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•	adverse developments related to the Coronavirus (COVID-19) global pandemic;

•	adverse economic or real estate developments affecting Southern California or Honolulu, Hawaii;

•	competition from other real estate investors in our markets;

•	decreasing rental rates or increasing tenant incentive and vacancy rates;

•	defaults on, early terminations of, or non-renewal of leases by tenants;

•	increases in interest rates or operating costs;

•	insufficient cash flows to service our outstanding debt or pay rent on ground leases;

•	difficulties in raising capital;

•	inability to liquidate real estate or other investments quickly;

•	adverse changes to rent control laws and regulations;

•	environmental uncertainties;

•	natural disasters;

•	insufficient insurance, or increases in insurance costs;

•	inability to successfully expand into new markets and submarkets;

•	difficulties in identifying properties to acquire and failure to complete acquisitions successfully;

•	failure to successfully operate acquired properties;

•	risks associated with property development;

•	risks associated with JVs;

•	conflicts of interest with our officers and reliance on key personnel;

•	changes in zoning and other land use laws;

•	adverse results of litigation or governmental proceedings;

•	failure to comply with laws, regulations and covenants that are applicable to our business;

•	possible terrorist attacks or wars;

•	possible cyber attacks or intrusions;

•	adverse changes to accounting rules;

•	weaknesses in our internal controls over financial reporting;

•	failure to maintain our REIT status under federal tax laws; and

•	adverse changes to tax laws, including those related to property taxes.

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Organization and Business Description

Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and Honolulu, Hawaii. Through our interest in our Operating Partnership and its subsidiaries, consolidated JVs and unconsolidated Fund, we focus on owning, acquiring, developing and managing a significant market share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities. The terms "us," "we" and "our" as used in the consolidated financial statements refer to Douglas Emmett, Inc. and its subsidiaries on a consolidated basis.

At March 31, 2020, our Consolidated Portfolio consisted of (i) a 17.9 million square foot office portfolio, (ii) 4,161 multifamily apartment units and (iii) fee interests in two parcels of land from which we receive rent under ground leases. We also manage and own an equity interest in an unconsolidated Fund which, at March 31, 2020, owned an additional 0.4 million square feet of office space. We manage our unconsolidated Fund alongside our Consolidated Portfolio, and we therefore present the statistics for our office portfolio on a Total Portfolio basis. As of March 31, 2020, our portfolio (not including two parcels of land from which we receive rent under ground leases), consisted of the following properties (including ancillary retail space):

	Consolidated Portfolio		Total Portfolio
Office
Wholly-owned properties	53		53
Consolidated JV properties	17		17
Unconsolidated Fund properties	—		2
	70		72
Multifamily
Wholly-owned properties	10		10
Consolidated JV properties	1		1
	11		11
Total	81		83

Basis of Presentation

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

We consolidate entities in which we are considered to be the primary beneficiary of a VIE or have a majority of the voting interest of the entity. We are deemed to be the primary beneficiary of a VIE when we have (i) the power to direct the activities of that VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. We do not consolidate entities in which the other parties have substantive kick-out rights to remove our power to direct the activities, most significantly impacting the economic performance, of that VIE. In determining whether we are the primary beneficiary, we consider factors such as ownership interest, management representation, authority to control decisions, and contractual and substantive participating rights of each party.

We consolidate our Operating Partnership through which we conduct substantially all of our business, and own, directly and through subsidiaries, substantially all of our assets, and are obligated to repay substantially all of our liabilities, including $3.11 billion of consolidated debt. See Note 7. We also consolidate four JVs. As of March 31, 2020, these consolidated entities had aggregate total consolidated assets of $9.31 billion (of which $8.92 billion related to investment in real estate), aggregate total consolidated liabilities of $5.18 billion (of which $4.62 billion related to debt), and aggregate total consolidated equity of $4.13 billion (of which $1.59 billion related to noncontrolling interests).

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The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC in conformity with US GAAP as established by the FASB in the ASC. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in conformity 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 consolidated 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, 2020. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements in our 2019 Annual Report on Form 10-K and the notes thereto. Any references to the number or class 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 consolidated financial statements in accordance with the standards of the PCAOB.

We have not made any changes to our significant accounting policies disclosed in our 2019 Annual Report on Form 10-K.

Use of Estimates

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

Revenue Recognition

We account for our rental revenues and tenant recoveries in accordance with Topic 842 "Leases". Rental revenues and tenant recoveries are included in: (i) Rental revenues and tenant recoveries under Office rental, and (ii) Rental revenues under Multifamily rental, in our consolidated statements of operations.

We account for our office parking revenues in accordance with ASC 606 "Revenue from Contracts with Customers". Office parking revenues are included in Parking and other income under Office rental in our consolidated statements of operations. Our lease contracts generally make a specified number of parking spaces available to the tenant, and we bill and recognize parking revenues on a monthly basis in accordance with the lease agreements, generally using the monthly parking rates in effect at the time of billing. Office parking revenues were $30.2 million and $26.4 million for the three months ended March 31, 2020 and 2019, respectively. Office parking receivables were $1.2 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively, and are included in Tenant receivables in our consolidated balance sheets.

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 US GAAP are implemented by the FASB in the form of ASUs.  We consider the applicability and impact of all ASUs. Other than the ASUs discussed below, the FASB has not issued any other ASUs that we expect to be applicable and have a material impact on our consolidated financial statements.

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ASUs Adopted

ASU 2016-13 (Topic 326 - "Financial Instruments-Credit Losses")

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 is the first quarter of 2020. The amendments in the ASU should be applied on a modified-retrospective basis. The ASU impacts our measurement of credit losses for our Office parking receivables, which were $1.2 million and $1.3 million as of March 31, 2020 and December 31, 2019, respectively, and are included in Tenant receivables in our consolidated balance sheets. We adopted the ASU in the first quarter of 2020 and it did not have a material impact on our consolidated financial statements.

ASU 2020-04 (Topic 848 - "Reference Rate Reform")

In March 2020, the FASB issued ASU No. 2020-04, "Reference Rate Reform". The ASU contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. We elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients maintains the presentation of derivatives consistent with past presentation. We will continue to evaluate the impact of the guidance and may apply other elections, as applicable, as additional changes in the market occur. Our election to apply the hedge accounting expedients did not have a material impact on our consolidated financial statements in the first quarter of 2020.

We pay rent under a ground lease located in Honolulu, Hawaii, which expires on December 31, 2086. The rent is fixed at $733 thousand per year until February 28, 2029, after which it will reset to the greater of the existing ground rent or market. As of March 31, 2020, the right-of-use asset carrying value of this ground lease was $7.5 million and the ground lease liability was $10.9 million. We incurred ground rent expense of $182 thousand and $180 thousand for the three months ended March 31, 2020 and 2019, respectively, which is included in Office expenses in our consolidated statements of operations. The table below, which assumes that the ground rent payments will continue to be $733 thousand per year after February 28, 2029, presents the future minimum ground lease payments as of March 31, 2020:

Twelve months ending March 31:	(In thousands)
2021	$	733
2022	733
2023	733
2024	733
2025	733
Thereafter	45,262
Total future minimum lease payments	$	48,927

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Summary of our Acquired Lease Intangibles

(In thousands)	March 31, 2020				December 31, 2019
Above-market tenant leases	$	7,131			$	7,220
Above-market tenant leases - accumulated amortization	(1,990		)		(1,741		)
Above-market ground lease where we are the lessor	1,152				1,152
Above-market ground lease - accumulated amortization	(229		)		(224		)
Acquired lease intangible assets, net	$	6,064			$	6,407
Below-market tenant leases	$	101,299			$	102,583
Below-market tenant leases - accumulated accretion	(53,530		)		(50,216		)
Acquired lease intangible liabilities, net	$	47,769			$	52,367

    

Impact on the Consolidated Statements of Operations

The table below summarizes the net amortization/accretion related to our above- and below-market leases:

	Three Months Ended March 31,
(In thousands)	2020				2019
Net accretion of above- and below-market tenant lease assets and liabilities(1)	$	4,259			$	4,124
Amortization of an above-market ground lease asset(2)	(3		)		(4		)
Total	$	4,256			$	4,120

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(1)	Recorded as a net increase to office and multifamily rental revenues.

(2)	Recorded as a decrease to office parking and other income.

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Description of our Funds

As of March 31, 2020, we manage and own an equity interest of 33.5% in an unconsolidated Fund, Partnership X, through which we and other investors in the Fund own two office properties totaling 0.4 million square feet. During the three months ended March 31, 2020 we purchased additional interests of 3.6% in Partnership X for $6.6 million.

On November 21, 2019, we restructured Fund X which resulted in Fund X being treated as a consolidated JV from November 21, 2019, and we closed the Opportunity Fund. See Note 6 in our 2019 Annual Report on Form 10-K for more information.

At March 31, 2019, we managed and held direct and indirect equity interests in three unconsolidated Funds, consisting of 6.2% of the Opportunity Fund, 71.3% of Fund X and 24.5% of Partnership X, through which we and investors in the Funds' owned eight office properties totaling 1.8 million square feet. We did not purchase any interests in the Funds during the three months ended March 31, 2019.

Our Funds pay us fees and reimburse us for certain expenses related to property management and other services we provide, which are included in Other income in our consolidated statements of operations. We also receive distributions based on invested capital and on any profits that exceed certain specified cash returns to the investors. The table below presents cash distributions we received from our Funds:

	Three Months Ended March 31,
(In thousands)	2020				2019
Operating distributions received(1)	$	394			$	1,551
Capital distributions received(1)	219				2,225
Total distributions received(1)	$	613			$	3,776

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(1)	The distributions are not directly comparable to the prior period, the distributions during the three months ended March 31, 2020 reflect distributions from Partnership X, whereas the distributions during the three months ended March 31, 2019 reflect distributions from the Opportunity Fund, Fund X and Partnership X.

Summarized Financial Information for our Funds

The tables below present selected financial information for the Funds.  The amounts presented reflect 100% (not our pro-rata share) of amounts related to the Funds, and are based upon historical acquired book value:

(In thousands)	March 31, 2020				December 31, 2019
Total assets(1)	$	135,547			$	136,479
Total liabilities(1)	$	114,056			$	113,330
Total equity(1)	$	21,491			$	23,149

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(1) The balances reflect the financial position of Partnership X.

        

	Three Months Ended March 31,
(In thousands)	2020				2019
Total revenues(1)	$	4,602			$	20,159
Operating income(1)	$	1,522			$	5,395
Net income(1)	$	886			$	1,332

______________________________________________

(1)	The results of operations are not directly comparable to the prior period, the balances for the three months ended March 31, 2020 reflect the operations of Partnership X, whereas the balances for the three months ended March 31, 2019 reflect the combined operations of the Opportunity Fund, Fund X and Partnership X.

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(In thousands)	March 31, 2020				December 31, 2019
Restricted cash	$	121			$	121
Prepaid expenses	9,797				8,711
Other indefinite-lived intangibles	1,988				1,988
Furniture, fixtures and equipment, net	2,484				2,368
Other(1)	4,960				3,233
Total other assets	$	19,350			$	16,421

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(1) During the three months ended March 31, 2020, we recorded an asset write-down of $2.8 million for the estimated property damage related to a fire at one of our residential properties and recorded a corresponding insurance recovery receivable, as the recovery of the property damage loss is considered probable.

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Description		Maturity Date(1)		Principal Balance as of March 31, 2020				Principal Balance as of December 31, 2019				Variable Interest Rate		Fixed Interest Rate(2)		Swap Maturity Date
				(In thousands)
Wholly Owned Subsidiaries
Term loan(3)		1/1/2024		$	300,000			$	300,000			LIBOR + 1.55%		3.46%		1/1/2022
Term loan(3)		3/3/2025		335,000				335,000				LIBOR + 1.30%		3.84%		3/1/2023
Fannie Mae loan(3)		4/1/2025		102,400				102,400				LIBOR + 1.25%		2.76%		3/1/2023
Term loan(3)(4)		8/15/2026		415,000				415,000				LIBOR + 1.10%		2.58%		8/1/2025
Term loan(3)		9/19/2026		400,000				400,000				LIBOR + 1.15%		2.44%		9/1/2024
Term loan(3)(5)		9/26/2026		200,000				200,000				LIBOR + 1.20%		2.77%		10/1/2024
Term loan(3)(6)		11/1/2026		400,000				400,000				LIBOR + 1.15%		2.18%		10/1/2024
Fannie Mae loan(3)		6/1/2027		550,000				550,000				LIBOR + 1.37%		3.16%		6/1/2022
Fannie Mae loan(3)		6/1/2029		255,000				255,000				LIBOR + 0.98%		3.26%		6/1/2027
Fannie Mae loan(3)(7)		6/1/2029		125,000				125,000				LIBOR + 0.98%		2.55%		6/1/2027
Term loan(8)		6/1/2038		30,679				30,864				N/A		4.55%		N/A
Revolving credit facility(9)		8/21/2023		—				—				LIBOR + 1.15%		N/A		N/A
Total Wholly Owned Subsidiary Debt				3,113,079				3,113,264
Consolidated JVs
Term loan(3)		2/28/2023		580,000				580,000				LIBOR + 1.40%		2.37%		3/1/2021
Term loan(3)		7/1/2024		400,000				400,000				LIBOR + 1.65%		3.44%		7/1/2022
Term loan(3)		12/19/2024		400,000				400,000				LIBOR + 1.30%		3.47%		1/1/2023
Term loan(3)		6/1/2029		160,000				160,000				LIBOR + 0.98%		3.25%		7/1/2027
Total Consolidated Debt(10)				4,653,079				4,653,264
Unamortized loan premium, net				6,526				6,741
Unamortized deferred loan costs, net				(39,390		)		(40,947		)
Total Consolidated Debt, net				$	4,620,215			$	4,619,058

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Except as noted below, our loans and revolving credit facility: (i) are non-recourse, (ii) are secured by separate collateral pools consisting of one or more properties, (iii) require interest-only monthly payments with the outstanding principal due upon maturity, and (iv) contain certain financial covenants which could require us to deposit excess cash flow with the lender under certain circumstances unless we (at our option) either provide a guarantee or additional collateral or pay down the loan within certain parameters set forth in the loan documents.  Certain loans with maturity date extensions require us to meet minimum financial thresholds in order to exercise those extensions.

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

(2)	Effective rate as of March 31, 2020. 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. See below for details of our loan costs.

(3)	The loan agreement includes a zero-percent LIBOR floor. The corresponding swaps do not include such a floor.

(4)	Effective rate will increase to 3.07% on April 1, 2020.

(5)	Effective rate will decrease to 2.36% on July 1, 2020.

(6)	Effective rate will increase to 2.31% on July 1, 2021.

(7)	Effective rate will increase to 3.25% on December 1, 2020.

(8)	Requires monthly payments of principal and interest. Principal amortization is based upon a 30-year amortization schedule.

(9)	$400 million revolving credit facility. Unused commitment fees range from 0.10% to 0.15%. The loan agreement includes a zero-percent LIBOR floor.

(10)	The table does not include our unconsolidated Fund's loan - see Note 15. See Note 12 for our fair value disclosures.

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Debt Statistics

The table below summarizes our consolidated fixed and floating rate debt:

(In thousands)		Principal Balance as of March 31, 2020				Principal Balance as of December 31, 2019
Aggregate swapped to fixed rate loans		$	4,622,400			$	4,622,400
Aggregate fixed rate loans		30,679				30,864
Total Debt		$	4,653,079			$	4,653,264

The table below summarizes certain consolidated debt statistics as of March 31, 2020:

  

Statistics for consolidated loans with interest fixed under the terms of the loan or a swap
Principal balance (in billions)		$4.65
Weighted average remaining life (including extension options)		5.9 years
Weighted average remaining fixed interest period		3.6 years
Weighted average annual interest rate		3.00%

Future Principal Payments

At March 31, 2020, the minimum future principal payments due on our consolidated secured notes payable and revolving credit facility were as follows:

Twelve months ending March 31:		Including Maturity Extension Options(1)
		(In thousands)
2021		$	760
2022		796
2023		580,833
2024		300,871
2025		1,135,912
Thereafter		2,633,907
Total future principal payments		$	4,653,079

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(1)	Some of our loan agreements require that we meet certain minimum financial thresholds to be able to extend the loan maturity.

Loan Costs

Deferred loan costs are net of accumulated amortization of $32.6 million and $30.7 million at March 31, 2020 and December 31, 2019, respectively. The table below presents loan costs, which are included in Interest expense in our consolidated statements of operations:

	Three Months Ended March 31,
(In thousands)	2020				2019
Deferred loan cost amortization	$	1,876			$	1,917

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(In thousands)	March 31, 2020				December 31, 2019
Interest payable	$	11,728			$	11,707
Accounts payable and accrued liabilities	96,627				66,437
Deferred revenue	47,840				53,266
Total interest payable, accounts payable and deferred revenue	$	156,195			$	131,410

We make use of interest rate swap 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. We do not speculate in derivatives and we do not make use of any other derivative instruments. See Note 7 regarding our debt, and our consolidated JVs' debt, that is hedged. See Note 15 regarding our unconsolidated Fund's debt that is hedged.

Derivative Summary

As of March 31, 2020, our interest rate swaps, which include the interest rate swaps of our consolidated JVs and our unconsolidated Fund, were designated as cash flow hedges:

	Number of Interest Rate Swaps		Notional   (In thousands)
Consolidated derivatives(1)(2)(4)(5)	47		$	5,517,400
Unconsolidated Fund's derivatives(3)(4)(5)	1		$	110,000

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(1)	The notional amount reflects 100%, not our pro-rata share, of our consolidated JVs' derivatives.

(2)	The notional amount includes forward swaps with a total initial notional of $895.0 million, that will increase to $1.48 billion in the future to replace existing swaps as they expire.

(3)	The notional amount reflects 100%, not our pro-rata share, of our unconsolidated Fund's derivatives.

(4)	Our derivative contracts do not provide for right of offset between derivative contracts.

(5)	See Note 12 for our derivative fair value disclosures.

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Credit-risk-related Contingent Features

Our swaps include credit-risk related contingent features. For example, we have agreements with certain of our interest rate swap counterparties that contain a provision under which we could be declared in default on our derivative obligations if repayment of the underlying indebtedness that we are hedging is accelerated by the lender due to our default on the indebtedness. As of March 31, 2020, there have been no events of default with respect to our interest rate swaps, our consolidated JVs' or our unconsolidated Fund's interest rate swaps. We do not post collateral for our interest rate swap contract liabilities. The fair value of our interest rate swap contract liabilities, including accrued interest and excluding credit risk adjustments, was as follows:

(In thousands)	March 31, 2020				December 31, 2019
Consolidated derivatives(1)	$	245,311			$	56,896
Unconsolidated Fund's derivatives(2)	$	496			$	—

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(1)	The amounts reflect 100%, not our pro-rata share, of our consolidated JVs' derivatives.

(2)	The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives.

 

Counterparty Credit Risk

We are subject to credit risk from the counterparties on our interest rate swap contract assets because we do not receive collateral. We seek to minimize that risk by entering into agreements with a variety of high quality counterparties with investment grade ratings. The fair value of our interest rate swap contract assets, including accrued interest and excluding credit risk adjustments, was as follows:

(In thousands)	March 31, 2020				December 31, 2019
Consolidated derivatives(1)	$	59			$	23,275
Unconsolidated Fund's derivatives(2)	$	—			$	963

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(1)	The amounts reflect 100%, not our pro-rata share, of our consolidated JVs' derivatives.

(2)	The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives.

Impact of Hedges on AOCI and the Consolidated Statements of Operations

The table below presents the effect of our derivatives on our AOCI and the consolidated statements of operations:

(In thousands)	Three Months Ended March 31,
	2020				2019
Derivatives Designated as Cash Flow Hedges:
Consolidated derivatives:
Loss recorded in AOCI before reclassifications(1)	$	(206,597	)		$	(21,563	)
Gains reclassified from AOCI to Interest Expense(1)	$	(420	)		$	(8,724	)
Interest Expense presented in the consolidated statements of operations	$	(35,420	)		$	(33,293	)
Unconsolidated Funds' derivatives (our share)(2):
Loss recorded in AOCI before reclassifications(1)	$	(370	)		$	(2,405	)
Gains reclassified from AOCI to Income from unconsolidated Funds(1)	$	(72	)		$	(616	)
Income from unconsolidated Funds presented in the consolidated statements of operations	$	323			$	1,551

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(1)	See Note 10 for our AOCI reconciliation.

(2)	We calculate our share by multiplying the total amount for each Fund by our equity interest in the respective Fund.

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Future Reclassifications from AOCI

At March 31, 2020, our estimate of the AOCI related to derivatives designated as cash flow hedges that will be reclassified to earnings during the next twelve months as interest rate swap payments are made is as follows:

	(In thousands)
Consolidated derivatives:
Losses to be reclassified from AOCI to Interest Expense	$	(62,013	)
Unconsolidated Fund's derivative (our share)(1):
Losses to be reclassified from AOCI to Income from unconsolidated Funds	$	(371	)

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(1)    We calculate our share by multiplying the total amount for the Fund by our equity interest in the Fund.

Transactions

    

During the three months ended March 31, 2020, (i) we acquired 5 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, and (ii) we acquired 150 OP Units for $7 thousand in cash.

During the three months ended March 31, 2019, (i) we acquired 22 thousand OP Units in exchange for issuing an equal number of shares of our common stock to the holders of the OP Units, and (ii) we acquired 13 thousand OP Units for $507 thousand in cash.

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 owned 29.1 million OP Units and fully-vested LTIP Units, and represented approximately 14% of our Operating Partnership's total outstanding interests as of March 31, 2020 when we owned 175.4 million OP Units (to match our 175.4 million shares of outstanding common stock). A share of our common stock, an OP Unit and an LTIP Unit (once vested and booked up) have essentially the same economic characteristics, sharing equally in the distributions from our Operating Partnership.  Investors who own OP Units have the right to cause our Operating Partnership to acquire their OP Units for an amount of cash per unit equal to the market value of one share of our common stock at the date of acquisition, or, at our election, exchange their OP Units for shares of our common stock on a one-for-one 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 provided our stock price increases by more than a specified hurdle.

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Changes in our Ownership Interest in our Operating Partnership

The table below presents the effect on our equity from net income attributable to common stockholders and changes in our ownership interest in our Operating Partnership:

	Three Months Ended March 31,
(In thousands)	2020				2019
Net income attributable to common stockholders	$	26,923			$	28,701
Transfers from noncontrolling interests:
Exchange of OP Units with noncontrolling interests	90				363
Repurchase of OP Units from noncontrolling interests	(4		)		(291		)
Net transfers from noncontrolling interests	86				72
Change from net income attributable to common stockholders and transfers from noncontrolling interests	$	27,009			$	28,773

AOCI Reconciliation⁽¹⁾ 

The table below presents a reconciliation of our AOCI, which consists solely of adjustments related to derivatives designated as cash flow hedges:

	Three Months Ended March 31,
(In thousands)	2020				2019
Beginning balance	$	(17,462	)		$	53,944
Consolidated derivatives:
Other comprehensive loss before reclassifications	(206,597		)		(21,563		)
Reclassification of gains from AOCI to Interest Expense	(420		)		(8,724		)
Unconsolidated Funds' derivatives (our share)(2):
Other comprehensive loss before reclassifications	(370		)		(2,405		)
Reclassification of gains from AOCI to Income from unconsolidated Funds	(72		)		(616		)
Net current period OCI	(207,459		)		(33,308		)
OCI attributable to noncontrolling interests	59,049				10,307
OCI attributable to common stockholders	(148,410		)		(23,001		)
Ending balance	$	(165,872	)		$	30,943

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(1)	See Note 9 for the details of our derivatives and Note 12 for our derivative fair value disclosures.

(2)	We calculate our share by multiplying the total amount for each Fund by our equity interest in the respective Fund.

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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. The table below presents our stock-based compensation expense:

	Three Months Ended March 31,
(In thousands)	2020				2019
Stock-based compensation expense, net	$	2,941			$	2,630
Capitalized stock-based compensation	$	859			$	670

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 non-forfeitable 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 March 31,
	2020				2019
Numerator (In thousands):
Net income attributable to common stockholders	$	26,923			$	28,701
Allocation to participating securities: Unvested LTIP Units	(106		)		(126		)
Net income attributable to common stockholders - basic and diluted	$	26,817			$	28,575
Denominator (In thousands):
Weighted average shares of common stock outstanding - basic and diluted(1)	175,373				170,221
Net income per common share - basic and diluted	$	0.15			$	0.17

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(1)

Outstanding OP Units and vested LTIP Units are not included in the denominator in calculating diluted EPS, even though they may be exchanged under certain conditions for common stock on a one-for-one basis, because their associated net income (equal on a per unit basis to the Net income per common share - diluted) was already deducted in calculating Net income attributable to common stockholders. Accordingly, any exchange would not have any effect on diluted EPS. The following table presents the OP Units and vested LTIP Units outstanding for the respective periods:

	Three Months Ended March 31,
(In thousands)	2020			2019
OP Units	28,295			26,340
Vested LTIP Units	799			1,835

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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 March 31, 2020, we did not have any fair value estimates of financial instruments using Level 3 inputs.

Financial instruments disclosed at fair value

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

Secured notes payable: See Note 7 for the details of our secured notes payable. We estimate the fair value of our consolidated secured notes payable by calculating the credit-adjusted present value of the principal and interest payments for each secured note payable. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs, assumes that the loans will be outstanding through maturity, and excludes any maturity extension options. The table below presents the estimated fair value and carrying value of our secured notes payable (excluding our revolving credit facility), the carrying value includes unamortized loan premium and excludes unamortized deferred loan fees:

(In thousands)	March 31, 2020				December 31, 2019
Fair value	$	4,681,015			$	4,678,623
Carrying value	$	4,653,079			$	4,653,264

Ground lease liability: See Note 3 for the details of our ground lease. We estimate the fair value of our ground lease liability by calculating the present value of the future lease payments disclosed in Note 3 using our incremental borrowing rate. The calculation incorporates observable market interest rates which we consider to be Level 2 inputs. The table below presents the estimated fair value and carrying value of our ground lease liability:

(In thousands)	March 31, 2020				December 31, 2019
Fair value	$	14,510			$	12,218
Carrying value	$	10,878			$	10,882

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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 non-performance risk. Our derivatives are not subject to master netting arrangements.  The table below presents the estimated fair value of our derivatives:

(In thousands)	March 31, 2020				December 31, 2019
Derivative Assets:
Fair value - consolidated derivatives(1)	$	—			$	22,381
Fair value - unconsolidated Fund's derivatives(2)	$	—			$	889
Derivative Liabilities:
Fair value - consolidated derivatives(1)	$	238,821			$	54,616
Fair value - unconsolidated Fund's derivatives(2)	$	554			$	—

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(1)	Consolidated derivatives, which include 100%, not our pro-rata share, of our consolidated JVs' derivatives, are included in interest rate contracts in our consolidated balance sheets. The fair values exclude accrued interest which is included in interest payable in the consolidated balance sheets.

(2)	The amounts reflect 100%, not our pro-rata share, of our unconsolidated Fund's derivatives. Our pro-rata share of the amounts related to the unconsolidated Fund's derivatives is included in our Investment in unconsolidated Funds in our consolidated balance sheets. See Note 15 regarding our unconsolidated Fund's debt and derivatives.

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Segment information is prepared on the same basis that our management reviews information for operational decision-making purposes.  We operate in two business segments: (i) the acquisition, development, ownership and management of office real estate and (ii) the acquisition, development, ownership and management of multifamily real estate.  The services for our office segment primarily include rental of office space and other tenant services, including parking and storage space rental.  The services for our multifamily segment include rental of apartments and other tenant services, including parking and storage space rental. Asset information by segment is not reported because we do not use this measure to assess performance or make decisions to allocate resources.  Therefore, depreciation and amortization expense is not allocated among segments.  General and administrative expenses and interest expense are not included in segment profit as our internal reporting addresses these items on a corporate level. The table below presents the operating activity of our reportable segments:

(In thousands)	Three Months Ended March 31,
	2020				2019
Office Segment
Total office revenues	$	219,889			$	197,290
Office expenses	(69,664		)		(63,449		)
Office segment profit	150,225				133,841
Multifamily Segment
Total multifamily revenues	31,461				26,896
Multifamily expenses	(9,356		)		(7,555		)
Multifamily segment profit	22,105				19,341
Total profit from all segments	$	172,330			$	153,182

The table below presents a reconciliation of the total profit from all segments to net income attributable to common stockholders:

(In thousands)	Three Months Ended March 31,
	2020				2019
Total profit from all segments	$	172,330			$	153,182
General and administrative expenses	(10,335		)		(9,832		)
Depreciation and amortization	(97,777		)		(79,873		)
Other income	1,989				2,898
Other expenses	(1,396		)		(1,845		)
Income from unconsolidated Funds	323				1,551
Interest expense	(35,420		)		(33,293		)
Net income	29,714				32,788
Less: Net income attributable to noncontrolling interests	(2,791		)		(4,087		)
Net income attributable to common stockholders	$	26,923			$	28,701

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We lease space to tenants primarily under non-cancelable operating leases that generally contain provisions for a base rent plus reimbursement of certain operating expenses, and we own fee interests in two parcels of land from which we receive rent under ground leases. The table below presents the future minimum base rentals on our non-cancelable office tenant and ground leases at March 31, 2020:

Twelve months ending March 31:	(In thousands)
2021	$	659,922
2022	573,790
2023	483,898
2024	378,781
2025	289,063
Thereafter	677,360
Total future minimum base rentals(1)	$	3,062,814

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(1)

Does not include (i) residential leases, which typically have a term of one year or less, (ii) holdover rent, (iii) other types of rent such as storage and antenna rent, (iv) tenant reimbursements, (v) straight- line rent, (vi) amortization/accretion of acquired above/below-market lease intangibles and (vii) percentage rents.  The amounts assume that early termination options held by tenants are not exercised.

Legal Proceedings

From time to time, we are party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.  Excluding ordinary, routine litigation incidental to our business, we are not currently a party to any legal proceedings that we believe would reasonably be expected to have a materially adverse effect on our business, financial condition or results of operations.

Concentration of Risk

We are subject to credit risk with respect to our tenant receivables and deferred rent receivables related to our tenant leases. Our tenants' ability to honor the terms of their respective leases remains dependent upon economic, regulatory and social factors. We seek to minimize our credit risk from our tenant leases by (i) targeting smaller, more affluent tenants, from a diverse mix of industries, (ii) performing credit evaluations of prospective tenants and (iii) obtaining security deposits or letters of credit from our tenants.  For the three months ended March 31, 2020 and 2019, no tenant accounted for more than 10% of our total revenues.  

All of our properties, including the properties of our consolidated JVs and unconsolidated Fund, are located in Los Angeles County, California and Honolulu, Hawaii, and we are therefore susceptible to adverse economic and regulatory developments, as well as natural disasters, in those markets.

We are subject to credit risk with respect to our interest rate swap counterparties that we use to manage the risk associated with our floating rate debt. We do not post or receive collateral with respect to our swap transactions. Our swap contracts do not provide for right of offset between derivative contracts. See Note 9 for the details of our interest rate contracts. We seek to minimize our credit risk by entering into agreements with a variety of high quality counterparties with investment grade ratings.

We have significant cash balances invested in a variety of short-term money market funds that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments are not insured against loss of principal and there is no guarantee that our investments in these funds will be redeemable at par value. We also have significant cash balances in bank accounts with high quality financial institutions with investment grade ratings.  Interest bearing bank accounts at each U.S. banking institution are insured by the FDIC up to $250 thousand.

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Asset Retirement Obligations

Conditional asset retirement obligations represent a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement is conditional on a future event that may or may not be within our control.  A liability for a conditional asset retirement obligation must be recorded if the fair value of the obligation can be reasonably estimated.  Environmental site assessments have identified thirty-two buildings in our Consolidated Portfolio which contain asbestos, and would have to be removed in compliance with applicable environmental regulations if these properties are demolished or undergo major renovations.

As of March 31, 2020, the obligations to remove the asbestos from properties which are currently undergoing major renovations, or that we plan to renovate in the future, are not material to our consolidated financial statements. As of March 31, 2020, the obligations to remove the asbestos from our other properties have indeterminable settlement dates, and we are unable to reasonably estimate the fair value of the associated conditional asset retirement obligations.

Development and Other Contracts

In West Los Angeles, we are building a high-rise apartment building with 376 apartments. In downtown Honolulu, we are converting a 25 story, 490,000 square foot office tower into approximately 500 apartments. We expect the conversion to occur in phases over a number of years as the office space is vacated. As of March 31, 2020, we had an aggregate remaining contractual commitment for these and other development projects of approximately $211.4 million. As of March 31, 2020, we had an aggregate remaining contractual commitment for repositionings, capital expenditure projects and tenant improvements of approximately $25.5 million.

Guarantees

We have made certain environmental and other limited indemnities and guarantees covering customary non-recourse carve- outs for our unconsolidated Fund's debt. We have also guaranteed the related swap. Our Fund has agreed to indemnify us for any amounts that we would be required to pay under these agreements. As of March 31, 2020, all of the obligations under the related debt and swap agreements have been performed in accordance with the terms of those agreements. The table below summarizes our Fund's debt as of March 31, 2020. The amounts reflect 100%, not our pro-rata share, of the amounts related to our Fund:

Fund(1)

Loan Maturity Date

Principal Balance (In Millions)

Variable Interest Rate

Swap Fixed Interest Rate

Swap Maturity Date

Partnership X(2)(3)

3/1/2023

$

110.0

LIBOR + 1.40%

2.30%

3/1/2021

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(1)	See Note 5 for more information regarding our unconsolidated Fund.

(2)	Floating rate term loan, swapped to fixed, which is secured by two properties and requires monthly payments of interest only, with the outstanding principal due upon maturity. As of March 31, 2020, assuming a zero-percent LIBOR interest rate during the remaining life of the swap, the maximum future payments under the swap agreement were $0.9 million.

(3)	Loan agreement includes a zero-percent LIBOR floor. The corresponding swap does not include such a floor.

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•	The local governments that have authorized rent deferrals are considering excluding office tenants, which would reduce or eliminate that headwind.

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◦	We entered into forward interest rate swaps to hedge future term-loan refinancings. The forward swaps have an initial notional amount of $495.0 million, with effective dates ranging from June 2020 to March 2021, and maturity dates ranging from April 2025 to June 2025, fixing the one-month LIBOR interest rate in a range of 0.74% to 0.91%.

•	Residential High-Rise Tower, Brentwood, California

•	1132 Bishop Street, Honolulu, Hawaii

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(1)

These average rental rates are not directly comparable from year to year because the averages are significantly affected from period to period by factors such as the buildings, submarkets, and types of space and terms involved in the leases executed during the respective reporting period. Because straight-line rent takes into account the full economic value of each lease, including rent concessions and escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease.

(2)	Reflects the weighted average straight-line Annualized Rent.

(3)	Reflects the weighted average leasing commissions and tenant improvement allowances divided by the weighted average number of years for the leases. Excludes leases substantially negotiated by the seller in the case of acquired properties and leases for tenants relocated from space being taken out of service.

(1)

Represents the average annual initial stabilized cash and straight-line rents per square foot on new and renewed leases signed during the quarter compared to the prior leases for the same space. Excludes Short-Term Leases, leases where the prior lease was terminated more than a year before signing of the new lease, leases for tenants relocated from space being taken out of service, and leases in acquired buildings where we believe the information about the prior agreement is incomplete or where we believe base rent reflects other off-market inducements to the tenant that are not reflected in the prior lease document.

(2)	Our office rent roll can fluctuate from period to period as a result of changes in our submarkets, buildings and term of the expiring leases, making these metrics difficult to predict.

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(1)

These average rental rates are not directly comparable from year to year because of changes in the properties and units included. For example: (i) the average for 2018 decreased from 2017 because we added a significant number of units at our Moanalua Hillside Apartments development in Honolulu, where the rental rates are lower than the average in our portfolio, and (ii) the average for 2019 increased from 2018 because we acquired The Glendon where higher rental rates offset the effect of adding additional units at our Moanalua Hillside Apartments development.

(1)	Occupancy rates include the impact of property acquisitions, most of whose occupancy rates at the time of acquisition were below that of our existing portfolio.

(2)	The Occupancy Rate for our multifamily portfolio was impacted by an acquisition in 2019 and by new units at our Moanalua Hillside Apartments development in Honolulu in 2019 and 2018 - see "Financings, Developments and Repositionings" above.

(3)	Average occupancy rates are calculated by averaging the occupancy rates at the end of each of the quarters in the period and at the end of the quarter immediately prior to the start of the period.

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(1)	Adjusts for our share of our unconsolidated Funds' depreciation and amortization of real estate assets.

(2)	Adjusts for the net income and depreciation and amortization of real estate assets that is attributable to the noncontrolling interests in our consolidated JVs.

(3)	We restructured one of our unconsolidated Funds in November 2019 after which it was consolidated as a JV. The adjustments for the unconsolidated Funds and consolidated JVs are therefore not directly comparable to the prior period. See Note 6 in our 2019 Annual Report on Form 10-K for more information.

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(1)

Our cash flows from operating activities are primarily dependent upon the occupancy and rental rates of our portfolio, the collectibility of rent and recoveries from our tenants, and the level of our operating expenses and general and administrative expenses, and interest expense.  The increase in cash provided by operating activities was primarily due to: (i) an increase in operating income from our office portfolio due to an increase in rental and occupancy rates, and an increase in our ownership interest in a JV we consolidated in November 2019, and (ii) an increase in operating income from our residential portfolio due to the acquisition in June 2019 of the The Glendon residential community, and leasing of new units at our Moanalua Hillside Apartments development.

(2)

Our cash flows from investing activities is generally used to fund property acquisitions, developments and redevelopment projects, and Recurring and non-Recurring Capital Expenditures. The increase in cash used in investing activities was primarily due to: (i) an increase of $8.3 million in capital expenditures for developments, (ii) $6.6 million paid for the acquisition of additional interests in our Fund, and (iii) a decrease of $2.0 million in capital distributions received from our Funds, partly offset by a decrease of $14.0 million in capital expenditures for improvements to real estate.

(3)

Our cash flows from financing activities are generally impacted by our borrowings and capital activities, as well as dividends and distributions paid to common stockholders and noncontrolling interests, respectively.  The increase in cash used in financing activities was primarily due to: (i) an increase of $4.6 million in dividends paid to our stockholders, (ii) an increase of $2.6 million in distributions paid to noncontrolling interests, partly offset by: (a) a decrease of $5.0 million in net borrowings, (b) a decrease in loan cost payments of $1.2 million, and (c) a decrease of $0.5 million paid to repurchase OP Units.

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•	Government actions that reduce or otherwise hinder our ability to collect rent promptly or at all, adversely affect tenant demand, increase our costs or otherwise reduce our collections;

•	Supply chain, governmental or other disruptions that adversely affect construction or our operations and/or those of our tenants;

•	Economic pressure on our tenants, which could lead to lower collections or defaults;

•	Reduced or different tenant demand, leading to lower occupancy and/or rental rates in our buildings;

•	Increases in expenses and/or capital investments or decreases in tenant demand as a result of safety concerns;

•	Increased risks of IT disruptions and/or cyber attacks as a result of our employees or tenants working remotely;

•	Disruption of our operations as a result of the illness or social distancing of our employees or tenants;

•	Changes in the financial markets, the value of our properties and/or our cash flows which adversely affect our stock price and/or our tenants' access to needed debt or equity capital on reasonable or any terms; and/or

•	Increases in the cost or availability, or changes to the terms, of insurance.

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