780

 
$
15,894

 
$
37,826

 
$
37,990

Other comprehensive income (loss): cash flow hedges
(14,890
)
 
11,367

 
(35,498
)
 
12,385

Comprehensive income
6,890

 
27,261

 
2,328

 
50,375

Less: Comprehensive (income) loss attributable to noncontrolling interests
1,913

 
(4,268
)
 
3,813

 
(7,998
)
Comprehensive income attributable to common stockholders
$
8,803

 
$
22,993

 
$
6,141

 
$
42,377

 
See accompanying notes to the consolidated financial statements.



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


 
Six Months Ended June 30,
 
2016
 
2015
Operating Activities
 

 
 

Net income
$
37,826

 
$
37,990

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

 
 

Income, including depreciation, from unconsolidated real estate funds
(3,230
)
 
(2,650
)
Gain on sale of investment in real estate
(1,082
)
 
—

Depreciation and amortization
118,120

 
101,080

Net accretion of acquired lease intangibles
(8,314
)
 
(12,940
)
Straight-line rent
(7,636
)
 
(3,366
)
Increase in the allowance for doubtful accounts
1,116

 
237

Amortization of deferred loan costs
3,235

 
3,974

Amortization of stock-based compensation
4,739

 
3,935

Operating distributions from unconsolidated real estate funds
893

 
535

Change in working capital components:
 

 
 

Tenant receivables
(1,487
)
 
(476
)
Interest payable, accounts payable and deferred revenue
12,455

 
3,133

Security deposits
5,072

 
(41
)
Other assets
5,064

 
4,784

Net cash provided by operating activities
166,771

 
136,195

 
 
 
 
Investing Activities
 

 
 

Capital expenditures for improvements to real estate
(35,183
)
 
(37,590
)
Capital expenditures for developments
(5,967
)
 
(2,074
)
Property acquisitions
(1,257,513
)
 
(89,906
)
Deposits for property acquisitions
(5,000
)
 
—

Proceeds from sale of investment in real estate
241,053

 
—

Proceeds from repayment of note receivable
—

 
1,000

Loan payments received from related parties
763

 
606

Contributions to unconsolidated real estate funds
—

 
(12
)
Capital distributions from unconsolidated real estate funds
18,839

 
4,053

Net cash used in investing activities
(1,043,008
)
 
(123,923
)
 
 
 
 
Financing Activities
 

 
 

Proceeds from borrowings
1,374,500

 
662,400

Repayment of borrowings
(693,511
)
 
(543,276
)
Loan costs
(14,575
)
 
(4,641
)
Contributions from noncontrolling interests in consolidated joint venture
320,000

 
—

Distributions to noncontrolling interests in our Operating Partnership
(16,787
)
 
(11,817
)
Cash dividends to common stockholders
(64,747
)
 
(61,054
)
Exercise of stock options
—

 
1,823

Taxes paid on exercise of stock options
(52,449
)
 
—

Repurchase of OP Units
(826
)
 
—

Net cash provided by financing activities
851,605

 
43,435

 
 
 
 
Increase (decrease) in cash and cash equivalents
(24,632
)
 
55,707

Cash and cash equivalents at beginning of period
101,798

 
18,823

Cash and cash equivalents at end of period
$
77,166

 
$
74,530


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


 
Six Months Ended June 30,
 
2016
 
2015
SUPPLEMENTAL CASH FLOWS INFORMATION
 
 
 
 
 
 
 
OPERATING ACTIVITIES
 
 
 
Cash paid for interest, net of capitalized interest of $503 and $463 for the six months ended June 30, 2016 and 2015, respectively
$
70,353

 
$
64,300

 
 
 
 
NONCASH INVESTING TRANSACTIONS
 
 
 
Accrual for capital expenditures for improvements to real estate and developments
$
181

 
$
1,369

Capitalized stock-based compensation for improvements to real estate and developments
$
448

 
$
402

Write-off of fully depreciated and amortized tenant improvements and lease intangibles
$
9,401

 
$
8,009

Write-off of fully amortized acquired lease intangible assets
$
598

 
$
14

Write-off of fully accreted acquired lease intangible liabilities
$
8,100

 
$
20,128

Settlement of note receivable in exchange for land and building acquired
$
—

 
$
26,500

Issuance of OP Units in exchange for land and building acquired
$
—

 
$
1,000

Application of deposit to purchase price of property
$
75,000

 
$
2,500

 
 
 
 
NONCASH FINANCING TRANSACTIONS
 
 
 
Loss from market value adjustments - our derivatives
$
(50,142
)
 
$
(5,740
)
Loss from market value adjustments - our unconsolidated Funds' derivatives
$
(1,149
)
 
$
(1,609
)
Dividends declared
$
65,252

 
$
61,352

Common stock issued in exchange for OP Units
$
11,458

 
$
17,203


See accompanying notes to the consolidated financial statements.



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




1. Overview

Organization and Business Description

Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. We focus on owning, acquiring, developing and managing a substantial share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities.

Through our interest in our Operating Partnership and its subsidiaries, our consolidated joint ventures and our unconsolidated Funds, we own or partially own, acquire, develop and manage real estate, consisting primarily of office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii.

As of June 30, 2016, we owned a consolidated portfolio of (i) fifty-eight office properties (including ancillary retail space), which included five office properties owned by our consolidated joint ventures, (ii) ten multifamily properties and (iii) fee interests in two parcels of land subject to ground leases from which we earn ground rent income. Alongside our consolidated portfolio, we also manage and own equity interests in our unconsolidated Funds, which at June 30, 2016, owned eight additional office properties, for a combined sixty-six office properties in our total portfolio. See Note 17 regarding the class A multi-tenant office property that we acquired in July, 2016.

The terms "us," "we" and "our" as used in these financial statements refer to Douglas Emmett, Inc. and its subsidiaries.

Basis of Presentation

The accompanying financial statements are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries, including our Operating Partnership and our consolidated joint ventures.  All significant intercompany balances and transactions have been eliminated in our consolidated financial statements.

As of June 30, 2016, our consolidated financial statements included one consolidated VIE in which we were deemed to be the primary beneficiary. The VIE was established in the first quarter of 2016 in connection with the acquisition of the Westwood Portfolio. As of June 30, 2016, the impact of consolidating the VIE increased the Company’s total assets, liabilities and equity by $1.42 billion (of which $1.37 billion related to real estate held for investment), $631.6 million and $789.1 million (of which $550.3 million related to the noncontrolling interests equity), respectively. See Note 3.

As of June 30, 2016, the carrying value of a property which we had agreed to sell was classified as held for sale in our consolidated balance sheets, and the carrying value in the comparable period has been reclassified to conform to the current period presentation.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with US GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited interim financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2015 Annual Report on Form 10-K and the notes thereto. Any references in this report to the number of properties, square footage, per square footage amounts, apartment units and geography, are outside the scope of our independent registered public accounting firm’s review of our financial statements, in accordance with the standards of the PCAOB.


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

2. Summary of Significant Accounting Policies

During the period covered by this Report, we have not made any material changes to our significant accounting policies included in our 2015 Annual Report on Form 10-K.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

Income Taxes

We have elected to be taxed as a REIT under the Code. Provided that we qualify for taxation as a REIT, we are generally not subject to corporate-level income tax on the earnings distributed currently to our stockholders that we derive from our REIT qualifying activities. We are subject to corporate-level tax on the earnings that we derive through our TRS.

New Accounting Pronouncements 

Changes to GAAP are established by the FASB in the form of ASUs.  We consider the applicability and impact of all ASUs.

Recently Issued and Adopted Accounting Pronouncements

In January 2015, the FASB issued ASU No. 2015-01, "Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)", which eliminates the concept of extraordinary items from GAAP. The Board is issuing this Update as part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). The objective of the Simplification Initiative is to identify, evaluate, and improve areas of GAAP for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to the users of financial statements. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, which for us is the first quarter of 2016. We adopted the ASU in the first quarter of 2016 and it did not have a material impact on our financial position, results of operations or disclosures.

In February 2015, the FASB issued ASU No. 2015-02, "Amendments to the Consolidation Analysis (Consolidation - Topic 810)", which provides guidance regarding the consolidation of certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, which for us is the first quarter of 2016. We adopted the ASU in the first quarter of 2016 and it did not have a material impact on our financial position, results of operations or disclosures.

In September 2015, the FASB issued ASU No. 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments", which amends "Business Combinations" (Topic 805). The ASU requires that an acquirer (i) recognize adjustments to provisional amounts from business combinations that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, (ii) record, in the same period’s financial statements, the effect on earnings, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (iii) disclosure of the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, which for us is the first quarter of 2016. We adopted the ASU in the first quarter of 2016 and it did not have a material impact on our financial position, results of operations or disclosures.

In March 2016, the FASB issued ASU No. 2016-05, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships", which amends "Derivatives and Hedging" (Topic 815). The ASU provides guidance on the effect of derivative contract novations on existing hedge accounting relationships. The ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, does not in and of itself require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, which for us would be the first quarter of 2017, and early adoption is permitted. We adopted the ASU in the first quarter of 2016 and it did not have a material impact on our financial position, results of operations or disclosures.

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


Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The ASU increases transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about leasing arrangements. To meet that objective, the FASB has created Topic 842. The accounting applied by a lessor is largely unchanged from that applied under previous GAAP. For example, the vast majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for those leases on a generally straight-line basis over the lease term. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those years, which for us would be the first quarter of 2019, and early adoption is permitted. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. We are currently evaluating the impact of this ASU.

In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which amends "Revenue from Contracts with Customers" (Topic 606). The ASU clarifies the guidance for principal versus agent considerations. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, which for us would be the first quarter of 2018, and early adoption is permitted commencing the first quarter of 2017. The amendments in this Update should be applied retrospectively. We are currently evaluating the impact of this ASU.

In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing" which amends "Revenue from Contracts with Customers" (Topic 606). The ASU provides guidance for identifying performance obligations and licensing. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, which for us would be the first quarter of 2018, and early adoption is permitted commencing the first quarter of 2017. The amendments in this Update should be applied retrospectively. We are currently evaluating the impact of this ASU.

In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients" which amends "Revenue from Contracts with Customers" (Topic 606). The ASU provides guidance for a variety of revenue recognition related topics. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those years, which for us would be the first quarter of 2018, and early adoption is permitted commencing the first quarter of 2017. The amendments in this Update should be applied retrospectively. We are currently evaluating the impact of this ASU.

In June 2016, the FASB issued ASU No. 2016-13, "Measurement of Credit Losses on Financial Instruments" which amends "Financial Instruments-Credit Losses" (Topic 326). The ASU provides guidance for measuring credit losses on financial instruments. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those years, which for us would be the first quarter of 2020, and early adoption is permitted commencing the first quarter of 2019. The amendments in this Update should be applied retrospectively. We are currently evaluating the impact of this ASU.

The FASB has not issued any other ASUs during 2016 that we expect to be applicable and have a material impact on our future financial position, results of operations or disclosures.


12
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

3. Investment in Real Estate

2016 Acquisitions

Westwood Portfolio Acquisition

On February 29, 2016 (Acquisition Date), a consolidated joint venture which we manage and own an equity interest in, acquired four class A multi-tenant office properties located in Westwood, California (Westwood Portfolio) for a contract price of $1.34 billion or approximately $777 per square foot. As of the Acquisition Date, we had contributed sixty-percent of the equity to the joint venture, but subsequently reduced that investment to thirty-percent on May 31, 2016 (Sell Down Date) when we sold half of our ownership interest to a third party investor. The results of operations for the acquisition are included in our consolidated statements of operations after the Acquisition Date. The table below (in thousands) summarizes our preliminary purchase accounting and funding sources for the acquisition (the purchase accounting is subject to adjustment within twelve months of the acquisition date):
Sources and Uses of Funds
Actual at Closing(1)
Pro Forma Sell Down Adjustments (2)
Pro Forma
 
 
 
 
Building square footage (in thousands)
1,725
 
1,725
 
 
 
 
Uses of funds - Investment in real estate:
 
 
 
Land
$
95,127

 
$
95,127

Buildings and improvements
1,238,162

 
1,238,162

Tenant improvements and lease intangibles
50,497

 
50,497

Acquired above and below-market leases, net(3)
(51,273
)
 
(51,273
)
Net assets and liabilities acquired(4)
$
1,332,513

 
$
1,332,513

 
 
 
 
Source of funds:
 
 
 
Cash on hand(5)
$
153,745

$
—

$
153,745

Credit facility(6)
290,000

(240,000
)
50,000

Non-recourse term loan, net(7)
568,768

—

568,768

Noncontrolling interests
320,000

240,000

560,000

Total source of funds
$
1,332,513

$
—

$
1,332,513

________________________________________________    
(1)
Reflects the purchase of the Westwood portfolio on the Acquisition Date when we contributed sixty-percent of the equity to the consolidated joint venture.
(2)
Reflects our sale of thirty-percent of the equity in the joint venture on the Sell Down Date, presented as of the Acquisition Date, treated as in-substance real estate, which reduced our ownership interest in the joint venture to thirty-percent. We sold the interest for the $240.0 million we contributed plus an additional $1.1 million to compensate for our costs of holding the investment. We recognized a gain on the sale of $1.1 million. We used the proceeds from the sale to pay down the balance owed on our revolving credit facility.
(3)
As of the Acquisition Date, the weighted average remaining life of the acquired above-and below-market leases was approximately 4.4 years.
(4)
The difference between the contract and purchase price related to credits received for prorations and similar matters.
(5)
Cash paid included $75.0 million paid through a deposit made before December 31, 2015 (which was included in other assets in the Company's consolidated balance sheet as reported in our 2015 Form 10-K filing), $67.5 million paid at closing, and $11.2 million spent on loan costs in connection with securing the $580.0 million term loan.
(6)
Reflects borrowings using the Company's credit facility, which bears interest at LIBOR plus 1.40%.
(7)
Reflects 100% (not only the Company's pro rata share) of a $580.0 million interest-only non-recourse loan, net of deferred loan costs of $11.2 million incurred to secure the loan. The loan has a seven-year term and is secured by the Westwood Portfolio. Interest on the loan is floating at LIBOR plus 1.40%, which has been effectively fixed at 2.37% per annum for five years through interest rate swaps. The deferred loan costs will be amortized over the seven-year loan term. Deferred loan costs are presented in the balance sheet as a direct deduction from the carrying amount of our secured notes payable and revolving credit facility.

13
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

The table below (in thousands) presents the revenues and net income attributable to common stockholders from the Westwood Portfolio which are included in the Company’s consolidated statement of operations from the date of acquisition:
Total office revenues
$
32,198

Net income attributable to common stockholders(1)
$
154

______________________________________________________
(1)    Excluding the impact of transaction costs , net income attributable to common stockholders would be $2.1 million.

The table below (in thousands) presents the historical results of Douglas Emmett, Inc. and the Westwood Portfolio on a combined basis as if the acquisition was completed on January 1, 2015, based on our thirty-percent ownership interest and includes adjustments that give effect to events that are (i) directly attributable to the acquisition, (ii)  expected to have a continuing impact on the Company, and (iii) are factually supportable. The pro forma reflects the hypothetical impact of the acquisition on the Company and does not purport to represent what the Company’s results of operations would have been had the acquisition occurred on January 1, 2015, or project the results of operations for any future period. The information does not reflect cost savings or operating synergies that may result from the acquisition or the costs to achieve any such potential cost savings or operating synergies.
 
Six Months Ended June 30,
 
2016
 
2015
 
 
 
 
Pro forma revenues
$
369,114

 
$
361,873

Pro forma net income attributable to common stockholders(1)
$
32,698

 
$
33,678

Pro forma net income attributable to common stockholders per share – basic
$
0.221

 
$
0.230

Pro forma net income attributable to common stockholders per share – diluted
$
0.214

 
$
0.223

_____________________________________________________
(1)    In the first quarter of 2015, we recognized $6.6 million of accretion for an above-market ground lease in other income related to the purchase of the Harbor Court Land (see "2015 Acquisitions" below and Note 4).

See Note 17 for information regarding a class A multi-tenant office property that we acquired in July, 2016.

2016 Disposition

During the second quarter of 2016, we entered into an agreement to sell a 168,000 square foot class A office property located in Sherman Oaks, Los Angeles with a carrying value of $42.6 million for $56.7 million. We expect the transaction to close during the third quarter of 2016. The property is classified as real estate held for sale in our consolidated balance sheets.

14
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

2015 Acquisitions

During the six months ended June 30, 2015, we closed two acquisitions: (i) on March 5, 2015, we purchased a Class A multi-tenant office property (First Financial Plaza), located in Encino, California, for $92.4 million, or approximately $407 per square foot, and (ii) on February 12, 2015, we acquired the fee interest in the land (Harbor Court Land) under one of our office buildings for $27.5 million. We recognized $6.6 million of accretion of an above-market ground lease related to the purchase of the Harbor Court Land, which is included in other income in the consolidated statement of operations. See Note 4. The results of operations for these acquisitions are included in our consolidated statements of operations after the respective date of their acquisitions. The table below (in thousands) summarizes our purchase price allocations for the acquisitions:
 
Harbor Court Land
 
First Financial Plaza
 
 
 
 
Building square footage (if applicable) (in thousands)
N/A
 
227
 
 
 
 
Investment in real estate:
 
 
 
Land
$
12,060

 
$
12,092

Buildings and improvements
15,440

 
75,039

Tenant improvements and lease intangibles
—

 
6,065

Acquired above and below-market leases, net
—

 
(790
)
Net assets and liabilities acquired
$
27,500

 
$
92,406


15
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

4. Acquired Lease Intangibles

Summary of our Acquired Lease Intangibles

The table below (in thousands) summarizes our above/below-market leases:
 
June 30, 2016
 
December 31, 2015
 
 
 
 
Above-market tenant leases
$
4,483

 
$
4,661

Accumulated amortization - above-market tenant leases
(2,543
)
 
(2,670
)
Below-market ground leases
3,198

 
3,198

Accumulated amortization - below-market ground leases
(744
)
 
(705
)
Acquired lease intangible assets, net
$
4,394

 
$
4,484

 
 
 
 
Below-market tenant leases
$
146,977

 
$
103,327

Accumulated accretion - below-market tenant leases
(78,978
)
 
(78,280
)
Above-market ground leases
4,017

 
4,017

Accumulated accretion - above-market ground leases
(484
)
 
(459
)
Acquired lease intangible liabilities, net
$
71,532

 
$
28,605

 
Impact on the Consolidated Statements of Operations

The table below (in thousands) summarizes the net amortization/accretion related to our above/below-market leases:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net accretion of above/below-market tenant leases(1)
$
5,001

 
$
3,202

 
$
8,296

 
$
6,322

Amortization of a below-market ground lease(2)
(4
)
 
(4
)
 
(8
)
 
(8
)
Accretion of above-market ground lease(3)
13

 
13

 
26

 
26

Accretion of an above-market ground lease(4)
—

 
—

 
—

 
6,600

Total
$
5,010

 
$
3,211

 
$
8,314

 
$
12,940

_______________________________________________
(1)
Recorded as a net increase to office and multifamily rental revenues.
(2)
Ground lease from which we earn ground rent income. Recorded as a decrease to office parking and other income.
(3)
Ground lease from which we incur ground rent expense. Recorded as a decrease to office expense.
(4)
Ground lease from which we incurred ground rent expense. Recorded as an increase to other income. During the first quarter of 2015, we acquired the fee interest in the land (Harbor Court Land). See Note 3.

The table below (in thousands) presents the future net accretion of above- and below-market tenant and ground leases at June 30, 2016:
Twelve months ending June 30:
 
Net increase to revenues
 
Decrease to expenses
 
Total
 
 
 
 
 
 
 
2017
 
$
15,651

 
$
50

 
$
15,701

2018
 
12,198

 
50

 
12,248

2019
 
11,232

 
50

 
11,282

2020
 
9,427

 
50

 
9,477

2021
 
6,646

 
50

 
6,696

Thereafter
 
8,451

 
3,283

 
11,734

Total
 
$
63,605

 
$
3,533

 
$
67,138


16
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

5. Investments in Unconsolidated Real Estate Funds

Description of our Funds

We manage and own equity interests in two unconsolidated Funds, Fund X and Partnership X, through which we and investors own eight office properties totaling 1.8 million square feet.  At June 30, 2016, we held equity interests of 68.61% of Fund X and 24.25% of Partnership X. Our Funds pay us fees and reimburse us for certain expenses related to property management and other services we provide to the Funds. We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors. The table below presents (in thousands) cash distributions received from our Funds:

 
Six Months Ended June 30,
 
2016
 
2015
 
 
 
 
Cash distributions received from our Funds
$
19,732

 
$
4,588


Notes receivable

In April 2013, we loaned $2.9 million to a related party investor in connection with a capital call made by Fund X, and in November 2015, we loaned $0.5 million to Partnership X to fund working capital. Both loans carried interest at LIBOR plus 2.5% per annum and were repaid in full during the first quarter of 2016. The outstanding balance of the Fund X and Partnership X loans at December 31, 2015 of $0.3 million and $0.5 million, respectively, were included in our investment in our unconsolidated funds in our consolidated balance sheet. The interest income recognized on these notes receivable was included in other income in our consolidated statements of operations.

Summarized Financial Information for our Funds

The accounting policies of the Funds are consistent with ours. The tables below present (in thousands) selected financial information for the Funds on a combined basis.  The amounts presented represent 100% (not our pro-rata share) of amounts related to the Funds, and are based upon historical acquired book value:

 
June 30, 2016
 
December 31, 2015
 
 
 
 
Total assets
$
692,332

 
$
691,543

Total liabilities
450,143

 
389,372

Total equity
242,189

 
302,171


 
Six Months Ended June 30,
 
2016
 
2015
 
 
 
 
Total revenues
$
35,237

 
$
35,041

Operating income
8,806

 
7,180

Net income
3,196

 
1,442



17
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

6. Other Assets

Other assets consisted of the following (in thousands):
 
June 30, 2016
 
December 31, 2015
 
 
 
 
Restricted cash
$
194

 
$
194

Prepaid expenses
2,304

 
6,720

Other indefinite-lived intangible
1,988

 
1,988

Deposits in escrow
5,000

 
75,000

Furniture, fixtures and equipment, net
1,293

 
1,448

Other
2,374

 
2,370

Total other assets
$
13,153

 
$
87,720








18
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

7. Secured Notes Payable and Revolving Credit Facility, net


The following table summarizes (in thousands) our secured notes payable and revolving credit facility:
Description
 
Maturity
Date(1)
 
Principal Balance as of June 30, 2016
 
Principal Balance as of December 31, 2015
 
Variable Interest Rate
 
Fixed Interest
Rate(2)
 
Swap Maturity Date
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholly Owned Subsidiaries
Term Loan
 
12/24/2016
 
$
20,000

 
$
20,000

 
LIBOR + 1.45%
 
N/A
 
 --
Term Loan
 
2/28/2018
 
1,000

 
—

 
N/A
 
3.00%
 
 --
Term Loan
 
4/2/2018
 
—

 
256,140

 
LIBOR + 2.00%
 
4.12%
 
4/1/2016
Term Loan
 
8/1/2018
 
530,000

 
530,000

 
LIBOR + 1.70%
 
3.74%
 
8/1/2016
Term Loan(3)
 
8/5/2018
 
352,994

 
355,000

 
 N/A
 
4.14%
 
 --
Term Loan(3)
 
2/1/2019
 
151,336

 
152,733

 
 N/A
 
4.00%
 
 --
Term Loan(4)
 
6/5/2019
 
285,000

 
285,000

 
N/A
 
3.85%
 
 --
Fannie Mae Loan
 
10/1/2019
 
145,000

 
145,000

 
LIBOR + 1.25%
 
N/A
 
 --
Term Loan(5)
 
3/1/2020
 
348,602

 
349,070

 
 N/A
 
4.46%
 
 --
Fannie Mae Loans
 
11/2/2020
 
388,080

 
388,080

 
LIBOR + 1.65%
 
3.65%
 
11/1/2017
Term Loan
 
4/15/2022
 
340,000

 
340,000

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

 
180,000

 
LIBOR + 1.45%
(7) 
3.06%
 
7/1/2020
Term Loan
 
11/2/2022
 
400,000

 
400,000

 
LIBOR + 1.35%
(7) 
2.64%
 
11/1/2020
Term Loan
 
6/23/2023
 
360,000

 
—

 
LIBOR + 1.55%
(7) 
2.57%
 
7/1/2021
Fannie Mae Loan
 
4/1/2025
 
102,400

 
102,400

 
LIBOR + 1.25%
(7) 
2.84%
 
3/1/2020
Fannie Mae Loan
 
12/1/2025
 
115,000

 
115,000

 
LIBOR + 1.25%
(7) 
2.76%
 
12/1/2020
Revolving credit line(6)
 
8/21/2020
 
—

 
—

 
LIBOR + 1.40%
 
N/A
 
 --
Total Wholly Owned Debt
$
3,719,412

 
$
3,618,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Joint Ventures
Term Loan
 
3/1/2017
 
$
15,740

 
$
15,740

 
LIBOR + 1.60%
 
N/A
 
 --
Term Loan
 
2/28/2023
 
580,000

 
—

 
LIBOR + 1.40%
(7) 
2.37%
 
3/1/2021
Total Debt(8) (9)
$
4,315,152

 
$
3,634,163

 
 
 
 
 
 
Deferred loan costs, net(10)
 
(34,227
)
 
(22,887
)
 
 
 
 
 
 
Total Debt, net
$
4,280,925

 
$
3,611,276

 
 
 
 
 
 
___________________________________________________
At June 30, 2016, the weighted average remaining life, including extension options, of our total consolidated term debt (excluding our revolving credit facility) was 4.8 years. For the $4.13 billion of term debt on which the interest rate was fixed under the terms of the loan or a swap, the weighted average (i) remaining life was 4.8 years, (ii) remaining period during which the interest rate was fixed was 3.0 years, (iii) annual interest rate was 3.31% and (iv) effective interest rate was 3.46% (including the non-cash amortization of deferred loan costs). Except as otherwise noted below, each loan (including our revolving credit facility) is secured by a one or more separate collateral pools consisting of one or more properties, requiring monthly payments of interest only, with the outstanding principal due upon maturity. Maturity dates include the effect of extension options.  The following table summarizes (in thousands) our fixed and floating rate debt:
Description
 
Principal Balance as of June 30, 2016
 
Principal Balance as of December 31, 2015
 
 
 
 
 
Aggregate swap fixed rate loans
 
$
2,995,480

 
$
2,492,360

Aggregate fixed rate loans
 
1,138,932

 
1,141,803

Aggregate floating rate loans
 
180,740

 
—

Total Debt
 
$
4,315,152

 
$
3,634,163

 
(1)
Maturity dates include the effect of extension options.

19
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

(2)
Includes the effect of interest rate swaps and excludes the effect of prepaid loan costs. See Note 9 for the details of our interest rate contracts.
(3)
Requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.
(4)
Interest only until February 2017, with principal amortization thereafter based upon a 30-year amortization schedule.
(5)
Interest rate is fixed until March 1, 2018. Interest-only payments until May 1, 2016, and principal amortization thereafter based upon a 30-year amortization schedule.
(6)
$400.0 million revolving credit facility. Unused commitment fees range from 0.15% to 0.20%.
(7)
Loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.
(8)
See Note 12 for our fair value disclosures.
(9)
At June 30, 2016, the minimum future principal payments due on our secured notes payable and revolving credit facility, excluding any maturity extension options, were as follows (in thousands):
Twelve months ending June 30:
 
 
 
2017
$
52,250

2018
358,512

2019
1,293,910

2020
145,000

2021
683,080

Thereafter
1,782,400

Total future principal payments
$
4,315,152


(10)
Deferred loan costs are net of accumulated amortization of $15.7 million and $15.2 million at June 30, 2016 and December 31, 2015, respectively. The table below (in thousands) sets forth loan costs and amortization of deferred loan costs, both of which are included in interest expense in our consolidated statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Loan costs
$
808

 
$
—

 
$
827

 
$
—

Deferred loan cost amortization
1,916

 
2,201

 
3,235

 
3,974

Total
$
2,724

 
$
2,201

 
$
4,062

 
$
3,974




8. Interest Payable, Accounts Payable and Deferred Revenue

Interest payable, accounts payable and deferred revenue consisted of the following (in thousands):

 
June 30, 2016
 
December 31, 2015
 
 
 
 
Interest payable
$
9,803

 
$
10,028

Accounts payable and accrued liabilities
36,201

 
23,716

Deferred revenue
23,687

 
23,673

Total interest payable, accounts payable and deferred revenue
$
69,691

 
$
57,417



20
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

9. Derivative Contracts

Hedges of Interest Rate Risk

We make use of interest rate swap and interest rate cap contracts to manage the risk associated with changes in interest rates on our floating-rate debt. When we enter into a floating-rate term loan, we generally enter into an interest rate swap agreement for the equivalent principal amount, for a period covering the majority of the loan term, which effectively converts our floating-rate debt to a fixed-rate basis during that time. In limited instances, we make use of interest rate caps to limit our exposure to interest rate increases on our floating-rate debt. We do not speculate in derivatives and we do not make use of any other derivative instruments. See Note 7 for the details of our floating-rate debt that we have hedged.

Accounting for Hedges of Interest Rate Risk

When we enter into derivative agreements, we generally elect to have them designated as cash flow hedges for accounting purposes. For hedging instruments designated as cash flow hedges, changes in fair value of the hedging instrument are recorded in accumulated other comprehensive income (loss) (AOCI), which is a component of equity outside of earnings, and any hedge ineffectiveness is recorded as interest expense. 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 unconsolidated Funds' hedges are reclassified to income, including depreciation, from unconsolidated real estate funds, as interest payments are made by our Funds on their hedged floating-rate debt. For hedging instruments which are not designated as cash flow hedges, changes in fair value of the hedging instrument are recorded as interest expense. We present our derivatives, including the derivatives of our consolidated joint ventures, on our consolidated balance sheet at fair value on a gross basis. Our share of the AOCI related to our unconsolidated Funds' derivatives is included in our investment in unconsolidated real estate funds on our consolidated balance sheet.

Summary of our derivatives

As of June 30, 2016, all of our interest rate swaps, including our unconsolidated Funds' interest rate swaps, were designated as cash flow hedges:
 
 
Number of Interest Rate Swaps
 
Notional (in thousands)(1)
 
 
 
 
 
Derivatives
 
19
 
$2,995,480
Unconsolidated Funds' derivatives(2)
 
2
 
$435,000
___________________________________________________
(1)
See Note 12 for our derivative fair value disclosures.
(2)
The notional amount presented represents 100%, not our pro-rata share, of the amounts related to our unconsolidated Funds. See Note 5 for more information regarding our unconsolidated Funds.


21
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

Credit-risk-related Contingent Features

We have agreements with each of our interest rate swap counterparties that contain a provision under which we could also be declared in default on our derivative obligations if we default on the underlying indebtedness that we are hedging. As of June 30, 2016, there have been no events of default with respect to our interest rate swaps or our unconsolidated Funds' interest rate swaps. The fair value of our interest rate swaps in a liability position were as follows (in thousands):
 
Fair value of derivatives in a liability position(1)
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
Derivatives
 
$
49,540

 
$
19,047

Unconsolidated Funds' derivatives(2)
 
$
904

 
$
—


__________________________________________________________________________________
(1)
Includes accrued interest and excludes any adjustment for nonperformance risk.
(2)
The notional amount presented represents 100%, not our pro-rata share, of the amounts related to our unconsolidated Funds. See Note 5 for more information regarding our unconsolidated Funds.
 
Counterparty Credit Risk

We are also subject to credit risk from the counterparties on our interest rate swap and interest rate cap contracts. We seek to minimize our credit risk by entering into agreements with a variety of high quality counterparties with investment grade ratings. The fair value of our interest rate swaps in an asset position were as follows (in thousands):

Fair value of derivatives in an asset position(1)
 
June 30, 2016
 
December 31, 2015
 
 
 
 
 
Derivatives
 
$
—

 
$
4,220

Unconsolidated Funds' derivatives(2)
 
$
—

 
$
737

___________________________________________________
(1)
Includes accrued interest and excludes any adjustment for nonperformance risk.
(2)
The notional amount presented represents 100%, not our pro-rata share, of the amounts related to our unconsolidated Funds. See Note 5 for more information regarding our unconsolidated Funds.


22
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

Impact of Hedges on AOCI and Consolidated Statements of Operations

The table below presents (in thousands) the effect of our derivative instruments, including our unconsolidated Funds' derivative instruments on our AOCI and statements of operations for the six months ended June 30:
 
2016
 
2015
Derivatives Designated as Cash Flow Hedges:
 
 
 
Loss recorded in AOCI (effective portion) - derivatives(1)(5)
$
(50,142
)
 
$
(5,740
)
Loss recorded in AOCI (effective portion) - unconsolidated Funds' derivatives(2)(5)
$
(1,149
)
 
$
(1,609
)
Loss reclassified from AOCI (effective portion) - derivatives(3)(5)
$
(15,569
)
 
$
(19,259
)
Loss reclassified from AOCI (effective portion) - unconsolidated Funds' derivatives(4)(5)
$
(224
)
 
$
(475
)
Gain (loss) recorded as interest expense (ineffective portion)(6)
$
—

 
$
—

 
 
 
 
Derivatives Not Designated as Cash Flow Hedges:
 

 
 

Gain (loss) recorded as interest expense(7)
$
—

 
$
—

___________________________________________________
(1)
Represents the change in fair value of our interest rate swaps, designated as cash flow hedges, which does not impact the statement of operations.
(2)
Represents our share of the change in fair value of our unconsolidated Funds' interest rate swaps designated as a cash flow hedges, which does not impact the statement of operations.
(3)
Reclassified from AOCI as an increase to interest expense.
(4)
Reclassified from AOCI as a decrease to income, including depreciation, from unconsolidated real estate funds (our share).
(5)
See the reconciliation of our AOCI in Note 10.
(6)
We did not record any ineffectiveness related to our derivatives designated as cash flow hedges.
(7)
We do not have any derivatives that are not designated as cash flow hedges.

Future Reclassifications from AOCI

At June 30, 2016, our estimate of the AOCI related to our derivatives and our unconsolidated Funds' derivatives, designated as cash flow hedges, that will be reclassified to earnings during the next twelve months, is presented in the table below (in thousands):

Derivatives(1)
$
21,906

Unconsolidated Funds' derivatives(2)
$
330

________________________________________
(1)
Reclassified as an increase to interest expense.
(2)
Reclassified as a decrease to income, including depreciation, from unconsolidated real estate funds (our share).



23
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

10.  Equity

Equity Transactions

During the six months ended June 30, 2016, we (i) acquired 869 thousand OP Units in exchange for issuing to the holders of the OP Units an equal number of shares of our common stock, (ii) acquired 25 thousand OP Units for $826 thousand in cash, at an average price of $33.05 per OP Unit, (iii) issued 1.4 million shares of our common stock for the exercise of 7.5 million stock options on a net settlement basis (net of the exercise price and related taxes), and (iv) sold a thirty-percent ownership interest in the joint venture that acquired the Westwood Portfolio to an investor for $241.1 million, which reduced our ownership interest in the joint venture from sixty-percent to thirty-percent.

During the six months ended June 30, 2015, we (i) acquired 1.3 million OP Units in exchange for issuing to the holders of the OP Units an equal number of shares of our common stock and (ii) issued 136 thousand shares of our common stock for the exercise of options for net proceeds of $1.8 million at an average price of $13.44 per share. In addition, we issued 34 thousand OP Units valued at $1.0 million in connection with the acquisition of land under one of our office buildings. See Note 3.

Condensed Consolidated Statements of Equity

The tables below present (in thousands) our condensed consolidated statements of equity:

 
Douglas Emmett, Inc. Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance as of January 1, 2016
$
1,926,211

 
$
355,337

 
$
2,281,548

Net income
33,848

 
3,978

 
37,826

Cash flow hedge fair value adjustments
(27,707
)
 
(7,791
)
 
(35,498
)
Contributions to consolidated joint venture
—

 
320,000

 
320,000

Sale of equity interest in consolidated joint venture
—

 
239,971

 
239,971

Dividends and distributions
(65,251
)
 
(16,787
)
 
(82,038
)
Exchange of OP units for common stock
11,458

 
(11,458
)
 
—

Repurchase of OP units
(498
)
 
(328
)
 
(826
)
Exercise of stock options
(52,449
)
 
—

 
(52,449
)
Stock-based compensation
—

 
5,187

 
5,187

Balance as of June 30, 2016
$
1,825,612

 
$
888,109

 
$
2,713,721


 
 
Douglas Emmett, Inc. Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance as of January 1, 2015
$
1,943,458

 
$
370,266

 
$
2,313,724

Net income
32,147

 
5,843

 
37,990

Cash flow hedge fair value adjustments
10,230

 
2,155

 
12,385

Dividends and distributions
(61,352
)
 
(11,817
)
 
(73,169
)
Exchange of OP units for common stock
17,203

 
(17,203
)
 
—

Issuance of OP units for cash
—

 
1,000

 
1,000

Exercise of stock options
1,823

 
—

 
1,823

Stock-based compensation
—

 
4,358

 
4,358

Balance as of June 30, 2015
$
1,943,509

 
$
354,602

 
$
2,298,111



24
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

Noncontrolling Interests

Our noncontrolling interests consist of (i) interests in our Operating Partnership which are not owned by us, (ii) interests owned by institutional investors in the consolidated joint venture that owns the Westwood Portfolio (see Note 3) (amounting to seventy-percent of the capital interests as of June 30, 2016) and (iii) a joint venture investor that owns a one-third interest in a consolidated joint venture which owns an office building in Honolulu, Hawaii. Noncontrolling interests in our Operating Partnership consist of OP Units and fully-vested LTIP Units and represented approximately 15% of our Operating Partnership's total interests as of June 30, 2016 when we and our Operating Partnership had 149.2 million shares of common stock and 25.8 million OP Units and fully-vested LTIP Units outstanding, respectively. A share of our common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics, sharing equally in the distributions from our Operating Partnership.  Investors who own OP Units have the right to cause our Operating Partnership to redeem their OP Units for an amount of cash per unit equal to the market value of one share of our common stock at the date of redemption, or, at our election, exchange their OP Units for shares of our common stock on a one-for-one basis. LTIP Units have been granted to our employees and non-employee directors as part of their compensation. These awards generally vest over a service period and once vested can generally be converted to OP Units.

Changes in our Ownership Interest in our Operating Partnership

The table below presents (in thousands) the effect on our equity from net income attributable to common stockholders and changes in our ownership interest in our Operating Partnership:
 
Six Months Ended June 30,
 
2016
 
2015
 
 
 
 
Net income attributable to common stockholders
$
33,848

 
$
32,147

 
 
 
 
Transfers (to) from noncontrolling interests:
 
 
 
Exchange of OP units with noncontrolling interests
11,458

 
17,203

Repurchase of OP units from noncontrolling interests
(498
)
 
—

Net transfers from noncontrolling interests
$
10,960

 
$
17,203

 
 
 
 
Change from net income attributable to common stockholders and transfers from noncontrolling interests
$
44,808

 
$
49,350


AOCI Reconciliation(1) 

The table below presents (in thousands) a reconciliation of our AOCI, which consists solely of adjustments related to derivatives designated as cash flow hedges for the six months ended June 30:
 
2016
 
2015
 
 
 
 
Beginning balance
$
(9,285
)
 
$
(30,089
)
 
 
 
 
Other comprehensive loss before reclassifications - derivatives
(50,142
)
 
(5,740
)
Other comprehensive loss before reclassifications - unconsolidated Funds' derivatives
(1,149
)
 
(1,609
)
Reclassifications from AOCI - derivatives(2)
15,569

 
19,259

Reclassifications from AOCI - unconsolidated Funds' derivatives(3)
224

 
475

Net current period OCI
(35,498
)
 
12,385

Less OCI attributable to noncontrolling interests
7,791

 
(2,155
)
OCI attributable to common stockholders
(27,707
)
 
10,230

 
 
 
 
Ending balance
$
(36,992
)
 
$
(19,859
)
___________________________________________________
(1)
See Note 9 for the details of our derivatives and Note 12 for our derivative fair value disclosures.
(2)
Reclassification as an increase to interest expense.
(3)
Reclassification as a decrease to income, including depreciation, from unconsolidated real estate funds.

25
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

Equity Compensation

On June 2, 2016, the Douglas Emmett, Inc. 2016 Omnibus Stock Incentive Plan became effective after receiving stockholder approval, superseding our prior plan, the Douglas Emmett, Inc. 2006 Omnibus Stock Incentive Plan. The key terms of the two plans are substantially identical, except for the date of expiration, the number of shares authorized for grants and various technical provisions. Our officers, employees, directors and consultants are eligible to participate in both plans, with grants awarded during June 2016 and onwards awarded under the 2016 Plan, and grants awarded prior to that date awarded under the 2006 Plan and remain outstanding according to their terms. Both plans are administered by the compensation committee of our board of directors.  Total net stock-based compensation expense was $2.4 million and $2.0 million for the three months ended June 30, 2016 and 2015, respectively, and $4.7 million and $3.9 million for the six months ended June 30, 2016 and 2015, respectively. These amounts are net of capitalized stock-based compensation of $231 thousand and $210 thousand for the three months ended June 30, 2016 and 2015, respectively, and $448 thousand and $402 thousand for the six months ended June 30, 2016 and 2015, respectively. The total intrinsic value of options exercised was $100.8 million for the three months ended June 30, 2016, and $101.9 million and $2.2 million for the six months ended June 30, 2016 and 2015, respectively.

11. EPS

We calculate basic EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares outstanding during the period. We calculate diluted EPS by dividing the net income attributable to common stockholders for the period by the weighted average number of common shares and dilutive instruments outstanding during the period using the treasury stock method. We account for unvested LTIP awards that contain nonforfeitable rights to dividends as participating securities and include these securities in the computation of basic and diluted EPS using the two-class method. The table below presents the calculation of basic and diluted EPS:
 
Three Months Ended June 30,

Six Months Ended June 30,
 
2016

2015

2016

2015
Numerator (in thousands):
 

 
 

 
 

 
 

Net income attributable to common stockholders
$
18,482

 
$
13,448

 
$
33,848

 
$
32,147

Allocation to participating securities: Unvested LTIP units
(101
)
 
(67
)
 
(184
)
 
(165
)
Numerator for the calculation of basic and diluted EPS
$
18,381

 
$
13,381

 
$
33,664

 
$
31,982

 
 
 
 
 
 
 
 
Denominator (in thousands):
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding - basic
147,722

 
145,898

 
147,479

 
145,614

Effect of dilutive securities: Stock options(1)
5,083

 
4,406

 
4,687

 
4,440

Weighted average shares of common stock and common stock equivalents outstanding - diluted
152,805

 
150,304

 
152,166

 
150,054

 
 
 
 
 
 
 
 
Basic EPS:
 
 
 

 
 
 
 
Net income attributable to common stockholders per share
$
0.124

 
$
0.092

 
$
0.228

 
$
0.220

 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 
 
 
Net income attributable to common stockholders per share
$
0.120

 
$
0.089

 
$
0.221

 
$
0.213

____________________________________________________
(1)
The following securities were excluded from the computation of the weighted average diluted shares because the effect of including them would be anti-dilutive to the calculation of diluted EPS:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
OP Units
25,114

 
26,740

 
25,331

 
26,627

Vested LTIP Units
807

 
4

 
811

 
351

Unvested LTIP units
679

 
573

 
613

 
539

(2) See Note 17 for information about common stock sales after June 30, 2016.

26
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

12. Fair Value of Financial Instruments

Our estimates of the fair value of financial instruments were determined using available market information and widely used valuation methods.  Considerable judgment is necessary to interpret market data and determine an estimated fair value.  The use of different market assumptions or valuation methods may have a material effect on the estimated fair values. The FASB fair value framework hierarchy distinguishes between assumptions based on market data obtained from sources independent of the reporting entity, and the reporting entity’s own assumptions about market-based inputs.  The hierarchy is as follows:
 
Level 1 - inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities.  
Level 2 - inputs are observable either directly or indirectly for similar assets and liabilities in active markets.  
Level 3 - inputs are unobservable assumptions generated by the reporting entity

As of June 30, 2016, we did not have any fair value measurements of financial instruments using Level 3 inputs.

Financial instruments disclosed at fair value

Short term financial instruments: The carrying amounts for cash and cash equivalents, tenant receivables, revolving credit lines, interest payable, accounts payable, security deposits and dividends payable approximate fair value because of the short-term nature of these instruments.

Secured notes payable: See Note 7 for the details of our secured notes payable. We estimate the fair value of our secured notes payable, which includes the secured notes payable of our consolidated joint ventures, by calculating the credit-adjusted present value of the principal and interest payments for each secured note payable. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs, assumes that the loans will be outstanding through maturity, and excludes any maturity extension options. The table below presents (in thousands) the estimated fair value of our secured notes payable:
Secured Notes Payable:
June 30, 2016
 
December 31, 2015
 
 
 
 
Fair value
$
4,376,574

 
$
3,691,075

Carrying value
$
4,315,152

 
$
3,634,163


Financial instruments measured at fair value

Derivative instruments: See Note 9 for the details of our derivatives. We present our derivatives on the balance sheet at fair value, on a gross basis, excluding accrued interest.  We estimate the fair value of our derivative instruments by calculating the credit-adjusted present value of the expected future cash flows of each derivative.  The calculation incorporates the contractual terms of the derivatives, observable market interest rates which we consider to be Level 2 inputs, and credit risk adjustments to reflect the counterparty's as well as our own nonperformance risk. Our derivatives are not subject to master netting arrangements.  The table below presents (in thousands) the estimated fair value of our derivatives:
 
June 30, 2016
 
December 31, 2015
Derivative Assets:
 
 
 
Fair value - derivatives(1)
$
—

 
$
4,830

Fair value - unconsolidated Funds' derivatives(2)
$
—

 
$
837

 
 
 
 
Derivative Liabilities:
 
 
 
Fair value - derivatives(1)
$
46,052

 
$
16,310

Fair value - unconsolidated Funds' derivatives(2)
$
878

 
$
—

____________________________________________________
(1)
Our derivatives are included in interest rate contracts in our consolidated balance sheet. The fair value excludes accrued interest (which is included in interest payable in the consolidated balance sheet).
(2)
Represents 100%, not our pro-rata share, of the amounts related to our unconsolidated Funds. Our pro-rata share of the amounts related to the unconsolidated Funds' derivatives is included in our investment in unconsolidated real estate funds in our consolidated balance sheet. See Note 5 for more information regarding our unconsolidated Funds.

27
Table of Contents
Douglas Emmett, Inc.
Notes to Consolidated Financial Statements (unaudited) (continued)

13. Segment Reporting

Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes.  We operate in two business segments: (i) the acquisition, development, ownership and management of office real estate and (ii) the acquisition, development, ownership and management of multifamily real estate.  The services for our office segment primarily include rental of office space and other tenant services, including parking and storage space rental.  The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources.  Therefore, depreciation and amortization expense is not allocated among segments.  General and administrative expenses and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level. Segment profit is not a measure of operating income or cash flows from operating activities as measured by GAAP, it is not indicative of cash available to fund cash needs, and should not be considered as an alternative to cash flows as a measure of liquidity.  Not all companies may calculate segment profit in the same manner.  We consider segment profit to be an appropriate supplemental measure to net income because it can assist both investors and management in understanding the core operations of our properties. The table below presents (in thousands) the operating activity of our reportable segments:

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Office Segment
 
 
 
 
 
 
 
Total office revenues
$
163,096

 
$
136,791

 
$
307,475

 
$
268,247

Office expenses
(53,381
)
 
(46,542
)
 
(101,264
)
 
(90,741
)
Office Segment profit
109,715

 
90,249

 
206,211

 
177,506

 
 
 
 
 
 
 
 
Multifamily Segment
 
 
 
 
 
 
 
Total multifamily revenues
24,119

 
23,666

 
48,312

 
47,019

Multifamily expenses
(5,341
)
 
(5,930
)
 
(11,372
)
 
(11,750
)
Multifamily Segment profit
18,778

 
17,736

 
36,940

 
35,269

 
 
 
 
 
 
 
 
Total profit from all segments
$
128,493

 
$
107,985

 
$
243,151

 
$
212,775


The table below (in thousands) is a reconciliation of the total profit from all segments to net income attributable to common stockholders:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Total profit from all segments
$
128,493

 
$
107,985

 
$
243,151

 
$
212,775

General and administrative
(9,403
)
 
(7,473
)
 
(17,474
)
 
(14,834
)
Depreciation and amortization
(62,568
)
 
(51,246
)
 
(118,120
)
 
(101,080
)
Other income
2,143

 
2,415

 
4,232

 
10,974

Other expenses
(1,684
)
 
(1,619
)
 
(3,235
)
 
(3,191
)
Income, including depreciation, from unconsolidated real estate funds