DEI

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2006, for Douglas Emmett, Inc. The financial statements presented relate to the company's accounting predecessor (Douglas Emmett Realty Advisors, Inc., and its consolidated institutional funds) rather than the newly formed REIT. The predecessor owned 42 office properties and six multifamily properties in Los Angeles County and Honolulu, Hawaii. The company consummated its Initial Public Offering (IPO) and formation transactions on October 30, 2006, subsequent to this reporting period.

Key Financial Metrics

Note: Net loss was significantly impacted by a $54.0 million loss on interest rate contracts for the quarter and a $5.3 million deficit distribution to minority partners.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 9.4% for the quarter and 8.3% for the nine-month period compared to 2005. Office revenue grew 6.9% (quarter) and 6.2% (nine months), driven by occupancy gains in repositioning properties. Multifamily revenue surged 27.9% (quarter) and 24.0% (nine months) due to new acquisitions.
• Operating Expenses: General and administrative expenses spiked 530% for the quarter and 180% for the nine months, primarily due to a one-time accrual of discretionary cash bonuses paid to employees prior to the IPO.
• Derivative Volatility: The company reported a $54.0 million loss on interest rate contracts for the quarter, reversing a $56.3 million gain in the same period in 2005. This volatility stems from fair value changes in swaps that did not qualify for hedge accounting.
• Acquisitions: The predecessor acquired a multifamily property in Honolulu in March 2006 for approximately $113.7 million.

Outlook, Risks, and Subsequent Events

Subsequent Events (Post-Sept 30, 2006):

• IPO Completion: On October 30, 2006, the company completed its IPO, issuing 75.9 million shares for net proceeds of approximately $1.52 billion.
• Capital Structure: The company assumed $2.54 billion in indebtedness and preferred equity. It increased its term loan by $545 million and entered a $250 million senior secured revolving credit facility.
• Debt Hedging: Post-IPO, the company executed new interest rate swaps to fix the rate on its $2.3 billion modified term loan at an effective rate of 5.13%.

Risks and Contingencies:

• Market Risk: Approximately 98.7% of debt is fixed; however, $35 million remains variable. A 50 basis point increase in LIBOR would decrease earnings by approximately $175,000 annually.
• Legal/Environmental: The company faces ordinary course legal proceedings and has identified asbestos in 14 properties, though settlement dates are indeterminable and fair value cannot be reasonably estimated.
• Concentration: All properties are located in Los Angeles County and Honolulu, creating geographic concentration risk.

Investor Verification Checklist

• Predecessor vs. Successor: Verify that financial results reflect the "predecessor" entity only and do not include the full consolidated REIT results post-IPO.
• Derivative Accounting: Confirm the treatment of interest rate swaps; the predecessor recorded fair value changes in earnings, whereas the post-IPO entity expects to use cash flow hedge accounting.
• One-Time Expenses: Scrutinize the $8.7 million increase in G&A expenses, which was driven by pre-IPO bonus accruals and is not indicative of ongoing operational costs.
• Debt Maturity: Review the maturity schedule of the $2.3 billion secured notes, noting that the majority is due in 2011-2016.
• Occupancy Rates: Validate the reported 93.7% office and 99.0% multifamily occupancy rates as of September 30, 2006.