United
States


Securities
and Exchange Commission


Washington,
D.C. 20549




FORM 10-Q




QUARTERLY
REPORT PURSUANT TO SECTION 13




OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended September 30, 2009




Commission
file number 001-33106









DOUGLAS
EMMETT,
INC.


(Exact
name of registrant as specified in its charter)




MARYLAND
            20-3073047(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)





808
      Wilshire Boulevard, Suite 200, Santa Monica, California
            90401(Address
      of principal executive offices)
            (Zip
      Code)





(310) 255-7700


(Registrant’s
telephone number, including area code)




None


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




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.




Yes  x     Noo




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




Yes  o     No  o




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):




Large
      accelerated filer  x
            Accelerated
      filer  oNon-accelerated
      filero(Do not
      check if a smaller reporting company)
            Smaller
      reporting company  o







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




Yes  o     Nox




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
            
            Outstanding
      at October 31, 2009Common
      Shares of beneficial interest,
            
            121,559,388
      shares$0.01
      par value per share











DOUGLAS
EMMETT, INC.


FORM
10-Q


TABLE
OF CONTENTS





PAGE
      NO.PART
      I.
            FINANCIAL
      INFORMATION
            3Item 1.
            Financial
      Statements
            3Consolidated
      Balance Sheets as of September 30, 2009 and December 31, 2008
      (unaudited)
            3Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2009 and 2008 (unaudited)
            4Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008 (unaudited)
            5Notes
      to Consolidated Financial Statements
            6Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            24Item 3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            30Item 4.
            Controls
      and Procedures
            30PART
      II.
            OTHER
      INFORMATION
            31Item 1.
            Legal
      Proceedings
            31Item 1A.
            Risk
      Factors
            31Item 2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            31Item 3.
            Defaults
      Upon Senior Securities
            31Item 4.
            Submission
      of Matters to a Vote of Security Holders
            32Item 5.
            Other
      Information
            32Item 6.
            Exhibits
            32SIGNATURES
            33








PART
I.  FINANCIAL INFORMATION





Item
1.  Financial Statements





Douglas
Emmett, Inc.


Consolidated
Balance Sheets


(unaudited
and in thousands, except for share data)




September
      30, 2009
            
            
            December
      31, 2008AssetsInvestment
      in real estate:Land
            
            $
            835,407
            
            
            $
            900,213Buildings
      and improvements
            
            
            5,014,894
            
            
            
            5,528,567Tenant
      improvements and lease intangibles
            
            
            521,909
            
            
            
            552,5366,372,210
            
            
            
            6,981,316Less:
      accumulated depreciation
            
            
            (634,123
            )
            
            
            (490,125
            )Net
      investment in real estate
            
            
            5,738,087
            
            
            
            6,491,191Cash
      and cash equivalents
            
            
            63,834
            
            
            
            8,655Tenant
      receivables, net
            
            
            1,530
            
            
            
            2,427Deferred
      rent receivables, net
            
            
            38,108
            
            
            
            33,039Interest
      rate contracts
            
            
            129,901
            
            
            
            176,255Acquired
      lease intangible assets, net
            
            
            12,901
            
            
            
            18,163Investment
      in unconsolidated real estate fund
            
            
            99,189
            
            
            
            -Other
      assets
            
            
            29,349
            
            
            
            31,304Total
      assets
            
            $
            6,112,899
            
            
            $
            6,761,034LiabilitiesSecured
      notes payable, including loan premium
            
            $
            3,274,743
            
            
            $
            3,692,785Accounts
      payable and accrued expenses
            
            
            75,916
            
            
            
            69,445Security
      deposits
            
            
            32,034
            
            
            
            35,890Acquired
      lease intangible liabilities, net
            
            
            147,548
            
            
            
            195,036Interest
      rate contracts
            
            
            283,591
            
            
            
            407,492Dividends
      payable
            
            
            12,155
            
            
            
            22,856Other
      liabilities
            
            
            -
            
            
            
            57,316Total
      liabilities
            
            
            3,825,987
            
            
            
            4,480,820EquityDouglas
      Emmett, Inc. stockholders' equity:Common
      stock, $0.01 par value 750,000,000 authorized, 121,554,388 and 121,897,388
      outstanding at September 30, 2009 and December 31, 2008,
      respectively.
            
            
            1,216
            
            
            
            1,219Additional
      paid-in capital
            
            
            2,289,094
            
            
            
            2,284,429Accumulated
      other comprehensive income (loss)
            
            
            (210,152
            )
            
            
            (274,111
            )Accumulated
      deficit
            
            
            (290,948
            )
            
            
            (236,348
            )Total
      Douglas Emmett, Inc. stockholders' equity
            
            
            1,789,210
            
            
            
            1,775,189Noncontrolling
      interests
            
            
            497,702
            
            
            
            505,025Total
      equity
            
            
            2,286,912
            
            
            
            2,280,214Total
      liabilities and equity
            
            $
            6,112,899
            
            
            $
            6,761,034


See
notes to consolidated financial statements.


3


Douglas
Emmett, Inc.


Consolidated
Statements of Operations


(unaudited
and in thousands, except for share data)








Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            2008
            
            
            2009
            
            
            2008RevenuesOffice
      rentalRental
      revenues
            
            $
            99,463
            
            
            $
            112,787
            
            
            $
            307,219
            
            
            $
            323,016Tenant
      recoveries
            
            
            8,059
            
            
            
            8,335
            
            
            
            23,159
            
            
            
            22,523Parking
      and other income
            
            
            15,939
            
            
            
            18,967
            
            
            
            49,977
            
            
            
            53,772Total
      office revenues
            
            
            123,461
            
            
            
            140,089
            
            
            
            380,355
            
            
            
            399,311Multifamily
      rentalRental
      revenues
            
            
            15,980
            
            
            
            16,483
            
            
            
            48,174
            
            
            
            50,130Parking
      and other income
            
            
            986
            
            
            
            1,081
            
            
            
            3,110
            
            
            
            3,083Total
      multifamily revenues
            
            
            16,966
            
            
            
            17,564
            
            
            
            51,284
            
            
            
            53,213Total
      revenues
            
            
            140,427
            
            
            
            157,653
            
            
            
            431,639
            
            
            
            452,524Operating
      ExpensesOffice
      expense
            
            
            38,691
            
            
            
            44,201
            
            
            
            115,668
            
            
            
            121,924Multifamily
      expense
            
            
            4,560
            
            
            
            4,369
            
            
            
            13,363
            
            
            
            12,888General
      and administrative
            
            
            5,585
            
            
            
            5,243
            
            
            
            17,895
            
            
            
            16,257Depreciation
      and amortization
            
            
            55,529
            
            
            
            63,611
            
            
            
            172,332
            
            
            
            184,218Total
      operating expenses
            
            
            104,365
            
            
            
            117,424
            
            
            
            319,258
            
            
            
            335,287Operating
      income
            
            
            36,062
            
            
            
            40,229
            
            
            
            112,381
            
            
            
            117,237Gain
      on disposition of interest in unconsolidated
              real
      estate fund
            
            
            -
            
            
            
            -
            
            
            
            5,573
            
            
            
            -Interest
      and other income
            
            
            56
            
            
            
            (43
            )
            
            
            3,030
            
            
            
            489Loss,
      including depreciation, from unconsolidated
              real
      estate fund
            
            
            (1,904
            )
            
            
            -
            
            
            
            (4,710
            )
            
            
            -Interest
      expense
            
            
            (45,326
            )
            
            
            (52,586
            )
            
            
            (139,154
            )
            
            
            (145,580
            )Net
      loss
            
            
            (11,112
            )
            
            
            (12,400
            )
            
            
            (22,880
            )
            
            
            (27,854
            )Less:  Net
      loss attributable to noncontrolling interests
            
            
            2,306
            
            
            
            2,704
            
            
            
            4,725
            
            
            
            6,230Net
      loss attributable to common stockholders
            
            $
            (8,806
            )
            
            $
            (9,696
            )
            
            $
            (18,155
            )
            
            $
            (21,624
            )Net
      loss attributable to common stockholdersper
      share – basic and diluted
            
            $
            (0.07
            )
            
            $
            (0.08
            )
            
            $
            (0.15
            )
            
            $
            (0.18
            )Dividends
      declared per common share
            
            $
            0.1000
            
            
            $
            0.1875
            
            
            $
            0.3000
            
            
            $
            0.5625Weighted
      average shares of common stockoutstanding
      – basic and diluted
            
            
            121,485,711
            
            
            
            121,509,098
            
            
            
            121,547,569
            
            
            
            120,372,893




















See
notes to consolidated financial statements.





4


Douglas
Emmett, Inc.


Consolidated
Statements of Cash Flows


(unaudited
and in thousands)




Nine
      Months Ended September 30,2009
            
            
            
            2008Operating
      ActivitiesNet
      loss
            
            $
            (22,880
            )
            
            
            $
            (27,854
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Non-cash
      profit sharing allocation to consolidated real estate fund
            
            
            660
            
            
            
            
            -Loss,
      including depreciation, from unconsolidated real estate
    fund
            
            
            4,710
            
            
            
            
            -Depreciation
      and amortization
            
            
            172,332
            
            
            
            
            184,218Net
      accretion of acquired lease intangibles
            
            
            (25,470
            )
            
            
            
            (32,330
            )Gain
      on disposition of interest in unconsolidated real estate
    fund
            
            
            (5,573
            )
            
            
            
            -Amortization
      of deferred loan costs
            
            
            1,573
            
            
            
            
            1,417Amortization
      of loan premium
            
            
            (3,742
            )
            
            
            
            (3,530
            )Non-cash
      market value adjustments on interest rate contracts
            
            
            14,971
            
            
            
            
            12,908Non-cash
      amortization of stock-based compensation
            
            
            3,558
            
            
            
            
            3,263Change
      in working capital components:Tenant
      receivables
            
            
            753
            
            
            
            
            267Deferred
      rent receivables
            
            
            (6,674
            )
            
            
            
            (10,886
            )Accounts
      payable, accrued expenses and security deposits
            
            
            15,115
            
            
            
            
            6,599Other
      assets
            
            
            (4,677
            )
            
            
            
            2,746Net
      cash provided by operating activities
            
            
            144,656
            
            
            
            
            136,818Investing
      ActivitiesCapital
      expenditures and property acquisitions
            
            
            (31,266
            )
            
            
            
            (656,758
            )Deconsolidation
      of Douglas Emmett Fund X, LLC
            
            
            (6,625
            )
            
            
            
            -Net
      cash used in investing activities
            
            
            (37,891
            )
            
            
            
            (656,758
            )Financing
      ActivitiesProceeds
      from long-term borrowings
            
            
            82,640
            
            
            
            
            1,510,425Deferred
      loan costs
            
            
            (21
            )
            
            
            
            (6,745
            )Repayment
      of borrowings
            
            
            (106,665
            )
            
            
            
            (858,400
            )Net
      change in short-term borrowings
            
            
            (25,275
            )
            
            
            
            (20,300
            )Contributions
      by Douglas Emmett Fund X, LLC investors
            
            
            66,074
            
            
            
            
            -Contributions
      by noncontrolling interests
            
            
            450
            
            
            
            
            319Distributions
      to noncontrolling interests
            
            
            (13,426
            )
            
            
            
            (21,239
            )Redemption
      of noncontrolling interests
            
            
            (2,880
            )
            
            
            
            (23,758
            )Issuance
      of common stock
            
            ─
            
            
            
            
            667Repurchase
      of common stock
            
            
            (5,337
            )
            
            
            ─Cash
      dividends
            
            
            (47,146
            )
            
            
            
            (64,717
            )Net
      cash (used in) provided by financing activities
            
            
            (51,586
            )
            
            
            
            516,252Increase
      (decrease) in cash and cash equivalents
            
            
            55,179
            
            
            
            
            (3,688
            )Cash
      and cash equivalents at beginning of period
            
            
            8,655
            
            
            
            
            5,843Cash
      and cash equivalents at end of period
            
            $
            63,834
            
            
            
            $
            2,155Noncash
      transactions:Investing
      activity related to contribution of properties to unconsolidated real
      estate fund
            
            $
            476,852
            
            
            
            $
            ─Financing
      activity related to contribution of debt and noncontrolling interest to
      unconsolidated real estate fund
            
            $
            (483,477
            )
            
            
            $
            ─




See
notes to consolidated financial statements.


5
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements
 (in
thousands, except shares and per share data)





1.
Overview





Organization
and Description of Business


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





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





Basis
of Presentation


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





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





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





6
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)








2.
Acquisitions, Dispositions and Other Transfers





We did not make any acquisitions during
the nine months ended September 30, 2009.





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





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





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





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





7
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)





3.
Segment Reporting





Segment
information is prepared on the same basis that our management reviews
information for operational decision-making purposes. We operate in two business
segments: (i) the acquisition, redevelopment, ownership and management of office
real estate and (ii) the acquisition, redevelopment, ownership and management of
multifamily real estate.  The products for our office segment
primarily include rental of office space and other tenant services, including
parking and storage space rental. The products for our multifamily segment
include rental of apartments and other tenant services, including parking and
storage space rental.





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





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








The
      following table represents operating activity within our reportable
      segments:Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,Office Segment
            
            2009
            
            
            2008
            
            
            2009
            
            
            2008Rental
      revenue
            
            $
            123,461
            
            
            $
            140,089
            
            
            $
            380,355
            
            
            $
            399,311Rental
      expense
            
            
            (38,691
            )
            
            
            (44,201
            )
            
            
            (115,668
            )
            
            
            (121,924
            )Segment
      profit
            
            
            84,770
            
            
            
            95,888
            
            
            
            264,687
            
            
            
            277,387Multifamily SegmentRental
      revenue
            
            
            16,966
            
            
            
            17,564
            
            
            
            51,284
            
            
            
            53,213Rental
      expense
            
            
            (4,560
            )
            
            
            (4,369
            )
            
            
            (13,363
            )
            
            
            (12,888
            )Segment
      profit
            
            
            12,406
            
            
            
            13,195
            
            
            
            37,921
            
            
            
            40,325Total
      segments' profit
            
            $
            97,176
            
            
            $
            109,083
            
            
            $
            302,608
            
            
            $
            317,712








The
      following table is a reconciliation of segment profit to net loss
      attributable to common stockholders:Three
      Months Ended September 30,
            
            
            Nine
      Months Ended September 30,2009
            
            
            
            2008
            
            
            
            2009
            
            
            
            2008Total
      segments' profit
            
            $
            97,176
            
            
            $
            109,083
            
            
            $
            302,608
            
            
            $
            317,712General
      and administrative expenses
            
            
            (5,585
            )
            
            
            (5,243
            )
            
            
            (17,895
            )
            
            
            (16,257
            )Depreciation
      and amortization
            
            
            (55,529
            )
            
            
            (63,611
            )
            
            
            (172,332
            )
            
            
            (184,218
            )Gain
      on disposition of interest inunconsolidated
      real estate fund
            
            
            -
            
            
            
            -
            
            
            
            5,573
            
            
            
            -Interest
      and other income
            
            
            56
            
            
            
            (43
            )
            
            
            3,030
            
            
            
            489Loss,
      including depreciation,from
      unconsolidated real estate fund
            
            
            (1,904
            )
            
            
            -
            
            
            
            (4,710
            )
            
            
            -Interest
      expense
            
            
            (45,326
            )
            
            
            (52,586
            )
            
            
            (139,154
            )
            
            
            (145,580
            )Net
      loss
            
            
            (11,112
            )
            
            
            (12,400
            )
            
            
            (22,880
            )
            
            
            (27,854
            )Less:
      Net loss attributable tononcontrolling
      interests
            
            
            2,306
            
            
            
            2,704
            
            
            
            4,725
            
            
            
            6,230Net
      loss attributable to common stockholders
            
            $
            (8,806
            )
            
            $
            (9,696
            )
            
            $
            (18,155
            )
            
            $
            (21,624
            ) 8
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share
data)





4.
Other Assets





Other
assets consist of the following as of:




September
      30,
              2009
            
            
            December
      31,
              2008Deferred
      loan costs, net of accumulated amortization of $4,544 and
              $3,336
      at September 30, 2009 and December 31, 2008, respectively
            
            $
            4,839
            
            
            $
            9,714Restricted
      cash
            
            
            2,941
            
            
            
            2,934Prepaid
      interest
            
            
            347
            
            
            
            4,360Prepaid
      expenses
            
            
            5,762
            
            
            
            3,845Interest
      receivable
            
            
            9,924
            
            
            
            5,938Other
      indefinite-lived intangible
            
            
            1,988
            
            
            
            1,988Other
            
            
            3,548
            
            
            
            2,525Total
      other assets
            
            $
            29,349
            
            
            $
            31,304








We
incurred deferred loan cost amortization expense of $483 and $577 for the three
months ended September 30, 2009 and 2008, respectively, and $1,573 and $1,417
for the nine months ended September 30, 2009 and 2008,
respectively.  Deferred loan cost amortization is included as a
component of interest expense in the consolidated statements of
operations.





5.
Accounts Payable and Accrued Expenses





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




September
      30,
                2009
              
              
              December
      31,
                2008Accounts
      payable
              
              $
              36,789
              
              
              $
              30,429Accrued
      interest payable
              
              
              26,020
              
              
              
              22,982Deferred
      revenue
              
              
              13,107
              
              
              
              16,034Total
      accounts payable and accrued expenses
              
              $
              75,916
              
              
              $
              69,445





6.
Acquired Lease Intangibles





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




September
      30,
                2009
              
              
              December
      31,
                2008Above-market
      tenant leases
              
              $
              32,770
              
              
              $
              34,227Accumulated
      amortization
              
              
              (22,842
              )
              
              
              (19,094
              )Below-market
      ground leases
              
              
              3,198
              
              
              
              3,198Accumulated
      amortization
              
              
              (225
              )
              
              
              (168
              )Acquired
      lease intangible assets, net
              
              $
              12,901
              
              
              $
              18,163Below-market
      tenant leases
              
              $
              261,523
              
              
              $
              288,437Accumulated
      accretion
              
              
              (127,375
              )
              
              
              (106,950
              )Above-market
      ground leases
              
              
              16,200
              
              
              
              16,200Accumulated
      accretion
              
              
              (2,800
              )
              
              
              (2,651
              )Acquired
      lease intangible liabilities, net
              
              $
              147,548
              
              
              $
              195,036




9
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)





7.
Secured Notes Payable





The
following summarizes our secured notes payable at:




Type
      of Debt
              
              Maturity
                Date(1)
              
              
              September30,
                2009
              
              
              December31,
                2008
              
              Variable
      Rate
              
              Effective
                Annual
      Fixed
                Rate(2)
              
              Swap
                Maturity
                Date
      (1)Variable
      Rate Swapped to Fixed Rate:Fannie
      Mae Loan I (3)
              
              06/01/12
              
              $
              293,000
              
              
              $
              293,000
              
              
              DMBS
      + 0.60%
              
              4.70%
              
              08/01/11Fannie
      Mae Loan II (3)
              
              06/01/12
              
              
              95,080
              
              
              
              95,080
              
              
              DMBS
      + 0.60%
              
              5.78
              
              08/01/11Modified
      Term Loan(4)(5)
              
              08/31/12
              
              
              2,300,000
              
              
              
              2,300,000
              
              
              LIBOR
      + 0.85%
              
              5.13
              
              08/01/10-08/01/12Term
      Loan (6)
              
              08/18/13
              
              
              -
              
              
              
              365,000
              
              
              --
              
              --
              
              --Fannie
      Mae Loan III (3)
              
              02/01/15
              
              
              36,920
              
              
              
              36,920
              
              
              DMBS
      + 0.60%
              
              5.78
              
              08/01/11Fannie
      Mae Loan IV (3)
              
              02/01/15
              
              
              75,000
              
              
              
              75,000
              
              
              DMBS
      + 0.76%
              
              4.86
              
              08/01/11Term
      Loan (7)
              
              04/01/15
              
              
              340,000
              
              
              
              340,000
              
              
              LIBOR
      + 1.50%
              
              4.77
              
              01/02/13Fannie
      Mae Loan V (3)
              
              02/01/16
              
              
              82,000
              
              
              
              82,000
              
              
              LIBOR
      + 0.62%
              
              5.62
              
              03/01/12Fannie
      Mae Loan VI (3)
              
              06/01/17
              
              
              18,000
              
              
              
              18,000
              
              
              LIBOR
      + 0.62%
              
              5.82
              
              06/01/12Subtotal
              
              
              
              
              3,240,000
              
              
              
              3,605,000
              
              
              
              
              5.10%Variable
      Rate:Wells
      Fargo Loan(8)
              
              03/01/10(9)
              
              
              18,000
              
              
              
              18,000
              
              
              LIBOR
      + 1.25%
              
              --
              
              --Secured
      Revolving Credit Facility (10)
              10/30/09(11)
              
              
              -
              
              
              
              49,300
              
              
              LIBOR
      / Fed Funds+(12)
              
              --
              
              --Subtotal
              
              
              
              
              3,258,000
              
              
              
              3,672,300Unamortized
      Loan Premium (13)
              
              
              
              16,743
              
              
              
              20,485Total
              
              
              
              $
              3,274,743
              
              
              $
              3,692,785


(1)
            As
      of September 30, 2009, the weighted average remaining life of our total
      outstanding debt is 3.3 years, and the weighted average remaining life of
      the interest rate swaps is 1.6 years.(2)
            Includes
      the effect of interest rate contracts.  Based on actual/360-day
      basis and excludes amortization of loan fees and unused fees on credit
      line.  The total effective rate on an actual/365-day basis is
      5.17% at September 30, 2009.(3)
            Secured
      by four separate collateralized pools.  Fannie Mae Discount
      Mortgage-Backed Security (DMBS) generally tracks 90-day LIBOR, although
      volatility may exist between the two rates, resulting in an immaterial
      amount of swap ineffectiveness.(4)
            Secured
      by seven separate collateralized pools.  Requires monthly
      payments of interest only, with outstanding principal due upon
      maturity.(5)
            Includes
      $1.11 billion swapped to 4.89% until August 1, 2010; $545.0 million
      swapped to 5.75% until December 1, 2010; $322.5 million swapped to 4.98%
      until August 1, 2011; and $322.5 million swapped to 5.02% until August 1,
      2012.  Each of these rates is based on actual/360-day
      basis.(6)
            This
      loan was transferred to an unconsolidated real estate fund in which our
      operating partnership holds an equity interest.  Secured by six
      properties in a collateralized pool.  These properties were also
      transferred to the same unconsolidated real estate
fund.(7)
            Secured
      by four properties in a collateralized pool.  Requires monthly
      payments of interest only, with outstanding principal due upon
      maturity.(8)
            This
      loan is held by a consolidated entity in which our operating partnership
      holds a two-thirds interest.  The loan has a one-year extension
      option.(9)
            Represents
      maturity date of March 1, 2010, which we have the option to extend to
      March 1, 2011.(10)
            This
      revolving credit facility is secured by nine properties and has no
      borrowings outstanding.  We exercised a one-year extension
      option and renewed the credit facility for $350 million (reduced from $370
      million, but on the same pricing and otherwise on the same terms and
      conditions as prior to the extension).  A second one-year
      extension option remains available.  See Note
  15.(11)
            Represents
      maturity date of October 30, 2009, which we have the option to extend to
      October 30, 2011.  We have exercised the first one-year
      extension option.  See Note 15 for further
      information.(12)
            This
      revolver bears interest at either LIBOR +0.70% or Fed Funds +0.95% at our
      election.  If the amount outstanding exceeds
      $262.5 million, the credit facility bears interest at either LIBOR
      +0.80% or Fed Funds +1.05% at our election.(13)
            Represents
      non-cash mark-to-market adjustment on variable rate debt associated with
      office properties.





10
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)








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




Twelve
      months ending September 30:2010
            
            $
            18,0002011
            
            
            -2012
            
            
            2,688,0802013
            
            
            -2014
            
            
            -Thereafter
            
            
            551,920Total
      future principal payments
            
            $
            3,258,000





Secured
Revolving Credit Facility


We have a
revolving credit facility with a group of banks led by Bank of America, N.A. and
Banc of America Securities, LLC.  At September 30, 2009, there were no
borrowings outstanding, so the entire balance was available to us under this
credit facility.  Amounts outstanding under the facility bear interest
at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds
Rate plus 95 basis points if the total amount outstanding is $262.5 million or
less.  However, if the total amount outstanding is greater than $262.5
million, then the amounts bear interest at a rate per annum equal to either
LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points.  Undrawn amounts under the credit facility bear interest at 15
basis points.  We have exercised the first of two one-year extension
options and have renewed the facility through October 2010 for $350 million
under the same terms and conditions that existed prior to the
extension.  See Note 15 for further information.





8.
Interest Rate Contracts





Risk
Management Objective of Using Derivatives


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





Cash
Flow Hedges of Interest Rate Risk


Our
objective in using derivatives is to add stability to interest expense and to
manage our exposure to interest rate movements or other identified
risks.  To accomplish this objective, we primarily use interest rate
swaps as part of our cash flow hedging strategy.  For derivatives
designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is initially reported in other comprehensive income
(loss) (outside of earnings) and subsequently reclassified to earnings when the
hedged transaction affects earnings.  The ineffective portion of
changes in the fair value of the derivative is recognized directly in
earnings.  The ineffectiveness attributable to a mismatch in the
underlying rate indices of the hedged item and the related derivative resulted
in our recording a loss of $218 and $97 for the three months ended September 30,
2009 and 2008, respectively, and recording a loss of $498 and $11 for the nine
months ended September 30, 2009 and 2008, respectively.  We assess the
effectiveness of each hedging relationship by comparing the changes in fair
value or cash flows of the derivative hedging instrument with the changes in
fair value or cash flows of the designated hedged item or transaction. For
derivatives not designated as hedges, changes in fair value are recognized in
earnings.  The fair value of these hedges is obtained through
independent third-party valuation sources that use conventional valuation
algorithms.





11
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)





Amounts
accumulated in other comprehensive income (loss) related to derivatives will be
reclassified to interest expense as interest payments are made on our
variable-rate debt. For derivatives designated as cash flow hedges, we estimate
an additional $131.5 million will be reclassified within the next 12 months from
accumulated other comprehensive income (loss) to interest expense as an increase
to interest expense.





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





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








Non-designated
Hedges


Derivatives
not designated as hedges are not speculative.  Prior to the initial
public offering (IPO) of Douglas Emmett, Inc., we entered into $2.2 billion
notional of pay-fixed swaps at swap rates ranging between 4.04% and 5.00%, as
well as $600 million of purchased caps to manage our exposure to interest rate
movements and other identified risks.  At the time of our IPO, we
entered into offsetting $2.2 billion notional of receive-fixed swaps at swap
rates ranging between 4.96% and 5.00%, as well as $600 million of sold caps,
which were intended to largely offset the future cash flows and future change in
fair value of our pre-IPO pay-fixed swaps and purchased caps to reduce the
effect on our reported earnings.  Accordingly, as of September 30,
2009, we had the following outstanding interest rate derivatives that were not
designated for accounting purposes as hedging instruments, but were used to
hedge our economic exposure to interest rate risk:





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





None of
the swaps or caps in the preceding table was designated as an accounting hedge
and, as a result, the changes in fair value of these interest rate swaps have
been recognized in earnings for all periods.  The aggregate net asset
fair value of these swaps decreased $4.8 million and $5.5 million for the three
months ended September 30, 2009 and 2008, respectively, and $14.5 million and
$12.9 million for the nine months ended September 30, 2009 and 2008,
respectively.  The decrease in net asset fair value was recorded as
additional interest expense. Included in the net $12.9 million decrease is a
$1.2 million increase related to the credit value adjustment resulting from our
initial application of a new accounting pronouncement related to fair value
measurements in the first quarter of 2008.








12
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)




Accounting
for Interest Rate Contracts


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





The
change in net unrealized gains and losses on cash flow hedges reflects a
reclassification from accumulated other comprehensive income (loss) to interest
expense, which increased interest expense by $36.8 million and $19.1 million for
the three months ended September 30, 2009 and 2008, respectively, and $107.1
million and $45.3 million for the nine months ended September 30, 2009 and 2008,
respectively.





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





Derivative
      fair values, disclosed as “Interest Rate Contracts”:
            Assets
            
            
            LiabilitiesDerivatives
      designated as accounting hedges
            $
            ─
            
            
            $
            182,091Derivatives
      not designated as accounting hedges
            
            129,901
            
            
            
            101,500Total
      derivatives
            $
            129,901
            
            
            $
            283,591





13
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)





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








Interest
      Rate ContractsDerivatives
      in Designated Cash Flow Hedging Relationships:
            
            Three
      months ended September 30, 2009
            
            
            Nine
      months ended September 30, 2009Amount
      of gain (loss) recognized in OCI on derivatives (effective
      portion)
            
            $
            (28,462
            )
            
            $
            (37,415
            )Amount
      of gain (loss) reclassified from accumulated OCI into earnings (effective
      portion)
            
            $
            (36,832
            )
            
            $
            (107,147
            )Location
      of gain (loss) reclassification from accumulated OCI into earnings
      (effective portion)
            
            Interest
      expense
            
            
            Interest
      expenseAmount
      of gain (loss) recognized in earnings on derivatives (ineffective portion
      and amount excluded from effectiveness testing)
            
            $
            (218
            )
            
            $
            (498
            )Location
      of gain (loss) recognized in earnings on derivatives (ineffective portion
      and amount excluded from effectiveness testing)
            
            Interest
      expense
            
            
            Interest
      expense




Interest
      Rate ContractsDerivatives
      Not Designated as Cash Flow Hedges:
            
            Three
      months ended September 30, 2009
            
            
            Nine
      months ended September 30, 2009Amount
      of realized and unrealized gain (loss) recognized in earnings on
      derivatives
            
            $
            61
            
            
            $
            (156
            )Location
      of gain (loss) recognized in earnings on derivatives
            
            Interest
      expense
            
            
            Interest
      expense





Credit-risk-related
Contingent Features





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





As of
September 30, 2009, the fair value of derivatives in a net liability position
was $169.0 million, which includes accrued interest but excludes any adjustment
for nonperformance risk related to these agreements.





14
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)


Fair
Value Measurement


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





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





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





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





Quoted Prices in
              Active
      Markets
              for
      Identical
              Assets
      and Liabilities (Level 1)
            
            Significant
              Other
              Observable
              Inputs (Level 2)
            
            Significant
              Unobservable
              Inputs (Level 3)
            
            Balance
      at
              September
      30,
              2009AssetsInterest Rate
      Contracts
            $
            ─
            $
            129,901
            $
            ─
            $
            129,901LiabilitiesInterest Rate
      Contracts
            $
            ─
            $
            283,591
            $
            ─
            $
            283,591


15
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share
data)





9.
Stockholders’ Equity





Noncontrolling
Interests


Noncontrolling
interests in our operating partnership relate to interests in the partnership
that are not owned by us.  Noncontrolling interests represented
approximately 22% of our operating partnership at September 30,
2009.  A unit in our operating partnership and a share of our common
stock have essentially the same economic characteristics as they share equally
in the total net income or loss distributions of our operating
partnership.  Investors who own units in our operating partnership
have the right to cause our operating partnership to redeem any or all of their
units in our operating partnership for cash equal to the then-current market
value of one share of common stock, or, at our election, shares of our common
stock on a one-for-one basis.  Prior to January 1, 2009 (the effective
date for a new accounting pronouncement on noncontrolling interests), we
calculated the book value of net assets allocable to noncontrolling interests
(formerly referred to as minority interests), and adjusted the balance to
reflect the calculated amount with a reclass to or from the retained earnings
(accumulated deficit) balance.





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





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




Total
      Equity
              
              
              Douglas
      Emmett, Inc. Stockholders' Equity
              
              
              Noncontrolling
      InterestsBalance
      as of January 1, 2009, as reported
              
              $
              2,280,214
              
              
              $
              1,775,189
              
              
              $
              505,025Comprehensive
      income (loss):Net
      loss
              
              
              (22,880
              )
              
              
              (18,155
              )
              
              
              (4,725
              )Other
      comprehensive income (loss)
              
              
              69,732
              
              
              
              52,069
              
              
              
              17,663Comprehensive
      income (loss)
              
              
              46,852
              
              
              
              33,914
              
              
              
              12,938Contributions
              
              
              450
              
              
              
              -
              
              
              
              450Dividends
      and distributions
              
              
              (49,660
              )
              
              
              (36,445
              )
              
              
              (13,215
              )Redemption
      of operating partnership units
              
              
              (8,217
              )
              
              
              2,435
              
              
              
              (10,652
              )Stock
      compensation
              
              
              5,373
              
              
              
              2,227
              
              
              
              3,146Deconsolidation
      of Douglas Emmett Fund X, LLC
              
              
              11,900
              
              
              
              11,890
              
              
              
              10Balance
      as of September 30, 2009
              
              $
              2,286,912
              
              
              $
              1,789,210
              
              
              $
              497,702
 
 The table
below represents our consolidated statements of comprehensive income
(loss):
  Three
      Months Ended
                September 30,
              
              
              Nine
      Months Ended
                September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      loss
              
              $
              (11,112
              )
              
              $
              (12,400
              )
              
              $
              (22,880
              )
              
              $
              (27,854
              )Cash
      flow hedge adjustment
              
              
              9,428
              
              
              
              (7,866
              )
              
              
              69,286
              
              
              
              5,119Equity
      interest in other comprehensive income (loss)of
      unconsolidated real estate fund
              
              
              (1,058
              )
              
              
              -
              
              
              
              446
              
              
              
              -Comprehensive
      income (loss)
              
              
              (2,742
              )
              
              
              (20,266
              )
              
              
              46,852
              
              
              
              (22,735
              )Less:
      Comprehensive income (loss) attributable tononcontrolling
      interests
              
              
              658
              
              
              
              2,704
              
              
              
              (12,938
              )
              
              
              6,230Comprehensive
      income (loss) attributable tocommon
      stockholders
              
              $
              (2,084
              )
              
              $
              (17,562
              )
              
              $
              33,914
              
              
              $
              (16,505
              )
  16
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share
data)
  Dividends


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





Taxability
of Dividends


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





Equity
Conversions and Repurchases


During
the nine months ended September 30, 2009, 476,500 operating partnership units
were converted to shares of common stock.  During the nine months
ended September 30, 2009, we repurchased 819,500 share equivalents in open
market transactions and 250,000 share equivalents in a private transaction for a
total combined consideration of approximately $8.2 million.  We
may make additional purchases of our share equivalents from time to time in
private transactions or in the public markets, but have no commitments to do
so.





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




Three
      Months Ended
                September 30,
              
              
              Nine
      Months Ended
                September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Net
      loss attributable to common stockholders
              
              $
              (8,806
              )
              
              $
              (9,696
              )
              
              $
              (18,155
              )
              
              $
              (21,624
              )Transfers
      from the noncontrolling interests:Increase
      in common stockholders paid-in capitalfor
      redemption of operating partnership units
              
              
              2,307
              
              
              
              4,707
              
              
              
              7,044
              
              
              
              193,330Change
      from net income attributable to commonstockholders
      and transfers fromnoncontrolling
      interests
              
              $
              (6,499
              )
              
              $
              (4,989
              )
              
              $
              (11,111
              )
              
              $
              171,706




Stock-Based
Compensation


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





During
the first quarter of 2009, we granted approximately 3.6 million long-term
incentive units and stock options with a total fair market value of $6.5
million. No additional grants were made during the first nine months of 2009.
Upon the vesting of equity awards, we recognized non-cash compensation expense
of $1.2 million and $1.1 million for the three months ended September 30, 2009
and 2008, respectively, and $3.4 million and $3.3 million for the nine months
ended September 30, 2009 and 2008, respectively.  An additional
$1.4 million of immediately-vested equity awards were granted during the
first quarter of 2009 to satisfy a portion of the bonuses accrued during 2008
and an additional $2.2 million of immediately-vested equity awards were
granted during the first quarter of 2008 to satisfy a portion of the bonuses
accrued during 2007.


17
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)





10.
Future Minimum Lease Receipts and Payments





Future
Minimum Lease Receipts


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





We lease
space to certain tenants under noncancelable leases that provide for percentage
rents based upon tenant revenues. Percentage rental income for the three months
ended September 30, 2009 and 2008 totaled $162 and $232, respectively, and $471
and $661 for the nine months ended September 30, 2009 and 2008,
respectively.





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





Twelve
months ending September 30:


2010
            
            $
            355,1832011
            
            
            311,7392012
            
            
            262,4902013
            
            
            215,0082014
            
            
            155,418Thereafter
            
            
            402,166Total
      future minimum base rentals
            
            $
            1,702,004





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





Future
Minimum Lease Payments


We
currently lease portions of the land underlying two of our office properties
after acquiring, in December 2008, the fee title to a third parcel of land that
we leased during 2008 as more fully described in the notes to consolidated
financial statements contained in our 2008 Annual Report on Form 10-K. We
expensed ground lease payments in the amount of $546 and $809 for the three
months ended September 30, 2009 and 2008, respectively, and $1,602 and $2,400
for the nine months ended September 30, 2009 and 2008,
respectively.





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





Twelve
      months ending September 30:2010
            
            $
            7332011
            
            
            7332012
            
            
            7332013
            
            
            7332014
            
            
            733Thereafter
            
            
            3,237Total
      future minimum lease payments
            
            $
            6,902





18
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)




11.
Fair Value of Financial Instruments





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





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





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








12.
Related Party Transactions





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





In
October 2008, we contributed these six properties, the related $365 million term
loan, and the benefits and burdens of the related swap agreement to Fund X in
exchange for an interest in the common equity of Fund X, which became an
unconsolidated equity investment in February 2009.  See Note 2 for
further information.  If Fund X fails to perform any obligations under
the swap agreement, we remain liable to the swap counterparties.  The
maximum future payments under the swap agreements was approximately $41.9
million as of September 30, 2009. As of September 30, 2009, all obligations
under the swap agreements have been performed by Fund X in accordance with the
terms of the agreements.





19
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)


13.
Commitments and Contingencies





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





Concentration
of Credit Risk


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





Asset
Retirement Obligations


Conditional
asset retirement obligations represent a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement is
conditional on a future event that may or may not be within our
control.  A liability for a conditional asset retirement obligation
must be recorded if the fair value of the obligation can be reasonably
estimated.  Environmental site assessments and investigations have
identified 23 properties in our portfolio containing asbestos, which would have
to be removed in compliance with applicable environmental regulations if these
properties undergo major renovations or are demolished.  As of
September 30, 2009, the obligations to remove the asbestos from these properties
have indeterminable settlement dates, and therefore, we are unable to reasonably
estimate the fair value of the associated conditional asset retirement
obligation.





Tenant
Concentrations


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




20
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)




14.
Summary of Significant Accounting Policies





Cash
and Cash Equivalents


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





Income
Taxes


We have
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (IRC) commencing with our initial taxable year ending December 31,
2006.  To qualify as a REIT, we are required to distribute at least
90% of our REIT taxable income to our stockholders and meet the various other
requirements imposed by the IRC relating to such matters as operating results,
asset holdings, distribution levels and diversity of stock ownership. Provided
we qualify for taxation as a REIT, we are generally not subject to
corporate-level income tax on the earnings distributed currently to our
stockholders that we derive from our REIT qualifying activities. We are subject
to corporate-level tax on the earnings we derive through our taxable REIT
subsidiary (TRS). If we fail to qualify as a REIT in any taxable year, and are
unable to avail ourselves of certain savings provisions set forth in the IRC,
all of our taxable income would be subject to federal income tax at regular
corporate rates, including any applicable alternative minimum tax.
 
 In
addition, we are subject to taxation by various state and local (and potentially
foreign) jurisdictions, including those in which we transact business or
reside.  Our non-TRS subsidiaries, including the operating
partnership, are either partnerships or disregarded entities for federal income
tax purposes.  Under applicable federal and state income tax rules,
the allocated share of net income or loss from the limited partnerships and
S-Corporation is reportable in the income tax returns of the respective partners
and stockholders.  Accordingly, no income tax provision is included in
the accompanying consolidated financial statements.


Earnings
Per Share (EPS)


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





21
 Douglas
Emmett, Inc.
 Notes
to Consolidated Financial Statements—(continued)
 (in
thousands, except shares and per share data)


Recently
Issued Accounting Literature





On July
1, 2009 the FASB released the authoritative version of the FASB Accounting
Standards Codification as the single source of authoritative nongovernmental
U.S. GAAP.  Codification Topic 105, Generally Accepted Accounting
Principles, established that the Codification is effective for interim
and annual periods ending after September 15, 2009.  All existing
accounting standard documents are superseded.  All other accounting
literature not included in the Codification will be considered
nonauthoritative.  Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants, therefore the Codification includes all relevant SEC guidance
organized using the same topical structure in separate sections within the
Codification.  All previous references to FASB Accounting Standards
(FASs), FASB Staff Positions (FSPs) or Emerging Issues Task Force Abstracts
(EITFs) are now replaced by the Accounting Standards Codification Topics (ASCs)
that contain the relevant and current accounting
pronouncements.  Modifications to the Codification, will come in the
form of Accounting Standards Updates (ASUs) which will serve to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the changes to the Codification.  The
Codification is not intended to change GAAP, but it will change the way GAAP is
organized and presented.  The Codification is effective for our
financial statements for the fiscal quarter ending September 30, 2009 and the
principal impact is limited to disclosures as all future references to
authoritative accounting literature will be referenced in accordance with the
Codification.





On
January 1, 2009, we adopted new FASB guidance contained in ASC 805, which
changes the method of accounting for business combinations.  Under
ASC 805, an acquiring entity is required to recognize all the assets
acquired and liabilities assumed in a transaction at the acquisition-date fair
value with limited exceptions.  ASC 805 requires that transaction
costs such as legal, accounting and advisory fees be
expensed.  ASC 805 also includes a substantial number of new
disclosure requirements.  The adoption of ASC 805 did not have a
material effect on our financial position or results of operations.





On
January 1, 2009, we adopted new FASB guidance contained in ASC 810, which
establishes new accounting and reporting standards for noncontrolling interests
in a subsidiary and for the deconsolidation of a
subsidiary.  Specifically, this statement requires the recognition of
a noncontrolling interest (minority interest) as equity in the consolidated
financial statements separate from the parent’s equity.  The amount of
net income attributable to the noncontrolling interest is included in
consolidated net income on the face of the income
statement.  ASC 810 clarifies that changes in a parent’s
ownership interest in a subsidiary that do not result in deconsolidation are
equity transactions if the parent retains its controlling financial
interest.  In addition, this statement requires that a parent
recognize a gain or loss in net income when a subsidiary is
deconsolidated.  Such gain or loss will be measured using the fair
value of the noncontrolling equity investment on the deconsolidation
date.  ASC 810 also includes expanded disclosure requirements
regarding the interests of the parent and its noncontrolling
interests.  The adoption of ASC 810 did not have a material
effect on our financial position or results of operations, other than
presentation differences.





On
January 1, 2009, we adopted new FASB guidance contained in ASC 815, which
expands disclosure requirements for an entity's derivative and hedging
activities.  Under ASC 815, entities are required to provide
enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for, and how
derivative instruments and related hedged items affect an entity's financial
position, financial performance and cash flows.  In order to meet
these requirements, entities must include quantitative disclosures about
derivative fair values and gains/losses on derivative instruments, qualitative
disclosures about objectives and strategies for using derivatives, and
disclosures about credit-risk-related contingent features in derivative
agreements.  The adoption of ASC 815 did not have a material
effect on our financial position or results of operations as this statement only
addresses disclosures.





On
January 1, 2009, we adopted new FASB guidance contained in ASC 260, which
clarifies that unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are
participating securities, and as participating securities, they must be included
in the computation of EPS pursuant to the two-class method.  The
adoption of ASC 260 did not have a material effect on our financial
position or results of operations.





22





On April
1, 2009, we adopted new FASB guidance contained in ASC 825, which requires
disclosures about the fair value of financial instruments for interim reporting
periods of publicly-traded companies as well as in annual financial
statements.  The adoption of ASC 825 did not have a material
effect on our financial position or results of operations as this statement only
addresses disclosures.





On April
1, 2009, we adopted new FASB guidance contained in ASC 855, which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  The adoption of ASC 855 did not have
a material effect on our financial position or results of operations as this
statement only addresses disclosures.  See Note 15 for subsequent
events disclosure.





In June
2009, the FASB issued FAS No. 167, Amendments to FASB
Interpretation No. 46(R) (FAS 167).  The statement is not yet
effective, and therefore has not been assigned a topic number under the
Codification.  This standard requires an enterprise to perform an
analysis to determine whether an enterprise’s variable interest or interests
give it a controlling financial interest in a variable interest
entity.  Additionally, an enterprise is required to assess whether it
has an implicit financial responsibility to ensure that a variable interest
entity operates as designed when determining whether it has the power to direct
the activities of the variable interest entity that most significantly impact
the entity’s economic performance.  FAS 167 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
November 15, 2009, which for us means January 1, 2010.  We are
currently evaluating the impact that FAS 167 will have on our financial
statements.





15.
Subsequent Events





Prior to
quarter end, we exercised the first of two one-year extension options that were
available to us on our secured revolving credit facility.  On October
30, 2009, we completed the extension of the facility through October 30, 2010
for $350 million (reduced from $370 million, but on the same pricing and
otherwise on the same terms and conditions as prior to the
extension).  The extended facility has one additional one-year
extension available.





We
evaluated subsequent events through November 5, 2009, the date on which these
financial statements were issued, and were not aware of any other events that
were material.


23


Item
2.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Forward
Looking Statements.


This
Quarterly Report on Form 10-Q (Report) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the Exchange Act).  You can find many (but not all) of these
statements by looking for words such as “approximates,” “believes,” “expects,”
“anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar
expressions in this Report.  We claim the protection of the safe
harbor contained in the Private Securities Litigation Reform Act of
1995.  We caution investors that any forward-looking statements
presented in this Report, or those that we may make orally or in writing from
time to time, are based on our beliefs and assumptions.  The actual
outcome will be affected by known and unknown risks, trends, uncertainties and
factors that are beyond our control or ability to predict.  Although we
believe that our assumptions are reasonable, they are not guarantees of future
performance and some will inevitably prove to be incorrect.  As a
result, our actual future results can be expected to differ from our
expectations, and those differences may be material.  Accordingly,
investors should use caution in relying on previously reported forward-looking
statements, which are based on results and trends at the time they are made, to
anticipate future results or trends.





Some
of the risks and uncertainties that may cause our actual results, performance or
achievements to differ materially from those expressed or implied by
forward-looking statements include the following: adverse economic or real
estate developments in Southern California and Honolulu; decreased rental rates
or increased tenant incentive and vacancy rates; defaults on, early termination
of, or non-renewal of leases by tenants; increased interest rates and operating
costs; failure to generate sufficient cash flows to service our outstanding
indebtedness; difficulties in identifying properties to acquire and completing
acquisitions; failure to successfully operate acquired properties and
operations; failure to maintain our status as a Real Estate Investment Trust
(REIT) under the Internal Revenue Code of 1986, as amended; possible adverse
changes in rent control laws and regulations; environmental uncertainties; risks
related to natural disasters; lack or insufficient amount of insurance;
inability to successfully expand into new markets and submarkets; risks
associated with property development; conflicts of interest with our officers;
changes in real estate zoning laws and increases in real property tax rates; and
the consequences of any possible future terrorist attacks. For further
discussion of these and other factors, see “Item 1A.  Risk Factors” in
our 2008 Annual Report on Form 10-K.





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








Critical
Accounting Policies





Our
discussion and analysis of our historical financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with GAAP.  The preparation of these financial
statements in conformity with GAAP requires us to make estimates of certain
items and judgments as to certain future events, for example with respect to the
allocation of the purchase price of acquired property among land, buildings,
improvements, equipment, and any related intangible assets and liabilities, or
the effect of a property tax reassessment of our properties.  These
determinations, even though inherently subjective and prone to change, affect
the reported amounts of our assets, liabilities, revenues and
expenses.  While we believe that our estimates are based on reasonable
assumptions and judgments at the time they are made, some of our assumptions,
estimates and judgments will inevitably prove to be incorrect.  As a
result, actual outcomes will likely differ from our accruals, and those
differences—positive or negative—could be material.  Some of our
accruals are subject to adjustment, as we believe appropriate based on revised
estimates and reconciliation to the actual results when available.





In
addition, we identified certain critical accounting policies that affect certain
of our more significant estimates and assumptions used in preparing our
consolidated financial statements in our 2008 Annual Report on Form
10-K.  We have not made any material changes to these policies during
the periods covered by this Report.


24


Historical Results of
Operations





Overview


Our results of operations for the three
and nine months ended September 30, 2008 and 2009 consists of the rental
operations for 48 office properties and nine multifamily properties that we
owned during both comparable periods as well as seven office properties that
were owned for less than both comparable periods as described in Note 2 to the
consolidated financial statements in Item 1 of this Report.  One of
the seven properties was acquired in February 2008.  The other six
properties were acquired in March 2008 and subsequently contributed to Douglas
Emmett Fund X, LLC (Fund X), an institutional real estate fund that we manage
and in which we own an equity interest.  The results of all seven
properties are only included following their respective dates of acquisition and
the results of the six contributed properties are included only through the end
of February 2009, when Fund X was deconsolidated, and thereafter only to the
extent of equity income or loss from our investment in Fund X.




Comparison
      of three months ended September 30, 2009 to three months ended September
      30, 2008





Revenues





Total Office
Revenue.  Total office revenue consists of rental revenue,
tenant recoveries and parking and other income.  For the reasons
described below, total office revenue decreased by $16.6 million, or 11.9%, to
$123.5 million for the three months ended September 30, 2009 compared to $140.1
million for the three months ended September 30, 2008.





Rental
Revenue.  Rental revenue includes rental revenues from our
office properties, percentage rent on the retail space contained within office
properties, and lease termination income.  Total office rental revenue
decreased by $13.3 million, or 11.8%, to $99.5 million for the three months
ended September 30, 2009 compared to $112.8 million for the three months ended
September 30, 2008.  The decrease is primarily due to $12.2 million of
rent reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009.





Tenant
Recoveries.  Total office tenant recoveries decreased by $0.3
million, or 3.3%, to $8.1 million for the three months ended September 30, 2009
compared to $8.3 million for the three months ended September 30,
2008.  The decrease is primarily due to $0.7 million in recoveries
reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009, partially offset by an increase in recoverable tenant direct
expenses.





Parking and Other
Income.  Total office parking and other income decreased by
$3.0 million, or 16.0%, to $15.9 million for the three months ended September
30, 2009 compared to $19.0 million for the three months ended September 30,
2008.  The decrease is primarily due to parking of $2.0 million
reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009, as well as decreases in parking income of $1.0 million for the remainder
of our portfolio as a result of lower occupancy and usage.





Total Multifamily
Revenue.Total multifamily revenue consists of rent, parking
income and other income.  Total multifamily revenue decreased by $0.6
million, or 3.4%, to $17.0 million for the three months ended September 30,
2009, compared to $17.6 million for the three months ended September 30,
2008.  The decrease is primarily due to a decline in rental income
attributable to a decrease in rental rates and a slight decrease in occupancy
levels for the comparable periods.





Operating
Expenses





Office Rental
Expenses.  Total office rental expense decreased by $5.5
million, or 12.5%, to $38.7 million for the three months ended September 30,
2009, compared to $44.2 million for the three months ended September 30,
2008.  The decrease is primarily due to $5.4 million of property
operating expenses reflected in our 2008 consolidated results from the six
properties we contributed to an unconsolidated real estate fund during the first
quarter of 2009.




25




Depreciation and
Amortization.  Depreciation and amortization expense decreased
$8.1 million, or 12.7%, to $55.5 million for the three months ended September
30, 2009, compared to $63.6 million for the three months ended September 30,
2008.  The decrease is primarily due to $7.6 million of depreciation
and amortization reflected in our 2008 consolidated results from the six
properties we contributed to an unconsolidated real estate fund during the first
quarter of 2009.





Non-Operating
Income and Expenses





Loss, including Depreciation, from
Unconsolidated Real Estate Fund.  The loss, including
depreciation, from unconsolidated real estate fund totaled $1.9 million for the
three months ended September 30, 2009.  The loss represents our equity
interest in the net income from the six properties owned by Fund X, including
the operating income net of historical cost-basis
depreciation.  During the third quarter of 2008, these six properties
were contained in our consolidated results, so there was no comparable amount
recorded in this line until the properties were deconsolidated at the end of
February 2009.





Interest
Expense.  Interest expense decreased $7.3 million, or 13.8%, to
$45.3 million for the three months ended September 30, 2009, compared to $52.6
million for the three months ended September 30, 2008.  This decrease
is primarily due to lower levels of outstanding debt during the third quarter of
2009 in comparison to the prior year, including our revolving credit facility,
which had no outstanding borrowings during the third quarter of 2009, and the
deconsolidation of debt associated with the six properties contributed to an
unconsolidated real estate fund in the first quarter of 2009.





Comparison
      of nine months ended September 30, 2009 to nine months ended September 30,
      2008





Revenues





Total Office
Revenue.  For the reasons described below, total office revenue
decreased by $19.0 million, or 4.7%, to $380.4 million for the nine months ended
September 30, 2009 compared to $399.3 million for the nine months ended
September 30, 2008.





Rental
Revenue.  Total office rental revenue decreased by $15.8
million, or 4.9%, to $307.2 million for the nine months ended September 30, 2009
compared to $323.0 million for the nine months ended September 30,
2008.  The decrease is primarily due to $17.4 million of rent
reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009, partially offset by increases totaling $1.6 million for the remainder of
our portfolio.  The increase of $1.6 million is a result of rate
increases for new and renewal tenants, partially offset by lower
occupancy.





Tenant
Recoveries.  Total office tenant recoveries increased by $0.6
million, or 2.8%, to $23.2 million for the nine months ended September 30, 2009
compared to $22.5 million for the nine months ended September 30,
2008.  The increase is due to an adjustment in 2008 to reduce tenant
recovery revenue related to property tax accruals, with no corresponding
adjustment recorded in 2009, partially offset by $0.7 million in recoveries
reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009.





Parking and Other
Income.  Total office parking and other income decreased by
$3.8 million, or 7.1%, to $50.0 million for the nine months ended September 30,
2009 compared to $53.8 million for the nine months ended September 30,
2008.  The decrease is primarily due to parking of $2.6 million
reflected in our 2008 consolidated results from the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009, as well as well as a decrease of $1.2 million for the remainder of our
portfolio as a result of lower occupancy and usage.





Total Multifamily
Revenue.Total multifamily revenue decreased by $1.9 million,
or 3.6%, to $51.3 million for the nine months ended September 30, 2009, compared
to $53.2 million for the nine months ended September 30, 2008.  The
decrease is primarily due to lower amortization of below-market leases for
certain multifamily units initially recorded at the time of our IPO, thus
causing a decline when comparing the 2009 and 2008 periods, as well as a decline
in rental rates for the comparable periods.





26





Operating
Expenses





Office Rental
Expenses.  Total office rental expense decreased by $6.3
million, or 5.1%, to $115.7 million for the nine months ended September 30,
2009, compared to $121.9 million for the nine months ended September 30,
2008.  The decrease is primarily due to $7.8 million in office rental
expenses reflected in our 2008 consolidated results to the six properties we
contributed to an unconsolidated real estate fund during the first quarter of
2009, partially offset by an increase in office rental expenses in our
portfolio.  Total office expenses increased in our portfolio by $1.5
million primarily as a result of lower comparable property tax accruals in the
prior period, partially offset by lower janitorial costs and ground rent
payments in the current period.





General and Administrative
Expenses.  General and administrative expenses increased $1.6
million, or 10.1%, to $17.9 million for the nine months ended September 30,
2009, compared to $16.3 million for the nine months ended September 30,
2008.  The increase is primarily due to the timing of accruals related
to compensation, including equity awards that are expensed over the multi-year
vesting period.





Depreciation and
Amortization.  Depreciation and amortization expense decreased
$11.9 million, or 6.5%, to $172.3 million for the nine months ended September
30, 2009, compared to $184.2 million for the nine months ended September 30,
2008.  The decrease is primarily due to $10.7 million in depreciation
and amortization reflected in our 2008 consolidated results related to the six
properties we contributed to an unconsolidated real estate fund during the first
quarter of 2009.







Non-Operating
Income and Expenses





Gain on Disposition of Interest in
Unconsolidated Real Estate Fund.  In February
2009, we recorded a gain of $5.6 million related to the contribution of six
properties to Fund X as described in Note 2 to our consolidated financial
statements in Item 1 of this Report.





Interest and Other
Income.  Interest and other income increased $2.5 million to
$3.0 million for the nine months ended September 30, 2009, compared to $0.5
million for the nine months ended September 30, 2008.  The increase
for the comparable periods was attributable to $2.3 million of income relating
to the six properties contributed to an unconsolidated real estate fund in the
first quarter of 2009.  See Note 2 to our consolidated financial
statements in Item 1 of this Report for a discussion about the contribution to
Fund X.





Loss, including Depreciation, from
Unconsolidated Real Estate Fund.  The loss, including
depreciation, from unconsolidated real estate fund totaled $4.7 million for the
nine months ended September 30, 2009.  The loss represents our equity
interest in the net loss from the six properties owned by Fund X, including the
operating income of the properties, net of our historical cost-basis
depreciation.  During the first nine months of 2008, subsequent to
acquiring the six properties, the operating results from the properties were
contained in our consolidated results, so there was no comparable amount
recorded in this line until the properties were deconsolidated at the end of
February 2009.





Interest
Expense.  Interest expense decreased $6.4 million, or 4.4%, to
$139.2 million for the nine months ended September 30, 2009, compared to $145.6
million for the nine months ended September 30, 2008.  This decrease
is primarily due to lower levels of outstanding debt during the first nine
months of  2009 in comparison to the prior year, including our
revolving credit facility, which had no outstanding borrowings for the majority
of the nine months ended September 30, 2009, and the deconsolidation of debt
associated with the six properties contributed to an unconsolidated real estate
fund in the first quarter of 2009.





Liquidity
and Capital Resources





Available
Borrowings, Cash Balances and Capital Resources





We had
total indebtedness of $3.3 billion at September 30, 2009, excluding a loan
premium representing the mark-to-market adjustment on variable rate debt
resulting from our IPO.  See Note 7 to our consolidated financial
statements in Item 1 of this Report.




27




We have a
revolving credit facility with a group of banks led by Bank of America, N.A. and
Banc of America Securities LLC totaling $370 million.  Historically,
we have used our revolving credit facility for general corporate purposes,
including acquisition funding, redevelopment and repositioning opportunities,
tenant improvements and capital expenditures, share equivalent repurchases,
recapitalizations and working capital.  At September 30, 2009, the
total amount of the facility was $370 million and there were no borrowings
outstanding, so the entire balance was available to us.  The facility
was scheduled to mature on October 30, 2009 with two one-year extensions
available to us.  We have exercised the first of the two one-year
extensions and, subsequent to quarter end, we completed the extension of the
facility through October 2010 for $350 million (reduced from $370 million, but
on the same pricing and otherwise on the same terms and conditions as prior to
the extension).  Amounts outstanding under the facility bear interest
at a rate per annum equal to either LIBOR plus 70 basis points or Federal Funds
Rate plus 95 basis points if the total amount outstanding is $262.5 million or
less.  However, if the total amount outstanding is greater than $262.5
million, then the amounts bear interest at a rate per annum equal to either
LIBOR plus 80 basis points or Federal Funds Rate plus 105 basis
points.  Undrawn amounts under the credit facility bear interest at 15
basis points.  We have the option to further extend the facility for
an additional one year to October 30, 2011.





We have
typically financed our capital needs through short-term lines of credit and
long-term secured mortgages at floating rates.  To mitigate the impact
of fluctuations in short-term interest rates on our cash flow from operations,
we generally enter into interest rate swap or interest rate cap agreements with
respect to our long-term secured mortgages.  At September 30, 2009,
99% of our debt was effectively fixed at an overall rate of 5.10% (on an actual
/ 360-day basis) by virtue of interest rate swap and interest rate cap
agreements in place at the end of the reporting period.  See Notes 7
and 8 to our consolidated financial statements in Item 1 of this
Report.





None of
our term loans with swapped-to-fixed interest rates mature until
2012.  Our other loan obligations, which remain at variable rates, are
our revolving credit facility described above, whose maturity can be extended,
under certain conditions, to October 30, 2011, and an $18 million secured
acquisition loan, whose maturity can be extended, under certain conditions, to
March 1, 2011.





In
October 2008, we completed the initial closing of Fund X.  The fund
raising period for Fund X expired in October 2009, although we are in
discussions concerning the possible admission of additional
investors.  The Fund will have an investment period of up to four
years from the initial closing, followed by a ten-year value creation
period.  With limited exceptions, Fund X will be our exclusive
investment vehicle during its investment period, using the same underwriting and
leverage principles and focusing primarily on the same markets as we
have.





At
September 30, 2009, our total borrowings under secured loans, including the
portion of debt attributable to our equity interest in Fund X, and excluding the
portion of consolidated debt attributable to our minority partner on the
Honolulu Club joint venture, represented 64.3% of our total market
capitalization of $5.3 billion.  Total market capitalization
includes our portion of the consolidated debt and the value of common stock and
operating partnership units each based on our common stock closing price at
September 30, 2009 on the New York Stock Exchange of $12.28 per
share.





The
nature of our business will cause us to have substantial liquidity needs over
both the short term and the long term.  We expect to meet our
short-term liquidity requirements generally through cash provided by operations
and, if necessary, by drawing on our secured revolving credit
facility.  We anticipate that cash provided by operations and
borrowings under our secured revolving credit facility will be sufficient to
meet our liquidity requirements for at least the next 12 months.





Our
long-term liquidity needs consist primarily of funds necessary to pay for
acquisitions, redevelopment and repositioning of properties, non-recurring
capital expenditures, and repayment of indebtedness at maturity. We will seek to
satisfy these needs through cash flow from operations, long-term secured and
unsecured indebtedness, the issuance of debt and equity securities, including
units in our operating partnership, property dispositions and joint venture
transactions.  The availability of liquidity over the long-term will
be impacted by the magnitude and duration of the current economic downturn and
unfavorable credit market conditions, among other things.  This could
impact the availability of capital in the future and could impact the interest
rates and other terms of borrowings or equity that we do obtain, which could
materially and adversely effect our liquidity, capital resources and results of
operations.


28





Contractual
Obligations





During
the first nine months of 2009, there were no material changes outside the
ordinary course of business in the information regarding specified contractual
obligations contained in our 2008 Annual Report on Form 10-K.





Off-Balance
Sheet Arrangements





At
September 30, 2009, we had an equity investment of $99.2 million in Fund X, an
unconsolidated real estate fund to which we contributed six
properties.  Fund X has debt outstanding, which is secured by the six
properties we contributed, totaling $365 million at September 30, 2009 as
summarized in the following table:








Type
      of Debt
            
            Maturity
              Date
            
            Variable
              Rate
            
            Effective
              Annual
      Fixed
              Rate(1)
            
            Swap
              Maturity
              DateVariable
      rate term loan(swapped
      to fixed rate)(2)
            
            08/18/13
            
            LIBOR
      + 1.65%
            
            5.52%
            
            09/14/12









(1)
            Includes
      the effect of interest rate contracts.  Based on actual/360-day
      basis and excludes amortization of loan fees.  The total
      effective rate on an actual/365-day basis is 5.59% at September 30,
      2009.(2)
            The
      loan is secured by six properties in a collateralized
      pool.  Requires monthly payments of interest only, with
      outstanding principal due upon
maturity.




Cash
Flows





Our cash flow from operating activities is primarily dependent upon
the occupancy level of our portfolio, the rental rates achieved on our leases,
the collectability of rent and recoveries from our tenants and the level of
operating expenses and other general and administrative costs.  Net
cash provided by operating activities increased by $7.8 million to $144.7
million for the nine months ended September 30, 2009, compared to
$136.8 million for the nine months ended September 30, 2008.  The
increase reflects higher net cash flow from existing properties that generated
improved results.





Our net
cash used in investing activities is generally used to fund property
acquisitions, development and redevelopment projects and recurring and
non-recurring capital expenditures. Net cash used in investing activities
decreased $618.9 million to $37.9 million for the nine months ended September
30, 2009 compared to $656.8 million for the nine months ended September 30,
2008.  The decrease was attributable to the absence of any property
acquisitions during the nine months ended September 30, 2009 in comparison to
the seven properties acquired during the comparable period of
2008.  See Note 2 to our consolidated financial statements in Item 1
of this Report.





Our net
cash related to financing activities is generally impacted by our borrowings,
capital activities net of dividends and distributions paid to common
stockholders and noncontrolling interests. Net cash used in financing activities
totaled $51.6 million for the nine months ended September 30, 2009 compared to
net cash provided by financing activities totaling $516.3 million for the nine
months ended September 30, 2008.  The comparative difference was
primarily due to the increased level of borrowings associated with property
acquisitions in 2008.  See Note 2 to our consolidated financial
statements in Item 1 of this Report.


29


Item
3.  Quantitative and Qualitative Disclosures about Market
Risk





At
September 30, 2009, approximately $3.2 billion, or 99%, of our debt was hedged
with derivative instruments.  Based on the level of variable rate debt
outstanding at September 30, 2009, by virtue of the mitigating effect of our
interest rate contracts, a 50 basis point change in LIBOR would result in an
annual impact to earnings of approximately $90.  We calculate interest
sensitivity by computing the amount of floating rate debt not mitigated by
interest rate contracts by the respective change in rate.  The
sensitivity analysis does not take into consideration possible changes in the
balances of fair value of our floating rate debt.





By using
derivative instruments to hedge exposure to changes in interest rates, we expose
ourselves to credit risk and the potential inability of our counterparties to
perform under the terms of the agreements.  We attempt to minimize
this credit risk by contracting with high-quality bank financial
counterparties.








Item
4.  Controls and Procedures




We
maintain disclosure controls and procedures (as such term is defined in Rule
13a-15(e) and 15d-15(e) under the Exchange Act)  that are designed to
ensure that information required to be disclosed in our reports under the
Exchange Act is processed, recorded, summarized and reported within the time
periods specified in the SEC’s rules and regulations and that such information
is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.






As of
September 30, 2009, the end of the period covered by this Report, we carried out
an evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, regarding the
effectiveness in design and operation of our disclosure controls and procedures
at the end of the period covered by this Report.  Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as
of that time, that our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in reports filed or
submitted under the Exchange Act (i) is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms and
(ii) is accumulated and communicated to our management including our Chief
Executive Officer and our Chief Financial Officer, to allow timely decisions
regarding required disclosure.






No
changes to our internal control over financial reporting were identified in
connection with the evaluation referenced above that occurred during the period
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.




30


PART
II.  OTHER INFORMATION





Item
1.  Legal Proceedings





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





Item
1A.  Risk Factors





There
have been no material changes to the risk factors included in Item 1A. “Risk
Factors” in our 2008 Annual Report on Form 10-K.





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







Sales.  We did not
make any unregistered sales of our securities during the quarter ended September
30, 2009.






Purchases.  We made
the following purchases of our share equivalents during the three months ended
September 30, 2009.




ISSUER
      PURCHASES OF EQUITY SECURITIESPeriod
            
            (a)
      Total Number of Share
              Equivalents
      Purchased
            
            
            (b)
      Average Price Paid per Share (or Unit)July
      2009
            
            ─
            
            
            ─August
      2009
            
            
            250,000
            
            
            $
            11.52September
      2009
            
            ─
            
            
            ─Total
            
            
            250,000





All
purchases were made in private unsolicited
transactions, not pursuant to a publicly announced program.





Item
3.  Defaults Upon Senior Securities





None.





31


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





None.








Item
5.  Other Information







(a)      Additional
Disclosures.None.






(b)      Stockholder
Nominations.There have been no material changes to the
procedures by which stockholders may recommend nominees to our board of
directors during the quarter ended September 30, 2009.  Please see the
discussion of our procedures in our most recent proxy statement.







Item
6.  Exhibits





Exhibit
      Number
            
            Description31.1
            
            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.(1)32.2
            
            Certificate
      of Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.(1)





(1)
            In
      accordance with SEC Release No. 33-8212, the following exhibit is being
      furnished, and is not being filed as part of this Report on Form 10-Q or
      as a separate disclosure document, and is not being incorporated by
      reference into any Securities Act of 1933 registration
      statement.


32


Signatures




Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.







DOUGLAS
      EMMETT, INC.Date:  November
      5, 2009
            By:
            /s/
      JORDAN L. KAPLANJordan
      L. KaplanPresident
      and Chief Executive OfficerDate:  November
      5, 2009
            By:
            /s/
      WILLIAM KAMERWilliam
      KamerChief
      Financial Officer