**UnitedStatesSecurities and Exchange Commission**

**Washington,D.C. 20549**

**FORM 10-Q**

**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarter ended September 30, 2006**

**Commissionfile number 1-33106**

**DOUGLAS EMMETT, INC.**

(Exact name of registrantas 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, California90401**

(Address and zip code ofprincipal executive offices)

**(310) 255-7700**

Registrant’s telephonenumber, including area code:

**None**

(Former name, formeraddress and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days.

Yes  x     No  o                  

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act.

Large accelerated filer  o     Acceleratedfiler  o     Non-acceleratedfiler  x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o     No  x                  

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| **Class**                              | ** ** | **Outstanding  at December 5, 2006** |
|----------------------------------------|------------|-------------------------------------------|
| Common Shares of  beneficial interest, |       | 115,005,860 shares                        |
| $0.01 par value  per share             |       |                                      |

 

 

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**DOUGLAS EMMETT, INC.FORM 10-QTABLE OF CONTENTS**

|                   | ** ** | ** **             | ** ** | ** **                                                                                                                                                         | ** ** | **PAGE NO.** |
|-------------------|------------|------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| PART I.      |       | FINANCIAL  INFORMATION |       | 3                                                                                                                                                                  |
|              |       | Item 1.           |       | Financial  Statements                                                                                                                                              |       | 3            |
|              |       |                   |       | Consolidated  Balance Sheets for the Douglas Emmett, Inc. Predecessor as of  September 30, 2006 (unaudited) and December 31, 2005              |       | 3            |
|              |       |                   |       | Consolidated Statements of Income for the Douglas  Emmett, Inc. Predecessor for the three and nine months ended  September 30, 2006 and 2005 (unaudited) |       | 4            |
|              |       |                   |       | Consolidated Statements of Cash Flows for the Douglas  Emmett, Inc. Predecessor for the nine months ended September 30,  2006 and 2005 (unaudited)       |       | 5            |
|              |       |                   |       | Notes to Consolidated Financial Statements for the  Douglas Emmett, Inc. Predecessor                                                                          |       | 6            |
|              |       | Item 2.           |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                                                        |       | 20           |
|              |       | Item 3.           |       | Quantitative and Qualitative Disclosures About Market  Risk                                                                                                        |       | 32           |
|              |       | Item 4.           |       | Controls and Procedures                                                                                                                                            |       | 33           |
| PART II.     |       | OTHER  INFORMATION     |       | 33                                                                                                                                                                 |
|              |       | Item 1.           |       | Legal  Proceedings                                                                                                                                                 |       | 33           |
|              |       | Item 1A.          |       | Risk  Factors                                                                                                                                                      |       | 33           |
|              |       | Item 2.           |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                                                                       |       | 34           |
|              |       | Item 3.           |       | Defaults Upon Senior Securities                                                                                                                                    |       | 34           |
|              |       | Item 4.           |       | Submission of Matters to a Vote of Security Holders                                                                                                                |       | 34           |
|              |       | Item 5.           |       | Other  Information                                                                                                                                                 |       | 34           |
|              |       | Item 6.           |       | Exhibits                                                                                                                                                           |       | 34           |
|              |       | SIGNATURES             |       | 35                                                                                                                                                                 |
| Exhibit 31.1 |       | 36                     |
| Exhibit 31.2 |       | 37                     |
| Exhibit 32.1 |       | 38                     |
| Exhibit 32.2 |       | 39                     |

 

2

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**Part I.FINANCIAL INFORMATIONItem 1. Financial Statements**

**Douglas Emmett, Inc.Consolidated Balance Sheets(in thousands, except for share data)**

| ** **                                                                          | ** ** | **The Predecessor**     | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                          | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                          | ** ** | **(Unaudited)**              | ** ** | ** ** | ** ** |
| **Assets**                                                                          | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Investment in  real estate                                                          |       |                         | $          | 2,690,836 |   |   |   | $ | 2,622,484 |   |   |
| Cash and cash  equivalents                                                          |       |                         | 119,311    |   |   |   | 108,282 |   |   |
| Tenant  receivables                                                                 |       |                         | 3,371      |   |   |   | 3,658 |   |   |
| Deferred rents  receivable                                                          |       |                         | 68,663     |   |   |   | 62,145 |   |   |
| Interest rate  contracts                                                            |       |                         | 78,510     |   |   |   | 71,992 |   |   |
| Other assets                                                                        |       |                         | 41,473     |   |   |   | 36,086 |   |   |
| Total assets                                                                        |       |                         | $          | 3,002,164 |   |   |   | $ | 2,904,647 |   |   |
| **Liabilities**                                                                     | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Secured notes  payable                                                              |       |                         | $          | 2,305,500 |   |   |   | $ | 2,223,500 |   |   |
| Accounts payable,  accrued expenses and tenant security deposits                    |       |                         | 97,270     |   |   |   | 84,418 |   |   |
| Interest rate  contracts                                                            |       |                         | 6,530      |   |   |   | 6,004 |   |   |
| Total liabilities                                                                   |       |                         | 2,409,300  |   |   |   | 2,313,922 |   |   |
| Preferred minority interest in consolidated real  estate partnerships               |       |                         | 184,000    |   |   |   | 184,000 |   |   |
| Minority interest  in consolidated real estate partnerships                         |       |                         | 521,636    |   |   |   | 504,516 |   |   |
| **Stockholders’  deficit:**                                                    | ** ** |                         | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Common stock—$0  par value; 10,000 shares authorized and 65 shares outstanding |       |                         | —     |   |   |   | — |   |   |
| Additional  paid-in capital                                                         |       |                         | —     |   |   |   | — |   |   |
| Accumulated  deficit                                                                |       |                         | (52,772    | ) |   |   | (97,791 | ) |   |
| Notes receivable  from stockholders                                                 |       |                         | (60,000    | ) |   |   | — |   |   |
| Total stockholders’ deficit                                                    |       |                         | (112,772   | ) |   |   | (97,791 | ) |   |
| Total liabilities  and stockholders’ deficit                                   |       |                         | $          | 3,002,164 |   |   |   | $ | 2,904,647 |   |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

3

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**Douglas Emmett, Inc.Consolidated Statements of Income(Unaudited and in thousands, except for share data)**

| ** **                                                                   | ** ** | **The Predecessor**                       | ** ** | **The Predecessor**                      | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **For the Three  Months Ended** | ** ** | **For the Nine  Months Ended** | ** ** |
| ** **                                                                   | ** ** | **September 30,**                         | ** ** | **September 30,**                        | ** ** |
| ** **                                                                   | ** ** | **2006**                                       | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Revenues:**                                                                | ** ** | ** **                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Office rental:                                                               |       |                                           |       |                                          |       |   |   |   |   |
| Rental revenues                                                              |       | $                                              | 76,922     |                                          | $          | 74,130 |   | $ | 227,441 |   | $ | 218,330 |   |
| Tenant recoveries                                                            |       | 4,364                                          |       | 3,267                                         |       | 13,267 |   | 9,866 |   |
| Parking and other  income                                                    |       | 8,967                                          |       | 7,006                                         |       | 28,998 |   | 25,654 |   |
| Total office  revenue                                                        |       | 90,253                                         |       | 84,403                                        |       | 269,706 |   | 253,850 |   |
| Multifamily rental:                                                          |       |                                           |       |                                          |       |   |   |   |   |
| Rent revenues                                                                |       | 14,126                                         |       | 10,998                                        |       | 40,026 |   | 32,358 |   |
| Parking and other  income                                                    |       | 485                                            |       | 423                                           |       | 1,309 |   | 983 |   |
| Total multifamily  revenue                                                   |       | 14,611                                         |       | 11,421                                        |       | 41,335 |   | 33,341 |   |
| Total revenue                                                                |       | 104,864                                        |       | 95,824                                        |       | 311,041 |   | 287,191 |   |
| **Operating  Expenses:**                                                     | ** ** | ** **                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Office rental                                                                |       | 34,490                                         |       | 31,939                                        |       | 95,622 |   | 90,960 |   |
| Multifamily  rental                                                          |       | 4,763                                          |       | 3,955                                         |       | 13,459 |   | 11,270 |   |
| General and  administrative expenses                                         |       | 10,415                                         |       | 1,652                                         |       | 13,551 |   | 4,845 |   |
| Depreciation and  amortization                                               |       | 31,604                                         |       | 26,037                                        |       | 85,220 |   | 83,709 |   |
| Total operating  expenses                                                    |       | 81,272                                         |       | 63,583                                        |       | 207,852 |   | 190,784 |   |
| Operating Income                                                             |       | 23,592                                         |       | 32,241                                        |       | 103,189 |   | 96,407 |   |
| (Loss) gain on  investments in interest contracts, net                       |       | (53,975                                        | )          | 56,291                                        |       | 5,992 |   | 62,591 |   |
| Interest and  other income                                                   |       | 1,426                                          |       | 1,524                                         |       | 3,974 |   | 2,270 |   |
| Interest expense                                                             |       | (28,508                                        | )          | (34,399                                       | )          | (86,563 | ) | (86,755 | ) |
| Deficit (distributions) recovery (to) from minority  partners, net           |       | (11,554                                        | )          | 11,705                                        |       | (5,306 | ) | (35,947 | ) |
| (Loss) income  before minority interest                                      |       | (69,019                                        | )          | 67,362                                        |       | 21,286 |   | 38,566 |   |
| **Minority  interest:**                                                      | ** ** | ** **                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Minority interest  income (expense) in consolidated real estate partnerships |       | 47,338                                         |       | (47,020                                       | )          | (17,096 | ) | (55,863 | ) |
| Preferred  minority investor                                                 |       | (4,025                                         | )          | (4,025                                        | )          | (12,075 | ) | (11,780 | ) |
| Net (loss) income                                                            |       | $                                              | (25,706    | )                                             | $          | 16,317 |   | $ | (7,885 | ) | $ | (29,077 | ) |
| Net (loss) income  per common share                                          |       | $                                              | (395       | )                                             | $          | 251 |   | $ | (121 | ) | $ | (447 | ) |
| Weighted average shares  of common stock outstanding                         |       | 65                                             |       | 65                                            |       | 65 |   | 65 |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

4

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

| ** **                                                                       | ** ** | **The Predecessor**                            | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
| ** **                                                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Operating activities:**                                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                   | (7,885     | ) | $ | (29,077 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |       |                                                |       |   |   |
| Minority interests in consolidated real estate  partnerships                     |       | 29,171                                              |       | 67,643 |   |
| Deficit distributions to minority partners                                       |       | 5,306                                               |       | 35,947 |   |
| Depreciation and amortization                                                    |       | 85,220                                              |       | 83,709 |   |
| Net accretion of above and below market leases                                   |       | (1,446                                              | )          | (1,337 | ) |
| Amortization of loan costs and fees                                              |       | 2,304                                               |       | 9,878 |   |
| Gain on interest rate swap contracts                                             |       | (5,992                                              | )          | (62,591 | ) |
| Changes in  operating assets and liabilities:                                    |       |                                                |       |   |   |
| Tenant receivables                                                               |       | 287                                                 |       | 3,024 |   |
| Deferred rent                                                                    |       | (6,518                                              | )          | (10,833 | ) |
| Other assets                                                                     |       | (6,696                                              | )          | (32,745 | ) |
| Accounts payable, accrued expenses and tenant  security deposits                 |       | 14,287                                              |       | 34,880 |   |
| Net cash provided by operating activities                                        |       | 108,038                                             |       | 98,498 |   |
| **Investing  activities:**                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Acquisition of and additions to properties                                       |       | (153,303                                            | )          | (211,296 | ) |
| Net cash used in investing activities                                            |       | (153,303                                            | )          | (211,296 | ) |
| **Financing  activities:**                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from borrowings                                                         |       | 82,000                                              |       | 1,865,000 |   |
| Repayments of borrowings                                                         |       | —                                              |       | (1,724,655 | ) |
| Proceeds from affiliate borrowing                                                |       | —                                              |       | 23,500 |   |
| Repayments of affiliate borrowing                                                |       | —                                              |       | (23,500 | ) |
| Deferred loan costs                                                              |       | (1,253                                              | )          | (14,476 | ) |
| Proceeds from interest rate swap contract  termination                           |       | —                                              |       | 10,982 |   |
| Payment on interest rate swap contract termination                               |       | —                                              |       | (1,281 | ) |
| Contributions by minority interests                                              |       | 33,264                                              |       | 141,570 |   |
| Distributions to minority interests                                              |       | (50,621                                             | )          | (139,186 | ) |
| Distributions to stockholders                                                    |       | (7,096                                              | )          | (16,240 | ) |
| Net cash provided by financing activities                                        |       | 56,294                                              |       | 121,714 |   |
| Net increase in cash and cash equivalents                                        |       | 11,029                                              |       | 8,916 |   |
| Cash and cash  equivalents at beginning of the period                            |       | 108,282                                             |       | 107,860 |   |
| Cash and cash  equivalents at end of the period                                  |       | $                                                   | 119,311    |   | $ | 116,776 |   |
| **Supplemental  disclosure of non-cash financing information:**                  | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Notes receivable from  stockholders                                              |       | (60,000                                             | )          | — |   |
| Contribution of notes  receivable from stockholders                              |       | 60,000                                              |       | — |   |

 

The accompanying notes are an integral part of the consolidated financial statements.

5

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements September 30, 2006 (Unaudited and in thousands, except for share data)**

**1. Organization andBasis of Presentation**

Douglas Emmett, Inc. is a Maryland corporationformed on June 28, 2005 which did not have any meaningful operatingactivity until the consummation of our initial public offering and the relatedacquisition of our predecessor and certain other entities in October 2006.Accordingly, we believe that a discussion of the results of Douglas Emmett, Inc.would not be meaningful for the periods covered by these financial statements.

As described inFootnote 13, we acquired our predecessor and certain other entitiessimultaneously with the closing of our initial public offering on October 30,2006. In these transactions:

·       Inour initial public offering we issued a total of 75,900,000 shares of ourcommon stock in exchange for net proceeds of approximately $1.52 billion incash.

·       Inour formation transactions, we acquired certain assets of our predecessor andother entities in exchange for the assumption or discharge of $2.54 billion inindebtedness and preferred equity, the payment of $1.89 billion in cash, andthe issuance of 49.1 million common units of our operating partnership and 39.1million shares of our common stock.

·       Weincreased the amount of our existing $1.76 billion term loan financing by$545.0 million and also entered into a $250.0 million senior securedrevolving credit facility, with an accordion feature to increase theavailability to $500.0 million under specified circumstances.

Because these transactions did not occur until after September 30,2006, the historical financial results in these financial statements relate toour accounting predecessor only. Ourpredecessor includes Douglas Emmett Realty Advisors, Inc., or DERA, as theaccounting acquirer, and nine consolidated real estate limited partnerships thatowned, directly or indirectly, office and multifamily properties and feeinterests in land subject to ground leases, which we refer to collectively asthe “institutional funds”. Forall periods presented, DERA was the general partner of, and had responsibilityfor the asset management of, our predecessor. As of each of September 30,2006 and December 31, 2005, our predecessor owned 42 office properties andthe fee interest in two parcels of land that we lease to third parties underlong-term ground leases, and as of September 30, 2006 and December 31,2005, our predecessor owned six and five multifamily properties, respectively.

Our predecessor does not include certain otherentities we acquired at the time of initial public offering (“IPO”), includingDouglas, Emmett and Company, or DECO, P.L.E. Builders, Inc., or PLE, andseven California limited partnerships and one California limited liabilitycompany, which we refer to collectively as the “single-asset entities.”DECO provided property management and leasing services to all of the propertiesacquired in the formation transactions, and PLE provided construction servicesin connection with improvements to tenant suites and common areas in theproperties. Each single-asset entity owns, directly or indirectly, onemultifamily or office property (or, in one case, a fee interest in land subjectto a ground lease).

After the completion ofthe IPO and the related formation transactions which occurred subsequent to theperiod covered by these financial statements, we are a fully integrated,self-administered, and self-managed Real Estate Investment Trust (“REIT”).Through our controlling interest in Douglas Emmett Properties, LP (theOperating Partnership) and its subsidiaries, we own, manage, lease, acquire and

6

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

developreal estate, consisting primarily of office and multifamily properties andowned, as of October 31, 2006, a portfolio of 46 office properties(including ancillary retail space) and nine multifamily properties, as well asthe fee interests in three parcels of land subject to ground leases. All ofthese properties are located in Los Angeles County, California and Honolulu,Hawaii. We expect to qualify as a REIT for federal income tax purposesbeginning with our initial taxable year ending December 31, 2006.

**2. Summary ofSignificant Accounting Policies**

**Basis ofPresentation**

In March 2005, the Emerging Issues Task Force(EITF) of the Financial Accounting Standards Board (FASB) reached a consensuson Issue No. 04-5, *Investor’sAccounting for an Investment in a Limited Partnership When the Investor is theSole General Partner and the Limited Partners Have Certain Rights*.EITF 04-5 clarifies certain aspects of Statement of Positions 78-9 *Accounting for Investments in Real Estate Ventures*,and provides guidance on determining whether a sole general partner in alimited partnership should consolidate its investment in a limited partnership.DERA is the sole general partner of the institutional funds and the limitedpartners of the institutional funds do not have substantive “kick-out” orparticipation rights as defined by EITF 04-5. DERA early adopted theguidance of EITF 04-5 and has consolidated the institutional fundsretrospectively.

The accompanyingconsolidated financial statements represent the historical financial statementsof our predecessor. They include the accounts of DERA and the institutionalfunds, but do not include the accounts of the non predecessor entities whichwere acquired at the time of the IPO as discussed in Note 1. All significant intercompanybalances and transactions have been eliminated in the consolidated financialstatements.

**Unaudited InterimFinancial Information**

The accompanying unauditedinterim financial statements have been prepared by the Company’s managementpursuant to the rules and regulations of the Securities and ExchangeCommission. Certain information and footnote disclosure normally included inthe financial statements prepared in accordance with U.S. generally acceptedaccounting principals may have been condensed or omitted pursuant to such rules andregulations, although management believes that the disclosures are adequate tomake the presentation not misleading. The accompanying unaudited financialstatements include, in the opinion of management, all adjustments, consistingof normal recurring adjustments, necessary to present fairly the financialinformation set forth therein. The results of operations for the interimperiods are not necessarily indicative of the results that may be expected forthe year ended December 31, 2006. The interim financial statements shouldbe read in conjunction with the predecessor’s audited financial statements forthe year ended December 31, 2005 and notes thereto included in ourProspectus.

**Use of Estimates**

The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make certain estimates and assumptions that affect thereported amounts in the consolidated financial statements and accompanyingnotes. Actual results could differ from those estimates.

7

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

**Segment Information**

Statement of Financial Accounting Standards (SFAS) No. 131,*Disclosures about Segments of an Enterpriseand Related Information*, established standards for disclosure aboutoperating segments and related disclosures about products and services,geographic areas and major customers. Segment information is prepared on thesame basis that the Company’s management reviews information for operationaldecision making purposes. Our predecessor operated two business segments: theacquisition, redevelopment, ownership and management of office real estate andthe acquisition, redevelopment, ownership and management of multifamily realestate.

The products for theoffice segment include primarily rental of office space and other tenantservices including parking and storage space rental. The products for themultifamily segment include rental of apartments and other tenant servicesincluding parking and storage space rental.

**Investment in RealEstate**

Acquisitions of properties subsequent to June 30,2001, the effective date of SFAS No. 141, *BusinessCombinations*, are accounted for utilizing the purchase method andaccordingly, the results of operations of acquired properties are included inour results of operations from the respective dates of acquisition. Estimatesof future cash flows and other valuation techniques are used to allocate thepurchase price of acquired property between land, buildings and improvements,equipment and identifiable intangible assets and liabilities such as amountsrelated to in-place at-market leases, acquired above-market groundleases, acquired above and below-market leases and tenant relationships.Initial valuations are subject to change until such information is finalized,but no later than 12 months from the acquisition date.

Thenet above and below market tenant and ground lease liability is summarized asfollows:

| ** **                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Above-market  tenant leases         |       |                   | $          | 11,018                |       |   |   | $ | 11,018 |   |   |
| Accumulated  accretion              |       |                   | (6,554     | )                     |       |   | (5,456 | ) |   |
| Above-market  leases, net(1)        |       |                   | 4,464      |                  |       |   | 5,562 |   |   |
| Below-market tenant leases          |       |                   | $          | 15,012                |       |   |   | $ | 14,748 |   |   |
| Accumulated  accretion              |       |                   | (7,198     | )                     |       |   | (5,155 | ) |   |
| Below-market  tenant leases, net(2) |       |                   | $          | 7,814                 |       |   |   | $ | 9,593 |   |   |
| Above-market ground leases          |       |                   | $          | 18,977                |       |   |   | $ | 18,977 |   |   |
| Accumulated  accretion              |       |                   | (2,205     | )                     |       |   | (1,703 | ) |   |
| Above-market ground  leases, net(3) |       |                   | $          | 16,772                |       |   |   | $ | 17,274 |   |   |

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(1)          Included in other assetsin our predecessor’s consolidated balance sheets.

(2)          Included in accountspayable, accrued expenses and tenant security deposits in our predecessor’sconsolidated balance sheets.

8

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

(3)          Includedin accounts payable, accrued expenses and tenant security deposits in ourpredecessor’s consolidated balance sheets and amortized into office rentaloperating expenses.

**Interest RateAgreements**

Our predecessor managed its interest rate riskassociated with borrowings by obtaining interest rate swap and interest ratecap contracts. No other derivative instruments were used.

In June 1998, the FASBissued SFAS No. 133 *Accounting forDerivative Instruments and Hedging Activities* (SFAS No. 133, asamended by SFAS No. 138). The statement requires our predecessor torecognize all derivatives on the balance sheet at fair value. Derivatives thatare not hedges must be adjusted to fair value and the changes in fair valuemust be reflected as income or expense. If the derivative is a hedge, dependingon the nature of the hedge, changes in the fair value of derivatives are eitheroffset against the change in fair value of the hedged assets, liabilities, orfirm commitments through earnings or recognized in other comprehensive income,a component of stockholders’ equity (deficit) until the hedged item isrecognized in earnings. The ineffective portion of a derivative’s change infair value is immediately recognized in earnings. Our predecessor’s investmentsin interest rate swap and interest rate cap contracts did not qualifyas effective hedges, and as such, thechanges in such contracts’ fair market values are being recorded in earnings.

**Income Taxes**

As a REIT, we will be permitted to deductdistributions paid to our stockholders, eliminating the federal taxation ofincome represented by such distributions at the company level. REITs aresubject to a number of organizational and operational requirements. If we failto qualify as a REIT in any taxable year, we will be subject to federal incometax (including any applicable alternative minimum tax) on our taxable income atregular corporate tax rates.

DERA was an S-Corporationand the institutional funds were limited partnerships. Under applicable federaland state income tax rules, the allocated share of net income or loss from thelimited partnerships and S-Corporation is reportable in the income tax returnsof the respective partners and stockholders. Accordingly, no income taxprovision is included in the accompanying consolidated financial statementsother than the 1.5% tax due on taxable income of S-Corporations in the State ofCalifornia.

**3. Investment inReal Estate**

Investmentin real estate for the predecessor consists of the following:

| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Land.                                  |       |                   | $          | 485,519               |       |   |   | $ | 444,894 |   |   |
| Buildings                              |       |                   | 2,403,418  |                  |       |   | 2,324,536 |   |   |
| Tenant improvements  and leasing costs |       |                   | 387,644    |                  |       |   | 359,312 |   |   |
| Investment in  real estate             |       |                   | 3,276,581  |                  |       |   | 3,128,742 |   |   |
| Less accumulated  depreciation         |       |                   | (585,745   | )                     |       |   | (506,258 | ) |   |
| Net investment in real  estate         |       |                   | $          | 2,690,836             |       |   |   | $ | 2,622,484 |   |   |

 

9

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

In March 2006, DERA acquired from unrelatedparties a multifamily property in Honolulu, Hawaii. The aggregate acquisitioncosts of this property approximated $113,730 (2006 acquisition).

In January 2005, DERA acquired from unrelatedparties an office building in Woodland Hills, California and a multifamilyproperty in Honolulu, Hawaii (2005 acquisition). The aggregate acquisitioncosts of these properties approximated $270,370.

Thefollowing table summarizes the allocation of estimated fair values of theassets acquired and liabilities assumed at the date of acquisition.

| ** **                                                        | ** ** | **2006**        | ** ** | **2005**         | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                        | ** ** | **Acquisition** | ** ** | **Acquisitions** | ** ** |
| Land                                                              |       |            | $          | 42,887           |       |   |   | $ | 45,407 |   |   |
| Buildings and  equipment.                                         |       |            | 68,394     |             |       |   | 204,137 |   |   |
| Tenant  improvements and other in-place lease assets              |       |            | 2,982      |             |       |   | 24,661 |   |   |
| Other assets:                                                     |       |            |       |             |       |   |   |   |   |
| Tenant receivables and other assets                               |       |            | 579        |             |       |   | 1,767 |   |   |
| Above-market tenant leases.                                       |       |            | —     |             |       |   | 2,986 |   |   |
| Accounts payable,  accrued expenses and tenant security deposits: |       |            |       |             |       |   |   |   |   |
| Other liabilities                                                 |       |            | (849       | )                |       |   | (3,708 | ) |   |
| Below-market tenant leases..                                      |       |            | (263       | )                |       |   | (4,880 | ) |   |
| Secured notes  payable                                            |       |            | —     |             |       |   | (100,500 | ) |   |
| Total acquisition  costs                                          |       |            | $          | 113,730          |       |   |   | $ | 169,870 |   |   |

 

**4. Other Assets**

Otherassets for the predecessor consist of the following:

| ** **                                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                     | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Deferred loan costs,  net of accumulated amortization of $2,799 and $969 at September 30, 2006  and December 31, 2005, respectively. |       |                   | $          | 13,366                |       |   |   | $ | 14,617 |   |   |
| Above-market  tenant leases.                                                                                                                   |       |                   | 4,464      |                  |       |   | 5,562 |   |   |
| Security deposit  funds                                                                                                                        |       |                   | 2,788      |                  |       |   | 3,043 |   |   |
| Prepaid impounds.                                                                                                                              |       |                   | 6,813      |                  |       |   | 5,266 |   |   |
| Prepaid expenses                                                                                                                               |       |                   | 13,169     |                  |       |   | 7,081 |   |   |
| Other                                                                                                                                          |       |                   | 873        |                  |       |   | 517 |   |   |
|                                                                                                                                           |       |                   | $          | 41,473                |       |   |   | $ | 36,086 |   |   |

 

DERA incurred deferredloan cost amortization expense of $625 and $7,570 for the three months ended September 30,2006 and 2005, and $2,304 and $9,878 for the nine months ended September 31,2006 and 2005, respectively. The deferred loan cost amortization is included asa component of interest expense in the consolidated statements of income.

10

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

**5. Minimum FutureLease Rentals**

Our predecessor leased space to tenants primarilyunder noncancelable operating leases which generally contain provisions for abase rent plus reimbursement for certain operating expenses. Operating expensereimbursements for the three months ended September 30, 2006 and 2005 were$4,364 and $3,267, respectively. Operating expense reimbursements for the ninemonths ended September 30, 2006 and 2005 were $13,267 and $9,866,respectively.

Our predecessor leased space to certain tenants undernoncancelable leases which provide for contingent rents based upon tenantrevenues. The contingent rental income for the three months ended September 30,2006 and 2005 totaled $190 and $242, respectively. The contingent rental incomefor the nine months ended September 30, 2006 and 2005 totaled $763 and$711, respectively.

Futureminimum base rentals for our predecessor on noncancelable operating leases at September 30,2006, are as follows:

| October 1, 2006 to  December 31, 2006 |   | $       | 73,081    |   |
|-------------------------------------------------|--------|---------|-----------|--------|
| 2007                                            |   | 285,826 |      |
| 2008                                            |   | 256,192 |      |
| 2009                                            |   | 217,352 |      |
| 2010                                            |   | 178,600 |      |
| Thereafter                                      |   | 506,050 |      |
|                                            |   | $       | 1,517,101 |   |

 

The above future minimumlease payments exclude tenant reimbursements, amortization of deferred rentreceivables and above/below-market lease intangibles. Some leases aresubject to termination options. In general, these leases provide fortermination payments should the termination options be exercised. The precedingtable is prepared assuming such options are not exercised.

**6. Secured Notes Payable**

Asummary of secured notes payable of our predecessor is as follows:

| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** | **Fixed/** | ** ** | **Effective**             | ** ** | **Maturity**              | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|------------|------------|---------------------------|------------|---------------------------|------------|
| **Type of Debt**             | ** ** | ** **             | ** ** | **2006**              | ** ** | **2005**   | ** ** | **Floating Rate(1)** | ** ** | **Interest Rate(1)** | ** ** | **Date** | ** ** |
| Variable Rate Swapped to Fixed Rate    |       |                   |       |                  |       |       |       |                      |       |                      |       |   |   |   |   |   |   |
| Modified Term  Loan(2)(3)              |       |                   | $          | 1,755,000             |       |       |       | $                         | 1,755,000  |                      |       | LIBOR + 0.85 | % |   | 4.92 | % |   | 09/01/12 |   |
| Barrington Plaza  and Pacific Plaza(3) |       |                   | 153,000    |                  |       |       | 153,000    |                      |       | DMBS + 0.60               | %(4)       |   | 4.70 | % |   | 12/22/11 |   |
| 555 Barrington and  The Shores(3)      |       |                   | 140,000    |                  |       |       | 140,000    |                      |       | DMBS + 0.60               | %(4)       |   | 4.70 | % |   | 12/22/11 |   |
| Moanalua Hillside  Apartments(3)       |       |                   | 75,000     |                  |       |       | 75,000     |                      |       | DMBS + 0.76               | %(4)       |   | 4.86 | % |   | 02/01/15 |   |
| Villas at Royal  Kunia(3)              |       |                   | 82,000     |                  |       |       | —     |                      |       | LIBOR + 0.62              | %          |   | 5.62 | % |   | 03/01/16 |   |
| The Trillium(3)                        |       |                   | 100,500    |                  |       |       | 100,500    |                      |       |   Fixed         |       |   | 4.28 | % |   | — | (5) |
| Total                                  |       |                   | $          | 2,305,500             |       |       |       | $                         | 2,223,500  |                      |       |   |   |   |   |   |   |   |   |
|                                        |            |                        |            |                       |            |            |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |  |

----

(1)           All of our floating rate debt has beenfixed through interest rate swaps. See note 8 for our predecessor’s interestrate agreements outstanding at September 30, 2006. The effective interestrate disclosed includes the impact of our predecessor’s interest rate swaps.

11

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

(2)           Secured by the following properties andcombined in seven separate cross collateralized pools: Studio Plaza, GatewayLos Angeles, Bundy/Olympic, Brentwood Executive Plaza, Palisades Promenade,12400 Wilshire, First Federal Square, 11777 San Vicente, Landmark II, ShermanOaks Galleria, Second Street Plaza, Olympic Center, MB Plaza, Valley OfficePlaza, Coral Plaza, Westside Towers, Valley Executive Tower, Encino Terrace,Westwood Place, Century Park Plaza, Lincoln/Wilshire, 100 Wilshire, EncinoGateway, Encino Plaza, 1901 Avenue of the Stars, Columbus Center, Warner CenterTowers, Beverly Hills Medical Center, Harbor Court and Bishop Place.

(3)           Requires monthly payments of interestonly, with outstanding principal due upon maturity.

(4)           Fannie Mae Discount Mortgage-BackedSecurity (DMBS). The Fannie Mae DMBS generally tracks 90-day LIBOR.

(5)           This note was repaid on October 30,2006 in conjunction with the formation transactions.

Upon completion of the IPOand formation transactions, our existing $1.76 billion modified term loanfinancing was amended increasing the term loan by $545.0 million, which werefer to herein as the amended modified term loan. The amended modified termloan matures on September 1, 2012, subject to the existence of no defaultand the payment of a fee on the fifth and sixth anniversary of August 25,2005, and bears interest at a rate per annum equal to the London InterbankOffer Rate, or LIBOR, plus 85 basis points.

Theminimum future principal payments due on the predecessor’s secured notespayable at September 30, 2006, are as follows:

| October 1,  2006 to December 31, 2006 |   | $         | 100,500   |   |
|-------------------------------------------------|--------|-----------|-----------|--------|
| 2007                                            |   | —    |      |
| 2008                                            |   | —    |      |
| 2009                                            |   | —    |      |
| 2010                                            |   | —    |      |
| Thereafter                                      |   | 2,205,000 |      |
| Total future principal  payments                |   | $         | 2,305,500 |   |

 

*Senior Secured Revolving Credit Facility*

In conjunction with ourIPO and formation transactions, we entered into a $250.0 million securedrevolving credit facility with a group of banks led by Bank of America, NA andBanc of America Securities, LLC, which bears interest at a rate per annum equalto LIBOR plus 70 basis points if the amount outstanding is $175.0 million orless and at LIBOR plus 80 basis points if the amount outstanding is greaterthan $175.0 million. The senior secured revolving credit facility contains anaccordion feature that allows us to increase the availability by $250.0million, to $500.0 million, under specified circumstances. The facility bearsinterest at 15 basis points on the undrawn balance. The facility has a term ofthree years and two one-year extensions.

12

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

**7. AccountsPayable, Accrued Expenses and Tenant Security Deposits**

Accountspayable, accrued expenses and tenant security deposits for our predecessorconsist of the following:

| ** **                              | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Tenant security  deposits               |       |                         | $          | 27,468                      |       |   |   | $ | 25,670 |   |   |
| Accounts payable  and accrued expenses. |       |                         | 38,589     |                        |       |   | 20,009 |   |   |
| Below-market  tenant leases             |       |                         | 7,814      |                        |       |   | 9,593 |   |   |
| Deferred revenue                        |       |                         | 6,627      |                        |       |   | 11,872 |   |   |
| Above-market  ground leases             |       |                         | 16,772     |                        |       |   | 17,274 |   |   |
|                                    |       |                         | $          | 97,270                      |       |   |   | $ | 84,418 |   |   |

 

**8. Interest RateAgreements**

Thetable below lists our predecessor’s derivative instruments, and their fairvalues as of September 30, 2006 and December 31, 2005:

| ** **                                       | ** ** | ** ** | ** ** | ** **                      | ** **                       | ** **                                                 | ** **                                              | ** **                                          | ** **                                              | **Fair Value**        | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------------|----------------------------------|------------------------------------------------------------|---------------------------------------------------------|-----------------------------------------------------|---------------------------------------------------------|----------------------------|------------|
| **Instrument**                                   | ** ** | ** ** | ** ** | **Notional  Value**             | ** **                       | **Interest  Pay Rate**                                | ** **                                              | **Effective  Date**                                 | ** **                                              | **Maturity  Date**         | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | ** **                      | ** **                       | ** **                                                 | ** **                                              | ** **                                          | ** **                                              | **Asset (Liability)** | ** ** |
| Interest rate caps                               |       | $          | 368,000    |                            | Ranging  from  6.520% to  6.700% |                                                       | Ranging  from  December 2004  to January 2005 |                                                | Ranging  from  December 2007  to January 2008 |                       |       | $ | — |   |   |   | $ | 60 |   |   |
| Interest rate swaps                              |       | 2,205,000  |       | Ranging from  4.038% to  5.000% |                             | Ranging from  August 2005  to March 2006         |                                                    | Ranging from  August 2010  to August 2012 |                                                    |                       | 71,980     |   |   |   | 65,928 |   |   |
| Interest rate caps                               |       | 450,000    |       | Ranging from  5.000% to  5.500% |                             | Ranging from  November 1, 2005  to March 1, 2006 |                                                    | August 1, 2011                                 |                                                    |                       | 6,530      |   |   |   | 6,004 |   |   |
| Sold caps                                        |       | 450,000    |       | Ranging from  5.000% to  5.500% |                             | Ranging from  November 1, 2005  to March 1, 2006 |                                                    | August 1, 2011                                 |                                                    |                       | (6,530     | ) |   |   | (6,004 | ) |   |
| Total net fair  value of interest rate contracts |       |       |       |                            |                             |                                                       |                                                    |                                                |                                                    |                       | $          | 71,980 |   |   |   | $ | 65,988 |   |   |
|                                                  |            |            |            |                                 |                                  |                                                            |                                                         |                                                     |                                                         |                            |            |  |  |  |  |  |  |  |  |  |  |  |

 

Any change in fair valueof interest rate contracts of our predecessor was recorded as a gain or loss inthe statement of operations because such contracts did not qualify as effectivehedges under SFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities* (SFAS 133, as amended by SFAS 138).In conjunction with the offering, we entered into a series of interest rateswaps that effectively offset any future changes in the fair value of all ofour existing interest rate contracts. These new interest rate contracts willalso not qualify for hedge accounting under SFAS 133. Our existing interestrate contracts resulted in an asset with a fair value of approximately $72.8million as of the closing of our IPO. 

13

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

Interestrate contracts resulted in this value being “locked-in” after the completion ofour IPO. We will collect over the remaining life of these interest ratecontracts an amount equal to the net fair value recorded.

We also entered into a newseries of $2.205 billion of interest rate swap contracts that effectivelyhedged our variable rate debt from future changes in interest rates. Unlike theinterest rate contracts described above, we expect the new interest ratecontracts to qualify for cash flow hedge accounting treatment under SFAS 133,and as such, all future changes in fair value of the new interest ratecontracts for periods after this offering will be recognized in othercomprehensive income until the hedged item is recognized in earnings. Anyineffective portion of the new interest rate contracts’ change in fair value isimmediately recognized in earnings.

On October 31, 2006we executed $545 million of fixed-to-floating interest rate swaps at a rate ofapproximately 4.90%. These swaps effectively fixed our $545 million inadditional borrowings on our amended modified term loan at a rate of 5.75%. Theseswaps mature on December 1, 2010. We expect these swaps to also qualifyfor cash flow hedge accounting treatment under SFAS No. 133.

**9. Minority Interests in Consolidated Real Estate Partnerships**

Our predecessor reflectedunaffiliated partners’ interests in the institutional funds as minorityinterest in consolidated real estate partnerships. Minority interest inconsolidated real estate partnerships represented the minority partners’ shareof the underlying net assets of our predecessor’s consolidated real estatepartnerships. When these consolidated real estate partnerships made cashdistributions to partners in excess of the carrying amount of the minorityinterest, our predecessor generally recorded a charge equal to the amount ofsuch excess distributions, even though there was no economic effect or cost. Ifthe excess distributions previously absorbed by our predecessor were recoveredthrough the future earnings of the consolidated real estate partnership, ourpredecessor would record income in the period of recovery. Our predecessorreported this charge and any subsequent recovery in the consolidated statementsof operations as deficit recovery (distributions) from (to) minority partners,net.

After the completion ofthe IPO and formation transactions, the continuing investors (including ourpredecessor principals and our executive officers) that elected to own ourOperating Partnership units comprise the minority interests in our OperatingPartnership.

A preferred minorityinvestor invested $99,000 and $85,000, in 2005 and 2004, respectively, in twoof our predecessor’s consolidated subsidiaries. In return, the preferredminority investor received a profit participation of 8.75% per annum on itsunreturned capital contribution. The preferred investor’s contributed capitalis reflected in the predecessor’s balance sheets as a component of minorityinterests as of September 30, 2006 and December 31, 2005.  The preferred minority investor’s interest wasredeemed in conjunction with the IPO and formation transactions.

**10. Related-Party Transactions**

Our predecessor paid$1,673 and $1,816 in real estate commissions to an operating company owned bythe stockholders of DERA for the three months ended September 30, 2006 and2005, and $5,626 and 

14

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

$4,713for the nine months ended September 30, 2006 and 2005, respectively. Thecommissions paid to the operating company are accounted for as leasing costsand are included in our predecessor’s investment in real estate in theconsolidated balance sheets.

Our predecessorcontributed its share of discretionary profit-sharing contribution(subject to statutory limitations), totaling $192 and $180 for the three andnine months ended September 30, 2006 and 2005, for services rendered byemployees of an operating company owned by the stockholders of DERA.

Property management feesrelated to management services were paid to an operating company owned by thestockholders of DERA. The management fees are based upon percentages of therental cash receipts collected by the properties. The fees range from 1.75% to4.00% of the cash receipts. Our predecessor expensed $2,649 and $2,270 in suchproperty management fees for the three months ended September 30, 2006 and2005, and $7,356 and $6,727 for the nine months ended September 30, 2006and 2005, respectively. At September 30, 2006 and December 31, 2005,our predecessor had $823 and $600, respectively, in accrued and unpaid propertymanagement fees.

Our predecessor contractedwith an operating company owned by the stockholders of DERA to provide buildingand tenant improvement work. For the three and nine months ended September 30,2006 and 2005, amounts totaling $5,593 and $4,903 and $10,425 and $10,607,respectively, were paid to the operating company for contracting workperformed. These amounts are included in the costs basis of the buildings andin tenant improvements.

Our predecessor leasedapproximately 26,785 square feet of office space to two operating companies ownedor controlled by the stockholders of DERA. The rents from these leases totaled$200 for the three months ended September 30, 2006 and 2005 and $599 forthe nine months ended September 30, 2006 and 2005.

On March 15, 2006,DERA’s stockholders contributed $60,000 to DERA in the form of promissory notes.As part of the IPO and formation transactions, these notes were repaid.

**11. Commitments and Contingencies**

We are subject to variouslegal proceedings and claims that arise in the ordinary course of business.These matters are generally covered by insurance. We believe that the ultimatesettlement of these actions will not have a material adverse effect to ourfinancial position and results of operations or cash flows.

***Concentration ofCredit Risk***

Our properties are locatedin Los Angeles County, California and Honolulu, Hawaii. The ability of thetenants to honor the terms of their respective leases is dependent upon theeconomic, regulatory and social factors affecting the markets in which thetenants operate. Financial instruments that subject us to credit risk consistprimarily of cash, accounts receivable, deferred rents receivable and interestrate contracts. We maintain our cash and cash equivalents with high qualityfinancial institutions. Accounts at each institution are insured by the FederalDeposit Insurance Corporation up to $100; and to date, we have not experiencedany losses on our deposited cash. We perform ongoing credit evaluations of ourtenants for potential credit losses.

15

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

***Asset Retirement Obligations***

In March 2005, theFASB issued Interpretation No. 47, Accountingfor Conditional Asset Retirement Obligations—an interpretation of FASBStatement No. 143 (FIN 47). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations,represents a legal obligation to perform an asset retirement activity in whichthe timing and/or method of settlement is conditional on a future event thatmay or may not be within a company’s control. Under this standard, a liabilityfor a conditional asset retirement obligation must be recorded if the fairvalue of the obligation can be reasonably estimated. FIN 47 is effective forfiscal years ending after December 15, 2005. Environmental siteassessments and investigations have identified 14 properties in our portfoliocontaining asbestos. If these properties undergo major renovations or aredemolished, certain environmental regulations are in place, which specify themanner in which the asbestos must be handled and disposed. As of September 30,2006, the obligations to remove the asbestos from these properties haveindeterminable settlement dates, and therefore, we are unable to reasonablyestimate the fair value of the conditional asset retirement obligation.

***Future MinimumLease Payments***

At September 30,2006, our predecessor has leased portions of the land underlying three of ouroffice properties as more fully described in the notes to the predecessor’s December 31,2005 consolidated financial statements contained in the Company’s Prospectusdated October 23, 2006. Our predecessor expensed ground lease payments inthe amount of $845 and $829 for the three months ended September 30, 2006and 2005 and $2,520 and $2,475 for the nine months ended September 30,2006 and 2005, respectively.

Thefollowing is a schedule of minimum ground lease payments as of September 30,2006:

| October 1,  2006 to December 31, 2006 |   | $       | 821     |   |
|-------------------------------------------------|--------|---------|---------|--------|
| 2007                                            |   | 3,283   |    |
| 2008                                            |   | 3,283   |    |
| 2009                                            |   | 3,408   |    |
| 2010                                            |   | 3,433   |    |
| Thereafter                                      |   | 128,475 |    |
|                                            |   | $       | 142,703 |   |

 

***TenantConcentrations***

For the nine months ended September 30,2006 and 2005, no tenant exceeded 10% of our predecessor’s total rental revenueand tenant reimbursements.

16

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

**12. Segment Reporting**

Our predecessor’s segmentsare based on our predecessor’s method of internal reporting which classifiedits operations by property type. Our predecessor’s segments by property typeincluded: Office and Multifamily.

Asset information bysegment is not reported because we do not use this measure to assessperformance and make decisions to allocate resources. Therefore, depreciationand amortization expense is not allocated among segments. Interest and otherincome, management services, general and administrative expenses, interestexpense, depreciation and amortization expense and net derivative gains andlosses are not included in rental revenues less rental expenses as the internalreporting addresses these items on a corporate level.

Rentalrevenues less rental expenses is not a measure of operating results or cashflows from operating activities as measured by U.S. generally acceptedaccounting principles, and it is not indicative of cash available to fund cashneeds and should not be considered an alternative to cash flows as a measure ofliquidity. All companies may not calculate rental revenues less rental expensesin the same manner. Our predecessor considered rental revenues less rentalexpenses to be an appropriate supplemental measure to net income because itassisted both investors and management to understand the core operations of ourpredecessor’s properties.

| ** **                           | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Office**                                                         | ** ** | **Multifamily** | ** ** | **Total** | ** ** |
| Rental revenues                      |       | $                                                                  | 90,253     |   |   | $ | 14,611 |   |   | $ | 104,864 |   |
| Percentage of  total                 |       | 86                                                                 | %          |   | 14 | % |   | 100 | % |
| Rental expenses                      |       | $                                                                  | 34,490     |   |   | $ | 4,763 |   |   | $ | 39,253 |   |
| Percentage of  total                 |       | 88                                                                 | %          |   | 12 | % |   | 100 | % |
| Rental revenues less rental expenses |       | $                                                                  | 55,763     |   |   | $ | 9,848 |   |   | $ | 65,611 |   |
| Percentage of total                  |       | 85                                                                 | %          |   | 15 | % |   | 100 | % |

 

| ** **                           | ** ** | **Three Months Ended September 30, 2005** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Office**                                                         | ** ** | **Multifamily** | ** ** | **Total** | ** ** |
| Rental revenues                      |       | $                                                                  | 84,403     |   |   | $ | 11,421 |   |   | $ | 95,824 |   |
| Percentage of  total                 |       | 88                                                                 | %          |   | 12 | % |   | 100 | % |
| Rental expenses                      |       | $                                                                  | 31,939     |   |   | $ | 3,955 |   |   | $ | 35,894 |   |
| Percentage of  total                 |       | 89                                                                 | %          |   | 11 | % |   | 100 | % |
| Rental revenues less rental expenses |       | $                                                                  | 52,464     |   |   | $ | 7,466 |   |   | $ | 59,930 |   |
| Percentage of total                  |       | 88                                                                 | %          |   | 12 | % |   | 100 | % |

 

17

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

 

| ** **                           | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Office**                                                        | ** ** | **Multifamily** | ** ** | **Total** | ** ** |
| Rental revenues                      |       | $                                                                 | 269,706    |   |   | $ | 41,335 |   |   | $ | 311,041 |   |
| Percentage of  total                 |       | 87                                                                | %          |   | 13 | % |   | 100 | % |
| Rental expenses                      |       | $                                                                 | 95,622     |   |   | $ | 13,459 |   |   | $ | 109,081 |   |
| Percentage of  total                 |       | 88                                                                | %          |   | 12 | % |   | 100 | % |
| Rental revenues less rental expenses |       | $                                                                 | 174,084    |   |   | $ | 27,876 |   |   | $ | 201,960 |   |
| Percentage of total                  |       | 86                                                                | %          |   | 14 | % |   | 100 | % |

 

| ** **                           | ** ** | **Nine Months Ended September 30, 2005** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Office**                                                        | ** ** | **Multifamily** | ** ** | **Total** | ** ** |
| Rental revenues                      |       | $                                                                 | 253,850    |   |   | $ | 33,341 |   |   | $ | 287,191 |   |
| Percentage of  total                 |       | 88                                                                | %          |   | 12 | % |   | 100 | % |
| Rental expenses                      |       | $                                                                 | 90,960     |   |   | $ | 11,270 |   |   | $ | 102,230 |   |
| Percentage of  total                 |       | 89                                                                | %          |   | 11 | % |   | 100 | % |
| Rental revenues less rental expenses |       | $                                                                 | 162,890    |   |   | $ | 22,071 |   |   | $ | 184,961 |   |
| Percentage of total                  |       | 88                                                                | %          |   | 12 | % |   | 100 | % |

 

Thefollowing is a reconciliation of rental revenues less rental expenses to net (loss)income available to common stockholders:

| ** **                                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Rental revenues  less rental expenses                         |       | $                                                    | 65,611     |                                                | $          | 59,930 |   | $ | 201,960 |   | $ | 184,961 |   |
| Add:                                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income                                     |       | 1,426                                                |       | 1,524                                               |       | 3,974 |   | 2,270 |   |
| Gain on investments in interest rate contracts, net           |       | —                                               |       | 56,291                                              |       | 5,992 |   | 62,591 |   |
| Less:                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| General and administrative expenses                           |       | 10,415                                               |       | 1,652                                               |       | 13,551 |   | 4,845 |   |
| Loss on investments in interest rate contracts, net           |       | 53,975                                               |       | —                                              |       | — |   | — |   |
| Interest expense                                              |       | 28,508                                               |       | 34,399                                              |       | 86,563 |   | 86,755 |   |
| Depreciation and amortization                                 |       | 31,604                                               |       | 26,037                                              |       | 85,220 |   | 83,709 |   |
| Deficit distributions (recovery) to (from) minority  partners |       | 11,554                                               |       | (11,705                                             | )          | 5,306 |   | 35,947 |   |
| Minority interest (income) expense                            |       | (43,313                                              | )          | 51,045                                              |       | 29,171 |   | 67,643 |   |
| Net (loss) income                                             |       | $                                                    | (25,706    | )                                                   | $          | 16,317 |   | $ | (7,885 | ) | $ | (29,077 | ) |

 

**13. SubsequentEvents**

On October 23, 2006, we adopted the DouglasEmmett, Inc. 2006 Omnibus Stock Incentive Plan. The stock incentive planpermits us to make grants of ‘‘incentive stock options, non-qualified stockoptions, stock appreciation rights, deferred stock awards, restricted stockawards, dividend equivalent rights and 

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**Douglas Emmett, Inc. Notes to Consolidated Financial Statements (Continued) September 30, 2006 (Unaudited and in thousands, except for share data)**

other stock-based awards’’within the meaning of Section 422 of the Code, or any combination of theforegoing. We have initially reserved 16,500,000 shares of our common stock forthe issuance of awards under our stock incentive plan. The number of sharesreserved under our stock incentive plan is also subject to adjustment in theevent of a stock split, stock dividend or other change in our capitalization.Generally, shares that are forfeited or canceled from awards under our stockincentive plan also will be available for future awards. On October 23,2006, pursuant to our stock incentive plan our operating partnership issued anaggregate of 1,089,000 LTIP units and we issued options to purchase an aggregateof 5,742,221 shares of our common stock at an exercise price of $21. Certain ofthese LTIP Units and options were immediately vested, while others vest overthree to four years.

On October 30, 2006 (i) we issued a total of75,900,000 shares of our common stock in our initial public offering inexchange for net proceeds of approximately $1.52 billion in cash; (ii) we acquired certain assets of our predecessor andother entities in exchange for the assumption or discharge of $2.54 billion inindebtedness and preferred equity, the payment of $1.89 billion in cash, andthe issuance of 49.1 million operating partnership units and 39.1 millionshares of our common stock; and (iii) we increased the amount ofour existing $1.76 billion term loan financing by $545.0 million and enteredinto a $250.0 million senior secured revolving credit facility.

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**Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Forward LookingStatements.**

*This reportcontains forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934.  Wecaution investors that any forward-looking statements presented in this report,or which management may make orally or in writing from time to time, are basedon the beliefs of, assumptions made by, and information currently available to,management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,”“might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similarexpressions, which do not relate solely to historical matters, are intended toidentify forward-looking statements. Such statements are based on assumptionsand the actual outcome will be affected by known and unknown risks, trends,uncertainties and factors that are beyond our control. Although we believe thatour assumption are reasonable, they are not guarantees of future performanceand some will inevitably prove to be incorrect. As a result, our actual futureresults can be expected to differ from our expectations, and those differencesmay be material. We are not undertaking any obligation to update anyforward-looking statements. Accordingly, investors should use caution inrelying on past forward-looking statements, which are based on results andtrends at the time they are made, to anticipate future results or trends.*

*Some of the risksand uncertainties that may cause our actual results, performance orachievements to differ materially from those expressed or implied byforward-looking statements include the following: adverse economic or realestate developments in Southern California and Honolulu; decreased rental ratesor increased tenant incentive and vacancy rates; defaults on, early terminationof, or non-renewal of leases by tenants; increased interest rates and operatingcosts; failure to generate sufficient cash flows to service our outstandingindebtedness; difficulties in identifying properties to acquire and completingacquisitions; failure to successfully operate acquired properties andoperations; failure to maintain our status as a REIT under the Internal RevenueCode of 1986, as amended; possible adverse changes in rent control laws andregulations; environmental uncertainties; risks related to natural disasters;lack or insufficient amount of insurance; inability to successfully expand intonew markets and submarkets; risks associated with property development;conflicts of interest with our officers; changes in real estate and zoning lawsand increases in real property tax rates; and the consequences of any futureterrorist attacks. Please refer to the risk factors included in the sectionentitled “Risk Factors” beginning on page 23 and elsewhere in ourProspectus dated October 23, 2006.*

*The risks included here are not exhaustive, andadditional factors could adversely affect our business and financialperformance. In addition, the risks discussed in our Prospectus dated October 23,2006, continue to be relevant to our performance and financial condition.Moreover, we operate in a very competitive and rapidly changing environment.New risk factors emerge from time to time and it is not possible for managementto predict all such risk factors, nor can it assess the impact of all such riskfactors on our Company’s business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements. Given these risks anduncertainties, investors should not place undue reliance on forward-lookingstatements as a prediction of actual results.*

**Executive Summary**

We are a fully integrated, self-administered andself-managed REIT and one of the largest owners and operators of high-qualityoffice and multifamily properties in Los Angeles County, California and inHonolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of aconsistent and focused strategy of identifying submarkets that are supplyconstrained, have high barriers to entry and exhibit strong economiccharacteristics such as population and job growth and a diverse economic base.In our office portfolio, we focus primarily on owning and acquiring a substantialshare of top-tier office properties within submarkets located near high-endexecutive housing and key lifestyle amenities. In our multifamily portfolio, wefocus primarily on owning and acquiring select properties at premier locationswithin these same submarkets.

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Through our controlling interest in Douglas EmmettProperties, LP (the Operating Partnership) and its subsidiaries, our officeportfolio now consists of 46 properties with approximately 11.6 millionrentable square feet, and our multifamily portfolio consists of nine propertieswith a total of 2,868 units. As of September 30, 2006, our officeportfolio was 93.7% leased, and our multifamily properties were 99.0% leased.Our office portfolio contributed approximately 84.8% of our annualized rent asof September 30, 2006, while our multifamily portfolio contributedapproximately 15.2%. As of September 30, 2006, our Los Angeles Countyoffice and multifamily portfolio contributed approximately 90.7% of ourannualized rent, and our Honolulu, Hawaii office and multifamily portfoliocontributed approximately 9.3%.

Our properties are concentrated in nine premier LosAngeles County submarkets—Brentwood, Olympic Corridor, Century City, SantaMonica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/WoodlandHills and Burbank—as well as in Honolulu, Hawaii. Los Angeles County representsthe nation’s second largest office market with a total inventory ofapproximately 368 million rentable square feet. Los Angeles unemployment was4.8% as of September 30, 2006. As of September 30, 2006, Hawaii’sunemployment rate was 2.6%. The Honolulu CBD has the largest concentration ofinstitutional quality office space in Hawaii, totaling over 5.1 millionrentable square feet.

We believe we will be able to achieve internal cashflow growth over time through rollover of existing leases to higher rents, thelease-up of vacant space and fixed annual rental rate increases included in ourleases. For example, we have been repositioning our Warner Center Towers, Trilliumand Bishop Place properties. Excluding the Warner Center/Woodland Hillssubmarket, where we acquired properties with significant vacancies in recentyears, our leased rate was 95.9%, which reflects a 1.6% premium to that of oursubmarkets (including the Warner Center/Woodland Hills submarket, our occupancyrate reflects a 0.40% premium). Our West Los Angeles multifamily portfolioincludes units that are significantly under market, primarily as a result ofrent control laws. Under the current law we can increase rents to market ratesas tenants vacate.

Our capital structure anddebt financing strategy provide us with the capacity to fund future growth andwith financial flexibility due to the lack of amortization and defeasance andlimited prepayment penalties. We have a $250.0 million senior secured revolvingcredit facility (or $500.0 million pursuant to an accordion feature), of which$35.0 million was drawn at the closing of our initial public offering (“IPO”).

**Basis ofPresentation**

Douglas Emmett, Inc. is a Maryland corporationformed on June 28, 2005 which did not have any meaningful operatingactivity until the consummation of our IPO and the related acquisition of ourpredecessor and certain other entities in October 2006. Accordingly, webelieve that a discussion of the results of Douglas Emmett, Inc. would notbe meaningful for the periods covered by this Quarterly Report.

We acquired ourpredecessor and certain other entities simultaneously with the closing of ourIPO on October 30, 2006. In these transactions:

·       Inour IPO we issued a total of 75,900,000 shares of our common stock in exchangefor net proceeds of approximately $1.52 billion in cash.

·       Inour formation transactions, we acquired certain assets of our predecessor andother entities in exchange for the assumption or discharge of $2.54 billion inindebtedness and preferred equity, the payment of $1.89 billion in cash, andthe issuance of 49.1 million common units of our operating partnership and 39.1million shares of our common stock.

·       Weincreased the amount of our existing $1.76 billion term loan financing by$545.0 million and also entered into a $250.0 million senior securedrevolving credit facility, with an accordion feature to increase theavailability to $500.0 million under specified circumstances.

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Because these transactions did not occur until after September 30,2006, the historical financial data covered and discussed below relate to ouraccounting predecessor only. Ourpredecessor includes Douglas Emmett Realty Advisors, Inc., or DERA, as theaccounting acquirer, and nine consolidated real estate limited partnershipsthat owned, directly or indirectly, office and multifamily properties and feeinterests in land subject to ground leases, which we refer to collectively asthe “institutional funds”. Asof each of September 30, 2006 and December 31, 2005, our predecessorowned 42 office properties and the fee interest in two parcels of land that welease to third parties under long-term ground leases, and as of September 30,2006 and December 31, 2005, our predecessor owned six and five multifamilyproperties, respectively.

At the time of our IPO, we also acquired certain otherentities which are not included in our predecessor, and which we refer to asthe “non-predecessor entities”: Douglas, Emmett and Company, P.L.E. Builders, Inc.,and seven California limited partnerships and one California limited liabilitycompany, each of which owned, directly or indirectly, a single multifamily oroffice property (or, in one case, a fee interest in land subject to a groundlease), which we refer to collectively as the “single-asset entities”. Concurrentlywith our IPO, P.L.E. Builders was renamed Douglas Emmett Builders. As of eachof September 30, 2006 and December 31, 2005, the single-assetentities owned four office properties, three multifamily properties and the feeinterest in one parcel of land that we lease to third parties under long-termground leases. Under applicable accounting rules, the financial statementsdiscussed herein do not include the non predecessor entities.

The results included for our predecessor do notreflect a number of significant changes in our future accounting caused by ourIPO and the related acquisitions. These changes include certain purchaseaccounting adjustments under FAS 141, the straightlining of our rents and forin place interest rate swaps. In addition, our results may also be affected bythe potential future property tax reassessments resulting from our acquisitiontransactions. The results for our predecessor also include changes in value forour in place interest rate swaps.  Because we entered into offsetting swapagreements at the time of the IPO, future fluctuations in the value of ourinterest rate swaps should not impact our financial results.

As a result of these facts, we urge readers to be evenmore than usually cautious in using these past results as a proxy for ourfuture results. Our reports for future periods will include results for bothour predecessor and the non-predecessor entities commencing as of October 31,2006, which means that our results for the fourth quarter of 2006 will still bepartly on a predecessor basis.

We expect to qualify as aREIT for federal income tax purposes beginning with our initial taxable yearending December 31, 2006.

**Critical AccountingPolicies**

Our discussion and analysis of the historicalfinancial condition and results of operations of our predecessor are based upontheir consolidated financial statements, which have been prepared in accordancewith U.S. generally accepted accounting principles, or GAAP. The preparation ofthese financial statements in conformity with GAAP requires management to makeestimates and assumptions in certain circumstances that affect the reportedamounts of assets and liabilities at the date of the financial statements andthe reported amount of revenues and expenses in the reporting period. Actualamounts may differ from these estimates and assumptions. We have summarizedbelow those accounting policies that require material subjective or complexjudgments and that have the most significant impact on our financial conditionsand results of operations.

*Consolidationof Limited Partnerships.**  *In March 2005, the EmergingIssues Task Force (EITF) of the Financial Accounting Standards Board (FASB)reached a consensus on Issue No. 04-05, *Investor’s Accounting for an Investment in a Limited Partnership Whenthe Investor is the Sole General Partner and the Limited Partners Have CertainRights*. EITF 04-5 clarifies certain aspects of Statement ofPosition 78-9, 

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*Accountingfor Investments in Real Estate Ventures*, and providesguidance on determining whether a sole general partner in a limited partnershipshould consolidate its investment in a limited partnership. DERA is the solegeneral partner of the institutional funds and the limited partners of theinstitutional funds do not have substantive ‘‘kick-out’’ or participationrights as defined by EITF 04-5. DERA early adopted the guidance of EITF 04-5and has consolidated the institutional funds retrospectively.

The accompanying consolidated financial statementsrepresent the historical financial statements of our predecessor, which includethe accounts of DERA and the institutional funds. All significant intercompanybalances and transactions have been eliminated in the consolidated financialstatements.

*Investmentin Real Estate.**  *Acquisitions of properties and otherbusiness combinations subsequent to June 30, 2001, the effective date ofSFAS No. 141, *Business Combinations*,are accounted for utilizing the purchase method and, accordingly, the resultsof operations of acquired properties are included in our results of operationsfrom the respective dates of acquisition. Estimates of future cash flows andother valuation techniques are used to allocate the purchase price of acquiredproperty between land, buildings and improvements, equipment and identifiableintangible assets and liabilities such as amounts related to in-place at-marketleases, acquired above- and below-market leases and tenant relationships.Initial valuations are subject to change until such information is finalized nolater than 12 months from the acquisition date. Each of these estimatesrequires a great deal of judgment, and some of the estimates involve complexcalculations. These allocation assessments have a direct impact on our resultsof operations because if we were to allocate more value to land there would beno depreciation with respect to such amount. If we were to allocate more valueto the buildings as opposed to allocating to the value of tenant leases, thisamount would be recognized as an expense over a much longer period of time,since the amounts allocated to buildings are depreciated over the estimatedlives of the buildings whereas amounts allocated to tenant leases are amortizedover the terms of the leases.

The fair values of tangible assets are determined onan ‘‘as-if-vacant’’ basis. The ‘‘as-if-vacant’’ fair value is allocated toland, where applicable, buildings, tenant improvements and equipment based oncomparable sales and other relevant information obtained in connection with theacquisition of the property.

The estimated fair value of acquired in-placeat-market leases are the costs we would have incurred to lease the property tothe occupancy level of the property at the date of acquisition. Such estimateincludes the fair value of leasing commissions and legal costs that would beincurred to lease the property to this occupancy level. Additionally, weevaluate the time period over which such occupancy level would be achieved andinclude an estimate of the net operating costs (primarily real estate taxes,insurance and utilities) incurred during the lease-up period, which generallyranges up to 8-12 months.

Above-market and below-market in-place lease valuesare recorded as an asset or liability based on the present value (using aninterest rate which reflects the risks associated with the leases acquired) ofthe difference between the contractual amounts to be paid pursuant to thein-place leases and our estimate of fair market lease rates for thecorresponding in-place leases, measured over a period equal to the remainingnoncancelable term of the lease.

Expenditures for repairs and maintenance are expensedto operations as incurred. Significant betterments are capitalized. When assetsare sold or retired, their costs and related accumulated depreciation areremoved from the accounts with the resulting gains or losses reflected in netincome or loss for the period.

The values allocated to land, buildings, siteimprovements, tenant improvements, and in-place leases are depreciated on astraight-line basis using an estimated life of 40 years for buildings, 15 yearsfor site improvements, and the respective lease term for tenant improvementsand in-place leases. The values of above- and below-market leases are amortizedover the life of the related lease and recorded as either an 

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increase (for below-marketleases) or a decrease (for above-market leases) to rental income. Theamortization of acquired in-place leases is recorded as an adjustment todepreciation and amortization in the consolidated statements of operations. Ifa lease were to be terminated prior to its stated expiration, all unamortizedamounts relating to that lease would be written off. Interest, insurance andproperty tax costs incurred during the period of construction of real estatefacilities are capitalized.

*Impairmentof Long-Lived Assets.**  *We assess whether there has beenimpairment in the value of our long-lived assets whenever events or changes incircumstances indicate the carrying amount of an asset may not be recoverable.Recoverability of assets to be held and used is measured by a comparison of thecarrying amount to the undiscounted future cash flows expected to be generatedby the asset. We consider factors such as future operating income, trends andprospects, as well as the effects of leasing demand, competition and otherfactors. If our evaluation indicates that we may be unable to recover thecarrying value of a real estate investment, an impairment loss is recorded tothe extent that the carrying value exceeds the estimated fair value of theproperty. These losses have a direct impact on our net income because recordingan impairment loss results in an immediate negative adjustment to net income.Assets to be disposed of are reported at the lower of the carrying amount orfair value, less costs to sell. The evaluation of anticipated cash flows ishighly subjective and is based in part on assumptions regarding futureoccupancy, rental rates and capital requirements that could differ materiallyfrom actual results in future periods. If our strategy changes or marketconditions otherwise dictate an earlier sale date, an impairment loss may berecognized and such loss could be material.

*RevenueRecognition.**  *Revenue and gain is recognized inaccordance with Staff Accounting Bulletin No. 104 of the Securities andExchange Commission, *Revenue Recognition inFinancial Statements*(SAB 104), as amended. SAB 104requires that four basic criteria must be met before revenue can be recognized:persuasive evidence of an arrangement exists; the delivery has occurred orservices rendered; the fee is fixed and determinable; and collectibility isreasonably assured. All leases are classified as operating leases. For alllease terms exceeding one year, rental income is recognized on a straight-linebasis over the terms of the leases. Deferred rent receivables represent rentalrevenue recognized on a straight-line basis in excess of billed rents.Reimbursements from tenants for real estate taxes and other recoverableoperating expenses are recognized as revenues in the period the applicablecosts are incurred. In addition, we record a capital asset for leaseholdimprovements constructed by us that are reimbursed by tenants, with theoffsetting side of this accounting entry recorded to deferred revenue which isincluded in accounts payable, accrued expenses and tenant security deposits.The deferred revenue is amortized as additional rental revenue over the life ofthe related lease.

Rental revenue from month-to-month leases or leaseswith no scheduled rent increases or other adjustments are recognized on a monthlybasis when earned.

Recoveries from tenants for real estate taxes, commonarea maintenance and other recoverable costs are recognized in the period thatthe expenses are incurred. Lease termination fees, which are included in rentalincome in the accompanying consolidated statements of operations, arerecognized when the related leases are canceled and we have no continuingobligation to provide services to such former tenants.

We recognize gains on sales of real estate pursuant tothe provisions of SFAS No. 66, *Accountingfor Sales of Real Estate* (SFAS No. 66). The specific timing ofa sale is measured against various criteria in SFAS No. 66 related to theterms of the transaction and any continuing involvement in the form ofmanagement or financial assistance associated with the property. If the salescriteria are not met, we defer gain recognition and account for the continuedoperations of the property by applying the finance, installment or costrecovery method.

*Monitoringof Rents and Other Receivables.**  *Wemaintain an allowance for estimated losses that may result from the inabilityof tenants to make required payments. If a tenant fails to make contractualpayments beyond any allowance, we may recognize bad debt expense in futureperiods equal to the amount 

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of unpaid rent anddeferred rent. We generally do not require collateral or other security fromour tenants, other than security deposits or letters of credit. If ourestimates of collectibility differ from the cash received, the timing andamount of our reported revenue could be impacted.

*FinancialInstruments.**  *The estimated fair values of financialinstruments are determined using available market information and appropriatevaluation methods. Considerable judgment is necessary to interpret market dataand develop estimated fair values. The use of different market assumptions orestimation methods may have a material effect on the estimated fair valueamounts. Accordingly, estimated fair values are not necessarily indicative ofthe amounts that could be realized in current market exchanges.

*InterestRate Agreements.**  *We manage our interest rate riskassociated with borrowings by obtaining interest rate swap and interest ratecap contracts. No other derivative instruments are used.

In June 1998, theFASB issued SFAS No. 133. The statement requires us to recognize all derivativeson the balance sheet at fair value. Derivatives that are not hedges must beadjusted to fair value and the changes in fair value must be reflected asincome or expense. If the derivative is a hedge, depending on the nature of thehedge, changes in the fair value of derivatives are either offset against thechange in fair value of the hedged assets, liabilities, or firm commitmentsthrough earnings or recognized in other comprehensive income, which is acomponent of our stockholders’ equity account. The ineffective portion of aderivative’s change in fair value is immediately recognized in earnings. Ourinvestments in interest rate swap and interest rate cap contracts do notqualify as effective hedges, and as such, the changes in such contracts’ fairmarket values are being recorded in earnings.

**Historical Resultsof Operations**

Our results of operations in 2006 and 2005 weresignificantly affected by our repositioning and acquisition activities in bothyears. As a consequence, our results are not comparable from period to perioddue to the varying timing of acquisitions and lease up or increased vacancyresulting from repositioning activities. Our repositioning efforts haveimpacted our operating results, and we expect that to continue. Upon completionof our repositioning efforts, we expect that we will be able to stabilizeoccupancy at these properties at levels consistent with the rest of ourportfolio.

In our office portfolio,our Repositioning and Acquisition Properties include the results of SantaMonica Square, Warner Center Towers, 9601 Wilshire, Sherman Oaks Galleria, 1901Avenue of the Stars, Studio Plaza, The Trillium, Beverly Hills Medical Center,Bishop Place and Harbor Court for both periods presented. As of September 30,2006, the Repositioning and Acquisition properties represented 49.7% of ourtotal office portfolio based on rentable square feet. In addition, we acquiredtwo properties, Moanalua Hillside Apartments in January 2005 and RoyalKunia in March 2006, in our multifamily portfolio. As of September 30,2006, our multifamily acquisitions represented 40.1% of the total units in ourmultifamily portfolio. During the periods presented, we had no multifamilyrepositioning properties.

**Comparison of threemonths ended September 30, 2006 to three months ended September 30,2005**

*Revenue*

*Office Revenue*

*TotalOffice Revenue.**  *Totaloffice revenue consists of rent, tenant recoveries and parking and otherincome. Total office portfolio revenue increased by $5.9 million, or 6.9%,to $90.3 million for the three months ended September 30, 2006compared to $84.4 million for the three months ended September 30,2005 for the reasons described below.

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*Rent.**  *Rent includes rental revenues fromour office properties, percentage rent on the retail space contained withinoffice properties, and lease termination income. Total office portfolio rentincreased by $2.8 million, or 3.8%, to $76.9 million for the threemonths ended September 30, 2006 compared to $74.1 million for thethree months ended September 30, 2005, primarily due to increases in rentsfrom our Repositioning and Acquisition Properties due to gains in occupancy atthese properties as part of our repositioning efforts. For the remainder of ouroffice portfolio that wasn’t acquired or repositioned during the periodspresented, rent also increased primarily due to gains in occupancy and roll-upin average rental rates for new and renewal leases signed since July 1,2005.

*TenantRecoveries.**  *Totaloffice portfolio tenant recoveries increased by $1.1 million, or 33.6%, to$4.4 million for the three months ended September 30, 2006 comparedto $3.3 million for the three months ended September 30, 2005 primarilydue to tenant recoveries at the Repositioning and Acquisition Properties andgains in occupancy and recoveries related to increases in operating expensesfor the remainder of our office portfolio discussed below.

*Parking and Other Income.**  *Total office portfolio parking andother income increased by $2.0 million, or 28.0%, to $9.0 million forthe three months ended September 30, 2006 compared to $7.0 millionfor the three months ended September 30, 2005. This increase was primarilydue to gains in occupancy in our Repositioning and Acquisition Properties andparking rate increases implemented in 2006 across the portfolio.

*Multifamily Revenue*

*TotalMultifamily Revenue.**  *Totalmultifamily revenue consists of rent and parking and other income. Totalmultifamily portfolio revenue increased by $3.2 million, or 27.9%, to$14.6 million for the three months ended September 30, 2006 comparedto $11.4 million for the three months ended September 30, 2005,primarily due to our multifamily acquisitions described above. Multifamilyrevenue from acquisitions increased $2.5 million to $4.8 million forthe three months ended September 30, 2006 compared to $2.3 millionfor the three months ended September 30, 2005. Multifamily revenue for therest of the portfolio increased $0.7 million, or 8.0%, to$9.8 million for the three months ended September 30, 2006 comparedto $9.1 million for the three months ended September 30, 2005.

*Rent.**  *Total multifamily portfolio rentincreased by $3.1 million, or 28.4%, to $14.1 million for the threemonths ended September 30, 2006 compared to $11.0 million for thethree months ended September 30, 2005.  Multifamily rent from acquisitions increased$2.4 million, to $4.6 million for the three months ended September 30,2006 compared to $2.2 million for the three months ended September 30,2005. Multifamily rent for the rest of the portfolio increased$0.7 million, or 8.3%, to $9.5 million for the three months ended September 30,2006 compared to $8.8 million for the three months ended September 30,2005. A significant number of our Santa Monica multifamily units were underleases signed prior to a 1999 change in California Law that allows landlords toreset rents to market rates when a tenant moves out. A portion of themultifamily increase was due to the rollover to market rents of several ofthese rent-controlled units, or “Pre-1999 Units,” since October 1,2005. The remainder of the increase was primarily due to increases in rentscharged to other tenants.

*Operating Expenses*

*OfficeRental Expenses.**  *Totalportfolio office rental expense increased by $2.6 million, or 8.0%, to$34.5 million for the three months ended September 30, 2006 comparedto $31.9 million for the three months ended September 30, 2005,primarily due to  gains in occupancy atour Repositioning and Acquisition Properties and increases in contractualexpenses including janitorial and security costs, higher insurance costs in2006 as a result of industry wide rate increases and higher utility costs as aresult of warmer than normal weather in 2006.

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*Multifamily RentalExpenses.**  *Totalmultifamily portfolio rental expense increased by $0.8 million, or 20.4%,to $4.8 million for the three months ended September 30, 2006compared to $4.0 million for the three months ended September 30,2005, primarily due to our multifamily acquisitions. Multifamily rental expensefrom acquisitions increased $0.7 million, to $1.4 million for thethree months ended September 30, 2006 compared to $0.7 million forthe three months ended September 30, 2005. Multifamily rental expenses forthe remainder of the multifamily properties portfolio increased approximately$0.1 million primarily due to higher insurance and utility costs as describedfor the office portfolio above.

*Generaland Administrative.**  *Generaland administrative expenses for the three months ended September 30, 2006increased $8.7 million, to $10.4 million for the three months ended September 30,2006 compared to $1.7 million for the three months ended September 30,2005. The increase is primarily due to the accrual of one time discretionarycash bonuses paid by our predecessor to its employees prior to the consummationof the IPO.

*Depreciation andAmortization.**  *Depreciationand amortization expense increased $5.6 million, or 21.4%, to $31.6 millionfor the three months ended September 30, 2006 compared to$26.0 million for the three months ended September 30, 2005. Theincrease was primarily due to the depreciation related to our Royal Kuniaacquisition in March 2006 and depreciation related to tenant improvementsand capital expenditures put in service since October 1, 2005.

*Non-OperatingIncome and Expenses*

*(Loss)*g*ain on Investmentsin Interest Rate Contracts, Net.**  *Weincurred a loss of $54.0 million on investments in interest rate contracts, forthe three months ended September 30, 2006 compared to a gain of$56.3 million for the three months ended September 30, 2005. The lossin 2006 and gain in 2005 was due to changes in the fair market value of our inplace interest rate swap contracts during the applicable three month period.

*InterestExpense.**  *Interestexpense decreased $5.9 million, or 17.1%, to $28.5 million for thethree months ended September 30, 2006 compared to $34.4 million forthe three months ended September 30, 2005. The decrease was due to a $7.6million accelerated loan fee amortization as part of an August 2005refinancing. This decrease was partially offset by approximately$1.2 million in additional interest expense related to the purchase of onemultifamily property in March 2006, which was financed with$82.0 million in debt at an effective interest rate (after taking intoaccount the effect of the interest rate swap contract) of 5.62%. The remainingoffsetting increase in interest expense was primarily due to an increase in theeffective interest rates over the 2005 comparable period.

*Deficit(Distributions) Recovery (to) from Minority Partners, Net.**  *Deficit (distributions) recovery(to) from minority partners, net was an $11.6 million distribution for thethree months ended September 30, 2006 compared to a net $11.7 millionrecovery for the three months ended September 30, 2005. The decrease wasprimarily due to distributions in the first three months of 2006 exceeding netincome resulting in a deficit distribution expense. For the three months ended September 30,2005 net income exceeded distributions to the limited partners in three of theinstitutional funds, resulting in the reversal of a portion of the deficitdistribution expense incurred in prior periods.

*Minority Interest.**  *Minority interest income increased$94.4 million, to $43.3 million for the three months ended September 30,2006 compared to a $51.0 million expense for the three months ended September 30,2005. The increase was primarily due to the allocation to minority interest oflosses and gains related to the change of fair market value of interest ratecontracts described above.

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**Comparison of ninemonths ended September 30, 2006 to nine months ended September 30,2005**

*Revenue*

*Office Revenue*

*TotalOffice Revenue.**  *Totaloffice revenue consists of rent, tenant recoveries and parking and otherincome. Total office portfolio revenue increased by $15.9 million, or6.2%, to $269.7 million for the nine months ended September 30, 2006compared to $253.9 million for the nine months ended September 30,2005 for the reasons described below.

*Rent.**  *Rent includes rental revenues fromour office properties, percentage rent on the retail space contained withinoffice properties, and lease termination income. Total office portfolio rentincreased by $9.1 million, or 4.2%, to $227.4 million for the ninemonths ended September 30, 2006 compared to $218.3 million for thenine months ended September 30, 2005, primarily due to increases in rentsfrom our Repositioning and Acquisition Properties primarily due to gains inoccupancy at these properties as part of our repositioning efforts. For theremainder of our office portfolio that wasn’t acquired or repositioned duringthe periods presented, rents also increased primarily due to gains in occupancyand roll-up in average rental rates for the new and renewal leases signed sinceJanuary 1, 2005.

*TenantRecoveries.**  *Totaloffice portfolio tenant recoveries increased by $3.4 million, or 34.5%, to$13.3 million for the nine months ended September 30, 2006 compared to$9.9 million for the nine months ended September 30, 2005 primarilydue to tenant recoveries at the Repositioning and Acquisition Properties andgains in occupancy and recoveries related to increases in operating expensesfor the remainder of our office portfolio discussed below.

*Parking and Other Income.**  *Total office portfolio parking andother income increased by $3.3 million, or 13.0%, to $29.0 million for thenine months ended September 30, 2006 compared to $25.7 million forthe nine months ended September 30, 2005. This increase was primarily dueto gains in occupancy in our Repositioning and Acquisition Properties andparking rate increases implemented in 2006 across the portfolio.

*Multifamily Revenue*

*TotalMultifamily Revenue.**  *Totalmultifamily revenue consists of rent and parking and other income. Totalmultifamily portfolio revenue increased by $8.0 million, or 24.0%, to$41.3 million for the nine months ended September 30, 2006 comparedto $33.3 million for the nine months ended September 30, 2005,primarily due to our multifamily acquisitions. Multifamily revenue for theseacquisitions increased $5.8 million, or 88.4%, to $12.3 million forthe nine months ended September 30, 2006 compared to $6.5 million forthe nine months ended September 30, 2005. Multifamily revenue for the restof the portfolio increased $2.2 million, or 8.3%, to $29.0 millionfor the nine months ended September 30, 2006 compared to$26.8 million for the nine months ended September 30, 2005 for thereasons described below.

*Rent.**  *Total multifamily portfolio rentincreased by $7.7 million, or 23.7%, to $40.0 million for the ninemonths ended September 30, 2006 compared to $32.4 million for thenine months ended September 30, 2005. Multifamily rent from theacquisitions increased $5.5 million, or 88.5%, to $11.8 million forthe nine months ended September 30, 2006 compared to $6.3 million forthe nine months ended September 30, 2005. Multifamily rent for the rest ofthe portfolio increased $2.1 million, or 8.2%, to $28.2 million forthe nine months ended September 30, 2006 compared to $26.1 millionfor the nine months ended September 30, 2005. A significant number of ourSanta Monica multifamily units, are under leases signed prior to a 1999 changein California Law that allows landlords to reset rents to market rates when atenant moves out. A portion of the multifamily increase was due to the rolloverto market rents of several of these rent-controlled units, or “Pre-1999Units,” since January 1, 2005. The remainder of the increase was primarilydue to increases in rents charged to other tenants.

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*Operating Expenses*

*OfficeRental Expenses.**  *Totalportfolio office rental expense increased by $4.7 million, or 5.1%, to$95.6 million for the nine months ended September 30, 2006 comparedto $91.0 million for the nine months ended September 30, 2005, primarilydue to increases in the Same Properties Portfolio contractual expensesincluding janitorial and security costs, higher insurance costs in 2006 as aresult of industry wide rate increases and higher utility costs as a result ofwarmer than normal weather in 2006 and gains in occupancy at our Repositioningand Acquisition Properties.

*MultifamilyRental Expenses.**  *Totalmultifamily portfolio rental expense increased by $2.2 million, or 19.4%,to $13.5 million for the nine months ended September 30, 2006compared to $11.3 million for the nine months ended September 30,2005, primarily due to our multifamily acquisitions. Multifamily rental expensefrom acquisitions increased $1.4 million, to $3.5 million for thenine months ended September 30, 2006 compared to $2.1 million for thenine months ended September 30, 2005. Rental expense for the remainder ofthe multifamily properties portfolio increased $0.7 million, or 8.1%, to$9.9 million for the nine months ended September 30, 2006 compared to$9.2 million for the nine months ended September 30, 2005, primarilydue to insurance costs as a result of industry wide rate increases and higherutility costs as a result of warmer than normal weather in 2006.

*Generaland Administrative.**  *Generaland administrative expenses increased $8.7 million to $13.5 million for thenine months ended September 30, 2006 compared to $4.8 million for the ninemonths ended September 30, 2005. The increase is primarily due to theaccrual of one time discretionary cash bonuses paid by our predecessor to itsemployees prior to the consummation of the IPO.

*Depreciation andAmortization.**  *Depreciationand amortization expense increased 1.8%, to $85.2 million for the ninemonths ended September 30, 2006 compared to $83.7 million for thenine months ended September 30, 2005. This increase related to our RoyalKunia acquisition in March 2006 and depreciation related to tenantimprovements and capital expenditures put into service since January 1,2005.

*Non-OperatingIncome and Expenses*

*(Loss)gain on Investments in Interest Rate Contracts, Net.**  *Gain on investments in interestrate contracts, net decreased $56.6 million, to $6.0 million for thenine months ended September 30, 2006 compared to $62.6 million forthe nine months ended September 30, 2005. The change was primarily due tochanges in the fair market value of our in place interest rate swap contractsduring the applicable nine month period.

*Interestand Other Income.**  *Interestand other income increased $1.7 million, or 75.1%, to $4.0 millionfor the nine months ended September 30, 2006 compared to $2.3 millionfor the nine months ended September 30, 2005. The increase was primarilydue to higher average cash balances and higher short-term interest rates forthe nine month period ended September 30, 2006 compared to the same periodin 2005.

*InterestExpense.**  *Interestexpense remained consistent for the nine months ended September 30, 2006compared to the same period in 2005. Increases in financing costs related toour acquisition of a multifamily property in March 2006 were offset by anaccelerated loan fee amortization related to our debt refinancing activities in2005.

*Deficit(Distributions) Recovery (to) from Minority Partners, Net.**  *Deficit distributions to minoritypartners, net decreased $30.6 million, or 85.2%, to $5.3 million for the ninemonths ended September 30, 2006 compared to a net $35.9 million for thenine months ended September 30, 2005. The decrease was primarily due to adistribution in the first nine months of 2005 related to a preferred investorcontribution that did not occur in the first nine months of 2006.

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*Minority Interest.**  *Minority interest expense decreased$38.5 million, or 56.9%, to $29.2 million for the nine months ended September 30,2006 compared to $67.6 million for the nine months ended September 30,2005. The decrease was primarily due to a decrease in net income for thereasons described above.

**Liquidity andCapital Resources**

*AvailableBorrowings, Cash Balances and Capital Resources*

Our predecessor had total indebtedness of$2.3 billion at September 30, 2006. After the completion of ourinitial public offering and formation transactions, our total indebtedness on October 31,2006 was $2.79 billion, excluding a loan premium representing mark-to-marketadjustment on variable rate debt assumed from the predecessor. The increase inour total indebtedness resulted largely from the increase of our existing $1.76billion term loan financing by $545.0 million. This term loan matures on September 1,2012, subject to the existence of no default and the payment of a fee on thefifth and sixth anniversary of August 25, 2005, and bears interest at arate per annum equal to the London Interbank Offer Rate, or LIBOR, plus 85basis points. In addition, we also entered into a $250.0 million seniorsecured revolving credit facility with a group of banks led by Bank of America,N.A. and Banc of America Securities LLC with an accordion feature thatallows us to increase availability to $500.0 million under specifiedcircumstances. This revolving credit facility has a three year term with twoone-year extensions and an effective rate of LIBOR plus 0.70% if theoutstanding amount is less than $175 million and LIBOR plus 0.80% if the amountoutstanding is greater than $175 million. We drew down $35 million under thiscredit facility at the closing of our initial public offering. We intend to useour new revolving credit facility for general corporate purposes, including tofund acquisitions, redevelopment and repositioning opportunities, to providefunds for tenant improvements and capital expenditures, and to provide workingcapital.

We have historically financed our operations,acquisitions and development through the use of short-term acquisitionlines of credit and replaced those lines with long-term secured floating ratemortgage debt. To mitigate the impact of fluctuations in short-term interestrates on our cash flow from operations, we generally enter into interest rateswap or interest rate cap agreements.

At October 31, 2006, all of our debt was fixedwith the exception of the additional $545 million of our $2.3 billion loan withEurohypo AG and Barclays Capital and amounts drawn on our secured creditfacility. On October 31, 2006, we executed $545 million of interest rateswap agreements to effectively fix the entire balance of our modified term loanat an effective rate of 5.13%.

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Accordingly,on October 31, 2006, our indebtedness was as follows:

| **Type of Debt(1)**                | ** ** | ** **                             | ** ** | **Principal  Balance** | ** ** | **Fixed/  Floating  Rate** | ** **   | **Effective  Annual  Interest  Rate(2)** | ** ** | **Maturity  Date** | ** ** | **Swap  Maturity  Date** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|------------------------|------------|----------------------------|--------------|------------------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **(Dollars in   thousands)** | ** ** | ** **             | ** ** | ** **                 | ** **   | ** **                               | ** ** | ** **         | ** ** |
| Variable Rate  Swapped to Fixed Rate         |       |                                   |       |                   |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |
| Modified Term  Loan(3)(4)                    |       |                                   | $          | 2,300,000              |       |                       | LIBOR + 0.85 | %                                        |       | 5.13               | %          |                     |       | 09/01/12 |   |   | 08/01/10-08/01/12 |   |
| Barrington Plaza  and Pacific Plaza          |       |                                   | 153,000    |                   |       | DMBS + 0.60                | %(5)         |                                     | 4.70       | %                  |       |                     | 12/22/11   |   |   | 08/01/11 |   |
| 555 Barrington and  The Shores               |       |                                   | 140,000    |                   |       | DMBS + 0.60                | %(5)         |                                     | 4.70       | %                  |       |                     | 12/22/11   |   |   | 08/01/11 |   |
| Moanalua Hillside  Apartments                |       |                                   | 75,000     |                   |       | DMBS + 0.76                | %(5)         |                                     | 4.86       | %                  |       |                     | 02/01/15   |   |   | 08/01/11 |   |
| Villas at Royal  Kunia                       |       |                                   | 82,000     |                   |       | LIBOR + 0.62               | %            |                                     | 5.62       | %                  |       |                     | 02/01/16   |   |   | 03/01/12 |   |
| Subtotal                                     |       |                                   | $          | 2,750,000              |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |   |
| Variable Rate                                |       |                                   |       |                   |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |
| Senior Secured  Revolving Credit Facility(6) |       |                                   | 35,000     |                   |       | LIBOR + 0.70               | %            |                                     | 6.02       | %                  |       |                     | 10/30/09   |   |   | N/A |   |
| Subtotal                                     |       |                                   | $          | 2,785,000              |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |   |
| Loan Premium(7)                              |       |                                   | 31,000     |                   |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |
| Total                                        |       |                                   | $          | 2,816,000              |       |                       |         |                                     |       |               |       |                     |       |   |   |   |   |   |

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(1)             As of October 31, 2006, after completion of ouroffering and the formation transactions as described in our Prospectus as filedwith the SEC.

(2)             Includes the effect of interest rate contracts, whereapplicable, and assumes a LIBOR rate of 5.32% as of October 31, 2006.

(3)             Secured by the following properties and combined inseven separate cross collateralized pools: Studio Plaza, Gateway Los Angeles,Bundy/Olympic, Brentwood Executive Plaza, Palisades Promenade, 12400 Wilshire,First Federal Square, 11777 San Vicente, Landmark II, Sherman Oaks Galleria,Second Street Plaza, Olympic Center, MB Plaza, Valley Office Plaza, CoralPlaza, Westside Towers, Valley Executive Tower, Encino Terrace, Westwood Place,Century Park Plaza, Lincoln/Wilshire, 100 Wilshire, Encino Gateway, EncinoPlaza, 1901 Avenue of the Stars, Columbus Center, Warner Center Towers, BeverlyHills Medical Center, Harbor Court, Bishop Place, Brentwood Court, BrentwoodMedical Plaza, Brentwood San Vicente Medical, San Vicente Plaza, andOwensmouth. Requires monthly payments of interest only, with outstandingprincipal due upon maturity.

(4)             Includes $1.11 billion swapped to 4.89% until August 1,2010; $322.5 million swapped to 4.98% until August 1, 2011; $322.5 millionswapped to 5.02% until August 1, 2012; and $545.0 million swapped to 5.75%until December 1, 2010.

(5)             Fannie Mae Discount Mortgage-Backed Security (DMBS). TheFannie Mae DMBS generally tracks 90-day LIBOR.

(6)             Loan is secured by 9 properties and has two one-yearextension options available.

(7)             Represents mark-to-market adjustment onvariable rate debt associated with office properties.

On September 30, 2006 and October 31, 2006,we did not have any off balance sheet financing arrangements.

On November 30, 2006, our total borrowings undersecured loans represented 39.1% of our total market capitalization of $7.1billion. Total market capitalization includes our consolidated debt and thevalue of common stock and operating partnership units each based on our commonstock closing price on the New York Stock Exchange of $26.30 per share.

We expect to meet our short-term liquidityrequirements generally through cash provided by operations and, if necessary,by drawing upon our senior secured revolving credit facility that was in placeat the consummation of this offering. We anticipate that cash provided byoperations and borrowings under our senior secured revolving credit facilitywill be sufficient to meet our liquidity requirements for at least the next12 months.

Our long-term liquidityneeds consist primarily of funds necessary to pay for acquisitions,redevelopment and repositioning of properties, non-recurring capitalexpenditures, and repayment of indebtedness at maturity. We do not expect thatwe will have sufficient funds on hand to cover all of these 

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long-termcash requirements. We will seek to satisfy these needs through cash flow fromoperations, long-term secured and unsecured indebtedness, the issuance of debtand equity securities, including units in our operating partnership, propertydispositions and joint venture transactions.

*Commitments*

Thefollowing table sets forth our principal obligations and commitments, excludingperiodic interest payments, as of October 31, 2006 after the completion ofour initial public offering and the related transactions described above:

| ** **                                                                                                                                  | ** ** | **Payment due by period (in thousands)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **Contractual Obligations**                                                                                                            | ** ** | ** **                                                        | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-2  years** | ** ** | **3-4  years** | ** ** | **Thereafter** | ** ** |
| Long-term debt obligations                                                                                                                  |       | $2,785,000                                                        |       |   | $ | — |   |   | $ | — |   | $35,000 |   |   | $2,750,000 |   |   |
| Minimum lease payments                                                                                                                      |       | 142,429                                                           |       |   | 547 |   |   | 6,566 |   | 6,841 |   |   | 128,475 |   |   |
| Purchase commitments related to capital expenditures  associated with tenant improvements and repositioning and other purchase  obligations |       | 11,664                                                            |       |   | 3,809 |   |   | 7,611 |   | 244 |   |   | — |   |   |
| Total                                                                                                                                       |       | $2,939,093                                                        |       |   | $ | 4,356 |   |   | $ | 14,177 |   | $42,085 |   |   | $2,878,475 |   |   |
|                                                                                                                                             |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The nature of our business, and the requirementsimposed by REIT rules that we distribute a substantial majority of ourincome on an annual basis, will cause us to have substantial liquidity needsover both the short term and the long term.

We intend to pay an annualdividend of $0.70 per share, with the fourth quarter dividend for 2006 to bepro rated for the period from October 30, 2006 to December 31, 2006.

**Cash Flows**

Cash and cash equivalents for our predecessor were$119.3 million and $116.8 million, respectively, at September 30,2006 and 2005.

Net cash provided by operating activities increased$9.5 million to $108.0 million for the nine months ended September 30,2006 compared to $98.5 million for the nine months ended September 30,2005. The increase was primarily due to a $7.0 million increase from thechange in operating assets and liabilities. The remainder of the increase wasdue to the contribution from the acquisition of one multifamily property in March 2006and improved operations at our office Same Properties Portfolio and therepositioning properties.

Net cash used in investing activities decreased$58.0 million to $153.3 million for the nine months ended September 30,2006 compared to $211.3 million for the nine months ended September 30,2005. The decrease was primarily due to a $56.0 million decrease in thecash used to acquire properties.

Net cash provided byfinancing activities decreased $65.4 million to $56.3 million for thenine months ended September 30, 2006 compared to $121.7 million forthe nine months ended September 30, 2005. The decrease was due to a netdecrease in net borrowings and increased net distributions to minorityinterests and stockholders.

**Item 3. Quantitativeand Qualitative Disclosures About Market Risk**

Our future income, cash flows and fair values relevantto financial instruments are dependent upon prevalent market interest rates.Market risk refers to the risk of loss from adverse changes in market pricesand interest rates. We use derivative financial instruments to manage, orhedge, interest rate risks related to our borrowings. In conjunction with ourinitial public offering, we entered into two new series of interest rate swapand interest rate cap contracts. The first series effectively offset all futurechanges in fair value 

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from our existing interestrate swap and interest rate cap contracts, and the second series effectivelyreplaced the existing interest rate contracts and qualified for hedgeaccounting under SFAS 133. We only enter into contracts with majorfinancial institutions based on their credit rating and other factors.

As of October 31, 2006, after giving effect toour initial public offering and formation transactions and the execution of anadditional $545 million in floating-to-fixed interest rate swaps, approximately98.7% (or $2.75 billion) of our total outstanding debt of$2.79 billion, excluding loan premiums, was subject to fixed interestrates.

After the formationtransactions and swap transactions described above, $35 million of our totaldebt outstanding at October 31, 2006 was not fixed or fixed through swapagreements. As a result, if LIBOR were to increase by 50 basis points, theincrease in interest expense on the variable rate debt would decrease futureearnings and cash flows by approximately $175,000 annually. If LIBOR were todecrease by 50 basis points, the decrease in interest expense on the variablerate debt would be approximately $175,000 annually.

**Item 4. Controlsand Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsunder the Securities Exchange Act of 1934 is processed, recorded, summarizedand reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2006, the end of the periodcovered by this report, we carried out an evaluation, under the supervision andwith the participation of management, including the Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofthe disclosure controls and procedures as of the end of the period covered bythis report. Based on the foregoing, the Chief Executive Officer and ChiefFinancial Officer concluded, as of that time, that our disclosure controls andprocedures were effective at the reasonable assurance level.

There have been nosignificant changes that occurred during the quarter covered by this report inour internal control over financial reporting identified in connection with theevaluation referenced above that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

**Part II. OTHERINFORMATION**

**Item 1. LegalProceedings**

Our predecessor is subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness. These matters are generally covered by insurance. Management believesthat the ultimate settlement of these actions will not have a material adverseeffect on our financial position, results of operations or cash flows.

**Item 1A. RiskFactors**

There have been nomaterial changes to the risk factors included in the section entitled “RiskFactors” beginning on page 23 and elsewhere in our Prospectus dated October 23,2006, which are herby incorporated by this reference.

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**Item 2.Unregistered Sales of Securities and Use of Proceeds**

None. All of theapproximately $1.52 billion of net proceeds from our initial public offeringwere used on October 30, 2006 to acquire certain assets of our predecessor andother entities.

**Item 3.Defaults Upon Senior Securities**

Not applicable.

**Item 4.Submission of Matters to a Vote of Security Holders**

None.

**Item 5. OtherInformation**

None.

**Item 6. Exhibits**

| **Exhibit** | ** ** | **Description**                                                                                             |
|-------------|------------|-------------------------------------------------------------------------------------------------------------|
| 3.1         |       | Articles of Amendment  and Restatement of Douglas Emmett, Inc.(1)                                      |
| 3.2         |       | Amended and  Restated Bylaws of Douglas Emmett, Inc.(1)                                                |
| 4.1         |       | Form of  Certificate of Common Stock of Douglas Emmett, Inc.(2)                                   |
| 31.1        |       | Certificate of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.    |
| 31.2        |       | Certificate of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.    |
| 32.1        |       | Certificate of  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.(3) |
| 32.2        |       | Certificate of  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.(3) |

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(1)          Incorporated byreference to Amendment No. 5 to the Registration Statement on Form S-11No. 333-135082 filed by the Registrant on October 6, 2006.

(2)          Incorporated byreference to Amendment No. 3 to the Form S-11 to theRegistration Statement on Form S-11 No. 333-135082 filedby the Registrant on October 3, 2006.

(3)          In accordance with SECRelease No. 33-8212, the following exhibit is being furnished, andis not being filed as part of this Report on Form 10-Q or as aseparate disclosure document, and is not being incorporated by reference intoany Securities Act of 1933 registration statement.

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**Signatures**

Pursuantto the requirements of the Securities and Exchange Act of 1934, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                              |   | DOUGLAS EMMETT, INC. |
|------------------------------|--------|----------------------|
| Date: December 5,  2006 |   | By:                  |   | /s/ JORDAN L. KAPLAN |
|                         |   |                 |   | Jordan L. Kaplan |
|                         |   |                 |   | *President and Chief Executive Officer* |
| Date: December 5,  2006 |   | By:                  |   | /s/ WILLIAM KAMER |
|                         |   |                 |   | William Kamer |
|                         |   |                 |   | *Chief Financial Officer* |

 

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