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, 2017
 
Commission file number 001-33106

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Douglas Emmett, Inc.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at
July 28, 2017
Common Stock, $0.01 par value per share
 
162,875,254
shares

1

DOUGLAS EMMETT, INC.
FORM 10-Q

Table of Contents
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2
Table of Contents
Glossary

Abbreviations used in this document:
AOCI
Accumulated other comprehensive income (loss)
ASU
Accounting Standards Update
ATM
At-the-Market
BOMA
Building Owners and Managers Association
CEO
Chief Executive Officer
CFO
Chief Financial Officer
Code
Internal Revenue Code of 1986, as amended
DEI
Douglas Emmett, Inc.
EPS
Earnings Per Share
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FFO
Funds from Operations
Fund X
Douglas Emmett Fund X, LLC
Funds
Unconsolidated institutional real estate funds (Fund X, Partnership X and Opportunity Fund)
GAAP
Generally Accepted Accounting Principles (United States)
IPO
Initial Public Offering
JV
Joint Venture
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
Opportunity Fund
Fund X Opportunity Fund, LLC
Partnership X
Douglas Emmett Partnership X, LP
PCAOB
Public Company Accounting Oversight Board (United States)
REIT
Real Estate Investment Trust
Report
Quarterly Report on Form 10-Q
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
TRS
Taxable REIT subsidiary(ies)
US
United States
VIE
Variable Interest Entity(ies)

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

Consolidated Portfolio
Includes the properties in our consolidated results, which includes the properties owned by our consolidated JVs.
Leased Rate
Signed leases not yet commenced as of the reporting date.
Rentable Square Feet

Based on the BOMA remeasurement and consists of leased square feet (including square feet with
respect to signed leases not commenced), available square feet, building management use square
feet and square feet of BOMA adjustment on leased space.

Total Portfolio

Includes our Consolidated Portfolio plus the properties owned by our unconsolidated real estate
Funds.



3
Table of Contents
Forward Looking Statements


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

•
adverse economic or real estate developments in Southern California and Honolulu, Hawaii;
•
a general downturn in the economy, such as the global financial crisis that commenced in 2008;
•
competition from other real estate investors in our markets;
•
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 debt;
•
failure to generate sufficient cash flows to make payments on a ground lease for one of our properties;
•
difficulties in raising capital;
•
difficulties in identifying properties to acquire and failure to complete acquisitions successfully;
•
failure to successfully operate acquired properties;
•
real estate investments are generally illiquid and difficult to sell quickly;
•
possible adverse changes in rent control laws and regulations;
•
environmental uncertainties;
•
risks related to natural disasters;
•
lack or insufficient amount of insurance, or increases in the cost of maintaining existing insurance coverage;
•
inability to successfully expand into new markets and submarkets;
•
risks associated with property development;
•
risks associated with JVs;
•
conflicts of interest with our officers and reliance on key personnel;    
•
changes in real estate zoning laws and increases in real property tax rates;
•
adverse results of litigation or governmental proceedings;
•
complying with laws, regulations and covenants that are applicable to our properties;
•
difficulty in liquidating our short term investments;
•
the consequences of any possible terrorist attacks or wars;
•
the consequences of any possible cyber attacks or intrusions;
•
adoption of new accounting pronouncements could adversely affect our operating results;
•
weaknesses in our internal controls over financial reporting could result in restatements of our operating results;
•
failure to maintain our REIT status under federal tax laws; and
•
changes to tax laws that could adversely affect us.

For further discussion of these and other risk factors see Item 1A. "Risk Factors” in our 2016 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.


4
Table of Contents


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Douglas Emmett, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
 
June 30, 2017
 
December 31, 2016
 
Unaudited
 
Audited
Assets
 

 
 

Investment in real estate:
 

 
 

Land
$
1,050,037

 
$
1,022,340

Buildings and improvements
7,555,950

 
7,221,124

Tenant improvements and lease intangibles
726,118

 
696,197

Property under development
85,269

 
58,459

Investment in real estate, gross
9,417,374

 
8,998,120

Less: accumulated depreciation and amortization
(1,903,764
)
 
(1,789,678
)
Investment in real estate, net
7,513,610

 
7,208,442

Cash and cash equivalents
173,151

 
112,927

Tenant receivables, net
2,529

 
2,165

Deferred rent receivables, net
99,195

 
93,165

Acquired lease intangible assets, net
4,673

 
5,147

Interest rate contract assets
37,092

 
35,656

Investment in unconsolidated real estate funds
107,140

 
144,289

Other assets
18,003

 
11,914

Total assets
$
7,955,393

 
$
7,613,705

 
 
 
 
Liabilities
 

 
 

Secured notes payable and revolving credit facility, net
$
4,314,137

 
$
4,369,537

Interest payable, accounts payable and deferred revenue
92,364

 
75,229

Security deposits
48,382

 
45,990

Acquired lease intangible liabilities, net
69,646

 
67,191

Interest rate contract liabilities
3,353

 
6,830

Dividends payable
36,976

 
34,857

Total liabilities
4,564,858

 
4,599,634

 
 
 
 
Equity
 

 
 

Douglas Emmett, Inc. stockholders' equity:
 

 
 

Common Stock, $0.01 par value, 750,000,000 authorized, 160,743,013 and 151,530,210 outstanding at June 30, 2017 and December 31, 2016, respectively
1,607

 
1,515

Additional paid-in capital
2,958,178

 
2,725,157

Accumulated other comprehensive income
20,871

 
15,156

Accumulated deficit
(853,586
)
 
(820,685
)
Total Douglas Emmett, Inc. stockholders' equity
2,127,070

 
1,921,143

Noncontrolling interests
1,263,465

 
1,092,928

Total equity
3,390,535

 
3,014,071

Total liabilities and equity
$
7,955,393

 
$
7,613,705


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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Revenues
 

 
 

 
 

 
 

Office rental
 

 
 

 
 

 
 

Rental revenues
$
135,665

 
$
126,650

 
$
268,681

 
$
237,656

Tenant recoveries
12,801

 
10,986

 
23,851

 
21,197

Parking and other income
27,076

 
25,460

 
53,358

 
48,622

Total office revenues
175,542

 
163,096

 
345,890

 
307,475

 
 
 
 
 
 
 
 
Multifamily rental
 

 
 

 
 

 
 

Rental revenues
22,237

 
22,406

 
44,478

 
44,833

Parking and other income
1,853

 
1,713

 
3,745

 
3,479

Total multifamily revenues
24,090

 
24,119

 
48,223

 
48,312

 
 
 
 
 
 
 
 
Total revenues
199,632

 
187,215

 
394,113

 
355,787

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 

 
 

Office expenses
57,887

 
53,381

 
112,772

 
101,264

Multifamily expenses
5,878

 
5,341

 
11,825

 
11,372

General and administrative
8,592

 
9,403

 
18,748

 
17,474

Depreciation and amortization
68,793

 
62,568

 
136,167

 
118,120

Total operating expenses
141,150

 
130,693

 
279,512

 
248,230

 
 
 
 
 
 
 
 
Operating income
58,482

 
56,522

 
114,601

 
107,557

 
 
 
 
 
 
 
 
Other income
2,331

 
2,143

 
4,493

 
4,232

Other expenses
(1,773
)
 
(1,908
)
 
(3,497
)
 
(4,912
)
Income, including depreciation, from unconsolidated real estate funds
1,113

 
1,644

 
3,290

 
3,230

Interest expense
(38,000
)
 
(37,703
)
 
(74,954
)
 
(73,363
)
Income before gains
22,153

 
20,698

 
43,933

 
36,744

Gains on sales of investments in real estate
—

 
1,082

 
—

 
1,082

Net income
22,153

 
21,780

 
43,933

 
37,826

Less:  Net income attributable to noncontrolling interests
(1,909
)
 
(3,298
)
 
(4,640
)
 
(3,978
)
Net income attributable to common stockholders
$
20,244

 
$
18,482

 
$
39,293

 
$
33,848

 
 
 
 
 
 
 
 
Net income attributable to common stockholders per share – basic
$
0.129

 
$
0.124

 
$
0.254

 
$
0.228

Net income attributable to common stockholders per share – diluted
$
0.129

 
$
0.120

 
$
0.253

 
$
0.221

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.23

 
$
0.22

 
$
0.46

 
$
0.44

 
See accompanying notes to the consolidated financial statements.

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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income
$
22,153

 
$
21,780

 
$
43,933

 
$
37,826

Other comprehensive income (loss): cash flow hedges
(4,193
)
 
(14,890
)
 
5,636

 
(35,498
)
Comprehensive income
17,960

 
6,890

 
49,569

 
2,328

Less: Comprehensive (income) loss attributable to noncontrolling interests
297

 
1,913

 
(4,561
)
 
3,813

Comprehensive income attributable to common stockholders
$
18,257

 
$
8,803

 
$
45,008

 
$
6,141

 
See accompanying notes to the consolidated financial statements.



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


 
Six Months Ended June 30,
 
2017
 
2016
Operating Activities
 

 
 

Net income
$
43,933

 
$
37,826

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

 
 

Income, including depreciation, from unconsolidated real estate funds
(3,290
)
 
(3,230
)
Gains on sales of investments in real estate
—

 
(1,082
)
Depreciation and amortization
136,167

 
118,120

Net accretion of acquired lease intangibles
(8,476
)
 
(8,314
)
Straight-line rent
(6,030
)
 
(7,636
)
Bad debt expense
504

 
1,116

Amortization of deferred loan costs
4,522

 
3,235

Non-cash market value adjustments on interest rate contracts
25

 
—

Amortization of stock-based compensation
5,311

 
4,739

Operating distributions from unconsolidated real estate funds
3,290

 
893

Change in working capital components:
 

 
 

Tenant receivables
(868
)
 
(1,487
)
Interest payable, accounts payable and deferred revenue
16,718

 
12,455

Security deposits
2,392

 
5,072

Other assets
4,404

 
5,064

Net cash provided by operating activities
198,602

 
166,771

 
 
 
 
 
 
 
 
Investing Activities
 

 
 

Capital expenditures for improvements to real estate
(51,370
)
 
(35,183
)
Capital expenditures for developments
(23,646
)
 
(5,967
)
Property acquisitions
(354,023
)
 
(1,257,513
)
Deposits for property acquisitions
(10,000
)
 
(5,000
)
Proceeds from sale of investments in real estate, net
—

 
241,053

Loan payments received from related parties
—

 
763

Acquisitions of additional interests in unconsolidated real estate funds
(2,571
)
 
—

Capital distributions from unconsolidated real estate funds
39,962

 
18,839

Net cash used in investing activities
(401,648
)
 
(1,043,008
)
 
 
 
 
 
 
 
 
Financing Activities
 

 
 

Proceeds from borrowings
933,000

 
1,374,500

Repayment of borrowings
(986,069
)
 
(693,511
)
Loan cost payments
(6,889
)
 
(14,575
)
Contributions from noncontrolling interests in consolidated JVs
188,248

 
320,000

Distributions paid to noncontrolling interests
(19,202
)
 
(16,787
)
Dividends paid to common stockholders
(70,075
)
 
(64,747
)
Taxes paid on exercise of stock options
(52,704
)
 
(52,449
)
Repurchase of OP Units
—

 
(826
)
Proceeds from issuance of common stock, net
276,961

 
—

Net cash provided by financing activities
263,270

 
851,605

 
 
 
 
Increase (decrease) in cash and cash equivalents
60,224

 
(24,632
)
Cash and cash equivalents at the beginning of the year
112,927

 
101,798

Cash and cash equivalents at quarter end
$
173,151

 
$
77,166


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


 
Six Months Ended June 30,
 
2017
 
2016
SUPPLEMENTAL CASH FLOWS INFORMATION
 
 
 
Cash paid for interest, net of capitalized interest
$
69,001

 
$
70,353

Capitalized interest paid
$
1,150

 
$
503

 
 
 
 
NON-CASH INVESTING TRANSACTIONS
 
 
 
Accrual increase for capital expenditures for improvements to real estate
$
417

 
$
181

Capitalized stock-based compensation for improvements to real estate and developments
$
475

 
$
448

Removal of fully depreciated and amortized tenant improvements and lease intangibles
$
22,077

 
$
9,401

Removal of fully amortized acquired lease intangible assets
$
71

 
$
598

Removal of fully accreted acquired lease intangible liabilities
$
2,935

 
$
8,100

Application of deposit to purchase price of property
$
—

 
$
75,000

 
 
 
 
NON-CASH FINANCING TRANSACTIONS
 
 
 
Loss from market value adjustments - consolidated derivatives
$
(4,016
)
 
$
(50,142
)
Gain (loss) from market value adjustments - unconsolidated Funds' derivatives
$
867

 
$
(1,149
)
Dividends declared
$
72,194

 
$
65,252

Common stock issued in exchange for OP Units
$
8,856

 
$
11,458


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 JVs 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, California and Honolulu, Hawaii. The terms "us," "we" and "our" as used in the financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis. As of June 30, 2017, our portfolio of properties consisted of the following properties (not including two parcels of land from which we receive rent under ground leases):

 
Consolidated Portfolio
 
Total Portfolio
Office (includes ancillary retail space)
 
 
 
Wholly-owned properties
52
 
52
Consolidated JV properties
9
 
9
Unconsolidated Fund properties
—
 
8
 
61
 
69
 
 
 
 
Multifamily
 
 
 
Wholly-owned properties
10
 
10
 
 
 
 
Total
71
 
79

Basis of Presentation

The accompanying financial statements are the consolidated financial statements of Douglas Emmett, Inc. and its subsidiaries, including our Operating Partnership and our consolidated JVs.  All significant intercompany balances and transactions have been eliminated in our consolidated financial statements. Our Operating Partnership and consolidated JVs are VIEs and we are the primary beneficiary. As of June 30, 2017, the total consolidated assets, liabilities and equity of the VIEs was $7.96 billion  (of which $7.51 billion related to investment in real estate), $4.56 billion and $3.39 billion (of which $1.26 billion related to noncontrolling interests), respectively.

The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP may have been condensed or omitted pursuant to SEC rules and regulations, although we believe that the disclosures are adequate to make their presentation not misleading. The accompanying unaudited interim financial statements include, in our opinion, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set forth therein. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The interim financial statements should be read in conjunction with the consolidated financial statements in our 2016 Annual Report on Form 10-K and the notes thereto. References in this Report to the number of properties, square footage, per square footage amounts, apartment units and geography, are outside the scope of our independent registered public accounting firm’s review of our financial statements in accordance with the standards of the PCAOB.


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

2. Summary of Significant Accounting Policies

We adopted ASU No. 2017-01, "Clarifying the Definition of a Business" in the first quarter of 2017. The ASU changed our accounting policy "Investment in Real Estate" disclosed in our 2016 Annual Report on Form 10-K. The ASU generally requires that our property acquisitions be accounted for as asset purchases, and the related acquisition expenses be capitalized as part of the respective asset. We historically accounted for our property acquisitions as business combinations and expensed the related acquisition expenses as incurred. We have not made any other changes during the period covered by this Report to our significant accounting policies disclosed in our 2016 Annual Report on Form 10-K.

Use of Estimates

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

Income Taxes

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

New Accounting Pronouncements 

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

Recently Issued Accounting Pronouncements

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting" which amends "Compensation-Stock Compensation" (Topic 718). The ASU provides guidance regarding the application of modification accounting in Topic 718 when there are changes to the terms or conditions of a share-based payment award. The ASU is effective for annual and interim periods beginning after December 15, 2017, which for us would be the first quarter of 2018, and early adoption is permitted. The ASU amendments are required to be applied on a prospective basis. We do not expect the ASU to have a material impact on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). The primary difference between Topic 842 and current GAAP is the recognition of lease assets and liabilities by lessees for leases classified as operating leases under current GAAP. The accounting applied by lessors is largely unchanged from current GAAP, for example, the vast majority of operating leases will remain classified as operating leases, and lessors will continue to recognize lease income for those leases on a straight-line basis over the lease term. Topic 842 requires an entity to separate the lease components from the non-lease components (for example, maintenance services or other activities that transfer a good or service to the customer) in a contract. Only the lease components must be accounted for in accordance with Topic 842. The consideration in the contract is allocated to the lease and non-lease components on a relative standalone price basis for lessees, or in accordance with the allocation guidance in Topic 606 for lessors. Topic 842 defines initial direct costs of a lease (which may be capitalized) as costs that would not have been incurred had the lease not been executed. Costs to negotiate a lease that would have been incurred regardless of whether the lease was executed, such as fixed employee salaries, are not considered to be initial direct costs, and may not be capitalized. The ASU is effective for annual and interim periods beginning after December 15, 2018, which for us would be the first quarter of 2019, and early adoption is permitted. We are currently evaluating the impact of this ASU.


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

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which provides guidance for the accounting of revenue from contracts with customers. The guidance supersedes the revenue recognition requirements in Topic 605, "Revenue Recognition", and most industry-specific guidance throughout the Industry Topics of the Codification. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09 by one year. In March 2016, the FASB issued ASU No. 2016-08, "Principal versus Agent Considerations (Reporting Revenue Gross versus Net)" which amends Topic 606 and clarifies the guidance for principal versus agent considerations. In April 2016, the FASB issued ASU No. 2016-10, "Identifying Performance Obligations and Licensing" which amends Topic 606 and provides guidance for identifying performance obligations and licensing. In May 2016, the FASB issued ASU No. 2016-12, "Narrow-Scope Improvements and Practical Expedients" which amends Topic 606 and provides guidance for a variety of revenue recognition related topics. In February 2017, the FASB issued ASU No. 2017-05 "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" (Subtopic 610-20), which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The various ASU's are effective for annual and interim periods beginning after December 15, 2017, which for us is the first quarter of 2018. Earlier application is permitted for annual and interim periods beginning after December 15, 2016, which for us was the first quarter of 2017. The amendments in these ASU's should be applied retrospectively. We are not planning on early adopting the ASU's and we expect to use the modified retrospective method of adoption. We are currently evaluating the impact to our accounting, particularly with respect to our tenant recovery revenues, and whether such changes will be material to our future results of operations and financial position. As noted above, ASU No. 2016-02 "Leases" requires that non-lease components such as tenant recovery revenues be accounted for in accordance with ASU No. 2014-09, which means that the classification and timing of our tenant recovery revenues could be impacted.

The FASB has not issued any other ASUs during 2017 that we expect to be applicable and have a material impact on our financial statements.

3. Investment in Real Estate

We generally account for our property acquisitions as asset purchases. Prior to January 1, 2017 we accounted for our acquisitions as business combinations. The results of operations from our acquisitions are included in our consolidated statements of operations after the respective acquisition dates. The purchase accounting for our 2016 acquisitions is subject to adjustment within twelve months of the acquisition date because they were accounted for as business combinations.

Acquisitions during the six months ended June 30, 2017

On April 25, 2017, a consolidated JV that we manage and in which we own an equity interest acquired two Class A office properties located in downtown Santa Monica, California for a total contract price of $352.8 million. The properties are located at 1299 Ocean Avenue and 429 Santa Monica Boulevard. The table below (in thousands) summarizes our purchase price allocations for the acquisitions. The difference between the total contract price and respective purchase prices below relates to prorations and similar matters:
 
 
1299 Ocean
 
 429 Santa Monica
 
 
 
 
Building square footage
206
 
87
 
 
 
 
Investment in real estate:
 
 
 
Land
$
22,748

 
$
4,949

Buildings and improvements
260,188

 
69,286

Tenant improvements and lease intangibles
5,010

 
3,248

Acquired above and below-market leases, net
(10,683
)
 
(723
)
Net assets and liabilities acquired
$
277,263

 
$
76,760


See Note 17 for information on the purchase of a Class A office property in July 2017.


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

Acquisitions during the six months ended June 30, 2016

Westwood Portfolio Acquisition

On February 29, 2016 (Acquisition Date), a consolidated JV which we manage and in which we own an equity interest acquired four Class A office properties located in Westwood, California (Westwood Portfolio) for a contract price of $1.34 billion. As of the Acquisition Date, we had contributed sixty-percent of the equity to the JV, which was subsequently reduced to thirty-percent on May 31, 2016 (Sell Down Date) when we sold half of our equity interest to a third party investor. The table below (in thousands) summarizes our purchase accounting and funding sources for the acquisition:
Sources and Uses of Funds
Actual at Closing(1)
Pro Forma Sell Down Adjustments(2)
Pro Forma
 
 
 
 
Building square footage
1,725

 
1,725

 
 
 
 
Uses of funds - Investment in real estate:
 
 
 
Land
$
94,996

 
$
94,996

Buildings and improvements
1,236,786

 
1,236,786

Tenant improvements and lease intangibles
50,439

 
50,439

Acquired above and below-market leases, net(3)
(49,708
)
 
(49,708
)
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 JV.
(2)
Reflects our sale of thirty-percent of the equity in the JV on the Sell Down Date, presented as of the Acquisition Date, treated as in-substance real estate, which reduced our ownership interest in the JV to thirty-percent. We sold the interest for the $240.0 million we contributed plus an additional $1.1 million to compensate us 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 a $75.0 million deposit, $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 + 1.40%.
(7)
Reflects 100% (not 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 + 1.40%, which has been effectively fixed at 2.37% per annum for five years through interest rate swaps. See Note 7 for information regarding our consolidated debt.

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 included in the consolidated statement of operations after the Acquisition Date:

 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Total office revenues
$
47,805

 
$
32,198

Net income attributable to common stockholders(1)
$
3,026

 
$
154

______________________________________________________
(1)
Excluding transaction costs, net income attributable to common stockholders was $3.0 million and $2.1 million for the six months ended June 30, 2017 and 2016, respectively.

The table below (in thousands, except per share information) 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, 2016, 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 us, and (iii) are factually supportable. The pro forma reflects the hypothetical impact of the acquisition on us and does not purport to represent what our results of operations would have been had the acquisition occurred on January 1, 2016, 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. Transaction costs related to the acquisition have been excluded.
 
 
Six months ended June 30, 2016
 
 
Pro forma revenues
$
369,114

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

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

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











14
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, 2017
 
December 31, 2016
 
 
 
 
Above-market tenant leases
$
5,196

 
$
5,110

Accumulated amortization - above-market tenant leases
(2,900
)
 
(2,379
)
Below-market ground leases
3,198

 
3,198

Accumulated amortization - below-market ground leases
(821
)
 
(782
)
Acquired lease intangible assets, net
$
4,673

 
$
5,147

 
 
 
 
Below-market tenant leases
$
113,550

 
$
104,925

Accumulated accretion - below-market tenant leases
(47,386
)
 
(41,241
)
Above-market ground leases
4,017

 
16,200

Accumulated accretion - above-market ground leases
(535
)
 
(12,693
)
Acquired lease intangible liabilities, net
$
69,646

 
$
67,191

 
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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net accretion of above/below-market tenant leases(1)
$
4,275

 
$
5,001

 
$
8,458

 
$
8,296

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

 
13

 
26

 
26

Total
$
4,284

 
$
5,010

 
$
8,476

 
$
8,314

_______________________________________________
(1)
Recorded as a net increase to office and multifamily rental revenues.
(2)
The amortization of the above-market rent we receive under this ground lease is recorded as a decrease to office parking and other income.
(3)
The accretion of the above-market rent we pay under this ground lease is recorded as a decrease to office expense.



15
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 three unconsolidated Funds, the Opportunity Fund, Fund X and Partnership X, through which we and investors own eight office properties totaling 1.8 million square feet.  We purchased a 3.7% interest in the Opportunity Fund during the second quarter of 2017. The Opportunity Fund's only investment is a 13.1% equity interest in Fund X. At June 30, 2017, we held direct and indirect equity interests of 3.7% of the Opportunity Fund, 69.1% of Fund X and 24.3% of Partnership X. Our Funds pay us fees and reimburse us for certain expenses related to property management and other services we provide. We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors. The table below presents (in thousands) cash distributions received from our Funds:

 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Operating distributions received
$
3,290

 
$
893

Capital distributions received
39,962

 
18,839

Total distributions received
$
43,252

 
$
19,732



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, 2017
 
December 31, 2016
 
 
 
 
Total assets
$
707,282

 
$
690,028

Total liabilities
$
524,736

 
$
448,544

Total equity
$
182,546

 
$
241,484


 
Six Months Ended June 30,
 
2017
 
2016
 
 
 
 
Total revenues
$
37,071

 
$
35,237

Operating income
$
9,723

 
$
8,774

Net income
$
2,853

 
$
3,163



16
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, 2017
 
December 31, 2016
 
 
 
 
Restricted cash
$
121

 
$
121

Prepaid expenses
2,641

 
6,779

Other indefinite-lived intangible
1,988

 
1,988

Deposits in escrow
10,000

 
—

Furniture, fixtures and equipment, net
1,144

 
1,093

Other
2,109

 
1,933

Total other assets
$
18,003

 
$
11,914








17
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, 2017
 
Principal Balance as of December 31, 2016
 
Variable Interest Rate
 
Fixed Interest
Rate(2)
 
Swap Maturity Date
 
 
 
 
 
 
 
 
 
 
 
 
 
Wholly Owned Subsidiaries
Term Loan(3)
 
—
 
$
—

 
$
1,000

 
—
 
—
 
—
Term Loan(3)
 
—
 
—

 
349,933

 
—
 
—
 
—
Fannie Mae Loans(3) 
 
—
 
—

 
388,080

 
—
 
—
 
—
Term Loan(4)
 
2/1/2019
 
148,457

 
149,911

 
 N/A
 
4.00%
 
—
Term Loan(4)
 
6/5/2019
 
283,305

 
285,000

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

 
145,000

 
LIBOR + 1.25%
 
N/A
 
—
Term Loan(4)(5)
 
3/1/2020
 
342,852

 
345,759

 
 N/A
 
4.46%
 
—
Term Loan(6) 
 
4/15/2022
 
340,000

 
340,000

 
LIBOR + 1.40%
 
2.77%
 
4/1/2020
Term Loan(6) 
 
7/27/2022
 
180,000

 
180,000

 
LIBOR + 1.45%
 
3.06%
 
7/1/2020
Term Loan(6) 
 
11/1/2022
 
400,000

 
400,000

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

 
360,000

 
LIBOR + 1.55%
 
2.57%
 
7/1/2021
Term Loan(6) 
 
12/23/2023
 
220,000

 
220,000

 
LIBOR + 1.70%
 
3.62%
 
12/23/2021
Term Loan(6) 
 
1/1/2024
 
300,000

 
300,000

 
LIBOR + 1.55%
 
3.46%
 
1/1/2022
Fannie Mae Loan(6)
 
4/1/2025
 
102,400

 
102,400

 
LIBOR + 1.25%
 
2.84%
 
3/1/2020
Fannie Mae Loans(6)
 
12/1/2025
 
115,000

 
115,000

 
LIBOR + 1.25%
 
2.76%
 
12/1/2020
Fannie Mae Loans(6)(7)
 
6/1/2027
 
550,000

 
—

 
LIBOR + 1.37%
 
3.51%
 
6/1/2022
Revolving credit facility(8)
 
8/21/2020
 
—

 
—

 
LIBOR + 1.40%
 
N/A
 
—
Total Wholly Owned Debt
3,487,014

 
3,682,083

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated JVs
Term Loan
 
7/21/2019
 
288,000

 
146,000

 
LIBOR + 1.55%
 
N/A
 
—
Term Loan(6)
 
2/28/2023
 
580,000

 
580,000

 
LIBOR + 1.40%
 
2.37%
 
3/1/2021
Total Consolidated Debt(9)
4,355,014

 
4,408,083

 
 
 
 
 
 
Deferred loan costs, net
 
(40,877
)
 
(38,546
)
 
 
 
 
 
 
Total Consolidated Debt, net
$
4,314,137

 
$
4,369,537

 
 
 
 
 
 
___________________________________________________
Except as otherwise noted below, each loan (including our revolving credit facility) is non-recourse and secured by one or more separate collateral pools consisting of one or more properties, and requires monthly payments of interest only with the outstanding principal due upon maturity.
(1)
Maturity dates include the effect of extension options.
(2)
Includes the effect of interest rate swaps and excludes the effect of prepaid loan fees. See Note 9 for details of our interest rate swaps.
(3)
At June 30, 2017, this loan had been paid off.
(4)
Requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.
(5)
Interest is fixed until March 2018.
(6)
Loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.
(7)
Effective rate decreases to 3.16% on November 1, 2017.
(8)
$400.0 million revolving credit facility. Unused commitment fees range from 0.15% to 0.20%.
(9)
See Note 12 for our fair value disclosures.

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

Debt Statistics

At June 30, 2017, the weighted average remaining life, including extension options, of our total consolidated term debt (excluding our revolving credit facility) was 5.4 years. For the $3.92 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 5.7 years, (ii) remaining period during which interest was fixed was 3.3 years, (iii) annual interest rate was 3.20% and (iv) effective interest rate was 3.36% (including the non-cash amortization of deferred loan costs). The following table summarizes (in thousands) our fixed and floating rate debt:
 
 
Principal Balance as of June 30, 2017
 
Principal Balance as of December 31, 2016
 
 
 
 
 
Aggregate swapped to fixed rate loans
 
$
3,147,400

 
$
2,985,480

Aggregate fixed rate loans
 
774,614

 
1,131,603

Aggregate floating rate loans
 
433,000

 
291,000

Total Debt
 
$
4,355,014

 
$
4,408,083


Future Principal Payments

At June 30, 2017, 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:
 
 
 
2018
$
351,066

2019
423,548

2020
432,999

2021
295,000

2022
640,000

Thereafter
2,212,401

Total future principal payments
$
4,355,014


Deferred Loan Costs

Deferred loan costs are net of accumulated amortization of $15.2 million and $15.4 million at June 30, 2017 and December 31, 2016 respectively. The table below (in thousands) sets forth amortization of deferred loan costs, which is included in Interest Expense in our consolidated statements of operations:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Loan costs expensed
$
376

 
$
808

 
$
376

 
$
827

Deferred loan cost amortization
2,424

 
1,916

 
4,522

 
3,235

Total
$
2,800

 
$
2,724

 
$
4,898

 
$
4,062


8. Interest Payable, Accounts Payable and Deferred Revenue

Interest payable, accounts payable and deferred revenue consisted of the following (in thousands):
 
June 30, 2017
 
December 31, 2016
 
 
 
 
Interest payable
$
10,966

 
$
9,561

Accounts payable and accrued liabilities
51,579

 
36,880

Deferred revenue
29,819

 
28,788

Total interest payable, accounts payable and deferred revenue
$
92,364

 
$
75,229


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

9. Derivative Contracts

Derivative Summary

As of June 30, 2017, all of our interest rate swaps, which include the interest rate swaps of our consolidated JVs and our unconsolidated Funds, were designated as cash flow hedges:
 
 
Number of Interest Rate Swaps
 
Notional
  (in thousands)
 
 
 
 
 
Consolidated derivatives(1)
 
26
 
$
3,147,400

Unconsolidated Funds' derivatives(2)
 
4
 
$
510,000

___________________________________________________
(1)
The notional amount includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(2)
The notional amount includes 100%, not our pro-rata share, of our unconsolidated Funds' derivatives.

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, 2017, there have been no events of default with respect to our interest rate swaps or our unconsolidated Funds' interest rate swaps. We do not post collateral for our swaps in a liability position. 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, 2017
 
December 31, 2016
 
 
 
 
 
Consolidated derivatives(2)
 
$
4,165

 
$
7,689

Unconsolidated Funds' derivatives(3)
 
$
—

 
$
—


__________________________________________________________________________________
(1)
Includes accrued interest and excludes adjustments for credit risk.
(2)
Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(3)
Our unconsolidated Funds did not have any derivatives in a liability position.
 
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. We do not receive collateral for our swaps in an asset position. 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, 2017
 
December 31, 2016
 
 
 
 
 
Consolidated derivatives(2)
 
$
36,764

 
$
35,144

Unconsolidated Funds' derivatives(3)
 
$
4,506

 
$
3,724

___________________________________________________
(1)
Includes accrued interest and excludes adjustments for credit risk.
(2)
Includes 100%, not our pro-rata share, of our consolidated JVs' derivatives.
(3)
Includes 100%, not our pro-rata share, of our unconsolidated Funds' derivatives.


20
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 derivative instruments on our AOCI and statements of operations:
 
Six Months Ended June 30,
 
2017
 
2016
Derivatives Designated as Cash Flow Hedges:
 
 
 
Loss recorded in AOCI - Consolidated derivatives(1)(5)
$
(4,016
)
 
$
(50,142
)
Gain (loss) recorded in AOCI - unconsolidated Funds' derivatives(2)(5)
$
867

 
$
(1,149
)
Loss reclassified from AOCI - Consolidated derivatives(3)(5)
$
(8,955
)
 
$
(15,569
)
Gain (loss) reclassified from AOCI - unconsolidated Funds' derivatives(4)(5)
$
170

 
$
(224
)
Gain recorded - Consolidated derivatives(6)
$
25

 
$
—

 
 
 
 
Derivatives Not Designated as Cash Flow Hedges:
 

 
 

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

 
$
—

___________________________________________________
(1)
Represents the effective portion of the change in fair value of interest rate swaps.
(2)
Represents our share of the effective portion of the change in fair value of our unconsolidated Funds' interest rate swaps.
(3)
Reclassified from AOCI as an increase to Interest expense.
(4)
Reclassified from AOCI as a increase (decrease) to Income, including depreciation, from unconsolidated real estate funds (our share).
(5)
See the reconciliation of our AOCI in Note 10.
(6)
Represents the ineffective portion of the change in fair value of interest rate swaps, which is recorded as a reduction (increase) to interest expense. Our unconsolidated Funds did not have any ineffectiveness related to their interest rate swaps.
(7)
We and our unconsolidated Funds do not have any derivatives that are not designated as cash flow hedges.

Future Reclassifications from AOCI

At June 30, 2017, our estimate of the AOCI related to derivatives, designated as cash flow hedges, that will be reclassified to earnings during the next twelve months as swap interest payments are made, is presented in the table below (in thousands):

Consolidated derivatives(1)
$
2,501

Unconsolidated Funds' derivatives(2)
$
1,043

________________________________________
(1)
Reclassified as an increase to Interest expense.
(2)
Reclassified as a decrease to Income, including depreciation, from unconsolidated real estate funds.



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

10.  Equity

Equity Transactions

During the six months ended June 30, 2017, we (i) acquired 659 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (ii) issued 1.3 million shares of our common stock for the exercise of 3.9 million stock options on a net settlement basis (net of the exercise price and related taxes) and (iii) issued 9.1 million shares of our common stock under our ATM program for net proceeds of $346.0 million (of which $69.0 million was received shortly after June 30, 2017). For information concerning additional sales made under our ATM program which settled subsequent to quarter end, please see Note 17. During the six months ended June 30, 2016, we (i) formed a JV which acquired the Westwood Portfolio, and an investor contributed $320.0 million directly to the JV for a forty-percent interest, we then sold half of our sixty-percent interest to an investor for $241.1 million, which reduced our interest in the joint venture to thirty-percent, see Note 3, (ii) acquired 869 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, (iii) acquired 25 thousand OP Units for $826 thousand in cash and (iv) 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).

Condensed Consolidated Statements of Equity

The tables below present (in thousands) our condensed consolidated statements of equity:
 
DEI Stockholders' Equity
 
Noncontrolling Interests
 
Total Equity
 
 
 
 
 
 
Balance as of January 1, 2017
$
1,921,143

 
$
1,092,928

 
$
3,014,071

Net income
39,293

 
4,640

 
43,933

Cash flow hedge fair value adjustments
5,715

 
(79
)
 
5,636

Contributions to consolidated JVs
—

 
188,248

 
188,248

Dividends and distributions
(72,194
)
 
(19,202
)
 
(91,396
)
Exchange of OP units for common stock
8,856

 
(8,856
)
 
—

Exercise of stock options(1)
(52,704
)
 
—

 
(52,704
)
Stock-based compensation
—

 
5,786

 
5,786

Sale of common stock, net of offering costs
276,961

 
—

 
276,961

Balance as of June 30, 2017
$
2,127,070

 
$
1,263,465

 
$
3,390,535

   
 
DEI 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 JV
—

 
320,000

 
320,000

Sale of equity interest in consolidated JV
—

 
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(1)
(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

__________________________________________________
(1) Reflects withholding taxes. We issued shares of our common stock for the exercise of stock options on a net settlement basis (net of the exercise price and related taxes).

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

Noncontrolling Interests

Our noncontrolling interests consist of interests in our Operating Partnership and consolidated JVs which are not owned by us. Noncontrolling interests in our Operating Partnership consist of OP Units and fully-vested LTIP Units, and represented approximately 13% of our Operating Partnership's total interests as of June 30, 2017 when we and our Operating Partnership had 160.7 million shares of common stock and 25.0 million OP Units and fully-vested LTIP Units outstanding. A share of our common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics, sharing equally in the distributions from our Operating Partnership.  Investors who own OP Units have the right to cause our Operating Partnership to 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 key employees and non-employee directors as part of their compensation. These awards generally vest over the 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,
 
2017
 
2016
 
 
 
 
Net income attributable to common stockholders
$
39,293

 
$
33,848

 
 
 
 
Transfers from noncontrolling interests:
 
 
 
Exchange of OP Units with noncontrolling interests
8,856

 
11,458

Repurchase of OP Units from noncontrolling interests
—

 
(498
)
Net transfers from noncontrolling interests
8,856

 
10,960

 
 
 
 
Change from net income attributable to common stockholders and transfers from noncontrolling interests
$
48,149

 
$
44,808



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:
 
2017
 
2016
 
 
 
 
Beginning balance
$
15,156

 
$
(9,285
)
 
 
 
 
Other comprehensive loss before reclassifications - our derivatives
(4,016
)
 
(50,142
)
Other comprehensive income (loss) before reclassifications - our Fund's derivatives
867

 
(1,149
)
Reclassifications from AOCI - our derivatives(2)
8,955

 
15,569

Reclassifications from AOCI - our Fund's derivatives(3)
(170
)
 
224

Net current period OCI
5,636

 
(35,498
)
Add OCI attributable to noncontrolling interests
79

 
7,791

OCI attributable to common stockholders
5,715

 
(27,707
)
 
 
 
 
Ending balance
$
20,871

 
$
(36,992
)
___________________________________________________
(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 an (increase) decrease to Income, including depreciation, from unconsolidated real estate funds.

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

Equity Compensation

On June 2, 2016, the Douglas Emmett 2016 Omnibus Stock Incentive Plan ("2016 Plan") became effective after receiving stockholder approval, superseding our prior plan, the Douglas Emmett 2006 Omnibus Stock Incentive Plan ("2006 Plan"), both of which allow for awards to our directors, officers, employees and consultants. The key terms of the two plans are substantially identical, except for the date of expiration, the number of shares authorized for grants and various technical provisions. Grants after June 2, 2016 were awarded under the 2016 Plan, while grants prior to that date were awarded under the 2006 Plan (grants under the 2006 Plan remain outstanding according to their terms). Both plans are administered by the compensation committee of our board of directors.  Total net stock-based compensation expense was $2.6 million and $2.4 million for the three months ended June 30, 2017 and 2016, and $5.3 million and $4.7 million for the six months ended June 30, 2017 and 2016 respectively. These amounts are net of capitalized stock-based compensation of $247 thousand and $231 thousand for the three months ended June 30, 2017 and 2016, and $475 thousand and $448 thousand for the six months ended June 30, 2017 and 2016 respectively. The total intrinsic value of options exercised during the three months ended June 30, 2016 was $100.8 million, and $102.1 million and $101.9 million during the six months ended June 30, 2017 and 2016, 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,
 
2017

2016

2017

2016
Numerator (in thousands):
 

 
 

 
 

 
 

Net income attributable to common stockholders
$
20,244

 
$
18,482

 
$
39,293

 
$
33,848

Allocation to participating securities: Unvested LTIP Units
(97
)
 
(101
)
 
(196
)
 
(184
)
Numerator for basic and diluted net income attributable to common stock holders
$
20,147

 
$
18,381

 
$
39,097

 
$
33,664

 
 
 
 
 
 
 
 
Denominator (in thousands):
 
 
 
 
 
 
 
Weighted average shares of common stock outstanding - basic
155,898

 
147,722

 
154,203

 
147,479

Effect of dilutive securities: Stock options(1)
54

 
5,083

 
607

 
4,687

Weighted average shares of common stock and common stock equivalents outstanding - diluted
155,952

 
152,805

 
154,810

 
152,166

 
 
 
 
 
 
 
 
Basic EPS:
 
 
 

 
 
 
 
Net income attributable to common stockholders per share
$
0.129

 
$
0.124

 
$
0.254

 
$
0.228

 
 
 
 
 
 
 
 
Diluted EPS:
 

 
 

 
 
 
 
Net income attributable to common stockholders per share
$
0.129

 
$
0.120

 
$
0.253

 
$
0.221

____________________________________________________
(1)
The following securities (in thousands) were excluded from the computation of the weighted average shares of common stock and common stock equivalents outstanding - diluted 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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
OP Units
24,797

 
25,114

 
24,730

 
25,331

Vested LTIP Units
313

 
807

 
536

 
811


24
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, 2017, we did not have any fair value estimates of financial instruments using Level 3 inputs.

Financial instruments disclosed at fair value

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

Secured notes payable: See Note 7 for the details of our secured notes payable. We estimate the fair value of our secured notes payable, which includes the secured notes payable of our consolidated JVs, 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, 2017
 
December 31, 2016
 
 
 
 
Fair value
$
4,355,289

 
$
4,429,224

Carrying value
$
4,355,014

 
$
4,408,083


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, 2017
 
December 31, 2016
Derivative Assets:
 
 
 
Fair value - consolidated derivatives(1)
$
37,092

 
$
35,656

Fair value - unconsolidated Funds' derivatives(2)
$
4,526

 
$
3,605

 
 
 
 
Derivative Liabilities:
 
 
 
Fair value - consolidated derivatives(1)
$
3,353

 
$
6,830

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

 
$
—

____________________________________________________
(1)
Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included in interest rate contracts in our consolidated balance 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 our unconsolidated Funds' derivatives. Our pro-rata share of the amounts related to the unconsolidated Funds' derivatives is included in our Investment in unconsolidated real estate funds in our consolidated balance sheet. See Note 5 for more information regarding our unconsolidated Funds.

25
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 it 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,
 
2017
 
2016
 
2017
 
2016
Office Segment
 
 
 
 
 
 
 
Total office revenues
$
175,542

 
$
163,096

 
$
345,890

 
$
307,475

Office expenses
(57,887
)
 
(53,381
)
 
(112,772
)
 
(101,264
)
Office Segment profit
117,655

 
109,715

 
233,118

 
206,211

 
 
 
 
 
 
 
 
Multifamily Segment
 
 
 
 
 
 
 
Total multifamily revenues
24,090

 
24,119

 
48,223

 
48,312

Multifamily expenses
(5,878
)
 
(5,341
)
 
(11,825
)
 
(11,372
)
Multifamily Segment profit
18,212

 
18,778

 
36,398

 
36,940

 
 
 
 
 
 
 
 
Total profit from all segments
$
135,867

 
$
128,493

 
$
269,516

 
$
243,151



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,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Total profit from all segments
$
135,867

 
$
128,493

 
$
269,516

 
$
243,151

General and administrative
(8,592
)
 
(9,403
)
 
(18,748
)
 
(17,474
)
Depreciation and amortization
(68,793
)
 
(62,568
)
 
(136,167
)
 
(118,120
)
Other income
2,331

 
2,143

 
4,493

 
4,232

Other expenses
(1,773
)
 
(1,908
)
 
(3,497
)
 
(4,912
)
Income, including depreciation, from unconsolidated real estate funds
1,113

 
1,644

 
3,290

 
3,230

Interest expense
(38,000
)
 
(37,703
)
 
(74,954
)
 
(73,363
)
Income before gains
22,153

 
20,698

 
43,933

 
36,744

Gains on sales of investments in real estate
—

 
1,082

 
—

 
1,082

Net income
22,153

 
21,780

 
43,933

 
37,826

Less: Net income attributable to noncontrolling interests
(1,909
)
 
(3,298
)
 
(4,640
)
 
(3,978
)
Net income attributable to common stockholders
$
20,244

 
$
18,482

 
$
39,293

 
$