July 14, 2006
Mail Stop 4561
William Kamer
Chief Financial Officer
Douglas Emmett, Inc.
808 Wilshire Blvd., Suite 200
Santa Monica, CA 90401
Re: Douglas Emmett, Inc.
Registration Statement on Form S-11
Filed June 16, 2006
File No. 333-135082
Dear Mr. Kamer:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. Refer to Section 1.05 of the merger agreements filed as
Exhibits
10.15 through 10.35 and Section 1.02 of the contribution
agreements
filed as Exhibits 10.36 through 10.38. Please tell us why the
conversion of these pre-formation interests into REIT shares and
OP
units should not be integrated with this offering. In responding
to
this comment, please consider in particular your use of a formula
based on a share of "pre-IPO" equity to determine each
distribution.
If integration is warranted, please tell us why this transaction
does
not constitute a roll-up within the meaning of Item 901 of
Regulation
S-K. Also, please provide us with form copies of the Formation
Transaction Documentation and Consent Form.
2. We note from page 37 that certain investors who elected to
receive
cash in the formation transactions will instead be receiving REIT
shares or operating partnership units due to limits on available
cash. Please discuss this in more detail and explain whether the
issuance of securities to these investors impacts the exemption
from
registration upon which you are relying.
3. Please provide us with copies of the artwork or graphics you
intend to use in the prospectus. We may have further comment.
Cover Page
4. We note that you have included cover page risk factors. Please
omit these risk factors in favor of additional information that is
key to the investment decision, including the amount of proceeds
to
be paid to affiliates, the fact that all of the REIT`s initial
interests be acquired from affiliates, and the identify of each
affiliate.
Summary, page 1
Summary Risk Factors, page 5
5. Please add a risk factor related to potential dilution and
share
price pressure caused by future stock issuances and sales by
affiliates and continuing investors.
Structure and Formation of Our Company, page 8
6. Please explain the reason for the contribution to DERA.
7. Please explain briefly how net operating income will be
calculated
for purposes of the pre-closing fund distributions and indicate
whether the distributions are subject to post-closing adjustment.
8. In the fourth bullet point on page 9, please make it clear-if
true-that contributors will receive no less than $1 billion in
cash
and securities for their interests.
9. Once known, please disclose the key terms of your proposed
financing arrangements, including any conditions placed by the
lenders on the offering itself (such as the amount of proceeds).
Also, please indicate whether any of your lenders or their
affiliates
have an interest in the formation transactions beyond the proposed
financing.
10. Please describe the closing conditions. Also, please explain
the
reason for the requirement that the aggregate amount of cash paid
in
the formation transactions be at least 90% of the difference
between
net offering proceeds and the amount paid to holders of preferred
interests.
11. Please revise the chart on page 12 to include your taxable
REIT
subsidiary, P.L.E. Builders, Inc., and briefly describe the
purpose
of this entity. Please make it clear in your summary that taxable
subsidiaries are not obligated to make distributions to your
operating partnership, which could result in reduced cash flow and
distributable profit.
Benefits to Related Parties, page 13
12. Please quantify the interest of each affiliate in this
transaction, including the pre-closing distributions, the value of
OP
units and shares to be received in exchange for the contribution
of
interests in the various entities and LTIP units and stock options
to
be issued by you.
Conflicts of interest, page 14
13. Please revise to briefly describe the conflicts of interest in
connection with the contribution agreements and formation
transactions apart from the limitations on indemnification and
your
vigorous enforcement.
Dividend Policy, page 16
14. Where relevant, please include a distribution table supporting
your projections for future dividends over the next 12 months.
Summary Historical and Pro Forma Financial and Operating Data,
page
18
Funds from Operations, page 20
15. We note that you have reconciled funds from operations to
income
(loss) before minority interest in operating partnership.
Generally,
non-GAAP financial measures that depict performance are balanced
with
net income (loss) or income (loss) from continuing operations.
Please advise us why you view income (loss) before minority
interest
in operating partnership to be the most directly comparable
financial
measure calculated and presented in accordance with GAAP or revise
your reconciliation in response to this comment throughout the
filing, as appropriate.
Risk Factors, page 23
Risks Related to Our Properties..., page 23
16. Please add a factor discussing risk related to your ability to
make continuing dividend payments of a particular level or at all
and
discussing the tax impact of distributions in excess of REIT
earnings. If you may fund distributions from proceeds or
borrowings,
please include a discussion of associated risks.
17. Please discuss risk of increased property taxes in the event
of a
reassessment following the close of this transaction.
The price we will pay for the assets..., page 23
18. Please revise to make it clear that your interests are being
purchased from affiliates.
Risks Related to Our Organization..., page 31
19. Please add a risk factor related to the board`s control over
executive compensation and the risk that compensation awards may
not
be tied to or correspond with improved financial results or share
price.
Our predecessor principals exercised..., page 32
20. Please explain in more detail how your predecessor principals
may
receive "disproportionate benefits."
Tax consequences to holders..., page 32
21. Please revise to explain the risk to shareholders with more
specificity.
Our senior management team..., page 32
22. Please quantify management`s control assuming the conversion
of
all partnership units.
Our fiduciary duties as sole member..., page 34
23. Please explain in more detail how your duties to shareholders
and
partners may conflict and how amendments to the partnership
agreement
could adversely affect partners` rights or-if not approved-
adversely
affect the rights of shareholders.
Forward-Looking Statements, page 41
24. We do not understand how use of the term "pro forma"
identifies a
forward-looking statement. Please advise or revise.
Use of Proceeds, page 42
25. Please separate offering proceeds from the sources of other
funds
needed for each specified purpose. Refer to instruction 3 to Item
504 of Regulation S-K. Be sure to break out loans incurred to
provide contributors with additional cash consideration and state
separately the amount of cash to be paid to prior investors as a
distribution and the amount of cash that represents consideration
for
their property interests. Also, please identify separately each
loan
to be repaid with the proceeds of this offering, indicate whether
it
was incurred within the last year and, if so, describe the use of
the
loan. Refer to instruction 4 to Item 504. Finally, please
provide
the information required by instruction 5 to Item 504.
MD&A, page 51
Overview, page 51
26. We note that the fair value of the tangible assets will be
determined based on relevant information obtained in connection
with
these interests. In light of the fact that you have not obtained
third-party appraisals of the properties, please discuss the type
of
relevant information you expect to rely on.
Significant Financing Transactions, page 53
Concurrent with this Offering, page 53
27. Please disclose your anticipated leverage ratio following the
contemplated financings.
Critical Accounting Policies, page 57
Impairment of Long-Lived Assets, page 59
28. We do not understand how you have reached the conclusion that
your strategy of holding properties over the long-term directly
decreases the likelihood of incurring an impairment loss.
Impairments to long-lived assets may result from a variety of
events
or changes in circumstances that may result during the early or
later
years of holding a long-term asset. Please supplementally advise
us
how you have reached your conclusion that the likelihood of
impairment has been diminished directly by your strategy or delete
this conclusion from your disclosure.
Historical Results of Operations, page 60
29. Please revise your disclosure to provide the readers with a
better understanding of trends and uncertainties. For example,
consider explaining how current and planned future repositioning
may
impact future operating results. Also, we note that personnel
costs
increased in 2005 as compared to 2004 but you have not explained
the
reason for the increase or disclosed whether such costs are
expected
to increase in the future. Refer to SEC Release No. 33-8350 for
additional guidance.
Comparison of three months ended March 31, 2006..., page 60
Multifamily Revenue, page 61
Rent, page 61
30. Please discuss separately increases due to rollover among
rent-
controlled units. We have the same comment with regard to your
discussion of year-over-year results.
Liquidity and Capital Resources, page 66
31. On page 68, please discuss timing and amount of anticipated
expenses related to current repositioning projects, such as Warner
Center Towers, Trillium and Bishop Place.
32. Please indicate your belief as to whether you will have
sufficient cash flows to cover your liquidity needs in the next 12
months. In this regard, we note that your senior revolving credit
facility has not yet been established. Please make this clear.
33. We note that distributions to minority interests and
stockholders
have exceeded net cash provided by operating activities during the
years ended December 31, 2005, 2004 and 2003. Please discuss the
source(s) of these excess distributions.
Commitments, page 68
34. Please recast the information in this section to provide the
table required by Item 303(a)(5) of Regulation S-K. In doing so,
please consider including any purchase commitments related to
capital
expenditures associated with tenant improvements, repositioning
and
any other purchase obligations.
Inflation, page 73
35. While your disclosure does discuss how the effects of
inflation
will generally be partially offset by rent increases and expense
escalations which will be paid by your tenants, your disclosure
does
not appear to discuss if inflation has had a material impact on
your
revenues or income from continuing operations during the three
most
recent fiscal years. Please revise your disclosure to fully meet
the
requirements of Item 303 (a)(3)(iv) of Regulation S-K.
Business and Properties, page 87
36. As necessary, please revise your summary to reflect changes
made
in response to comments on this section of your prospectus.
37. Where relevant, please provide the disclosure required by Item
24
of Form S-11.
38. In the chart on page 88, please break out information related
to
rent-controlled and non-rent-controlled residential units.
History, page 89
Overview, page 89
39. Please omit summary references to the institutional funds`
return
on capital both here and on page 95 (in the discussion of your
management team). You may, however, revise management`s
discussion
and analysis to provide such information in a more balanced
context,
including a detailed explanation of how you calculated the rate of
return and the identification of any recent trends. Reconsider
the
risk factor on page 35 as necessary.
Our Competitive Strengths, page 90
Disciplined Strategy..., page 91
40. Please disclose the basis of Eastdil Secured`s conclusion,
including how many public REITs it analyzed and how it obtained
information regarding each REIT`s market penetration.
Strong Internal Growth..., page 93
41. On page 94, please discuss the percentage of your Los Angeles
County office rent subject to re-lease in upcoming periods. Also,
with respect to your residential portfolios, please provide on
page
94 data that adjusts the average asking premium for rent-
controlled
units.
Diverse Tenant Base, page 92
42. Please disclose the basis of your belief that smaller
commercial
tenants are less rent sensitive and more likely to renew.
Business and Growth Strategies, page 96
Redevelopment and Repositioning..., page 96
43. With respect to each project, please disclose the market
average
rental and occupancy rates at the time of purchase and as of March
31, 2006. With respect to the Harbor Court project, please
disclose
your average rental rate at the time of purchase.
Existing Portfolio, page 99
44. Please revise footnotes (4), (8) and (9) to disclose the key
lease terms.
45. Where relevant, please include a section describing current
development, redevelopment or repositioning projects, including
Warner Center Towers and Trillium. Refer to Item 14(d) of Form S-
11.
Management, page 131
Employment Agreements, page 137
46. Please confirm that you will discuss and file as exhibits to
this
registration statement all executive employment agreements prior
to
consummating this offering.
Certain Relationships and Related Transactions, page 141
47. Please revise to provide the information described in
Instruction
5 to Item 404(a) of Regulation S-K and Item 404(d).
Intercompany Transactions..., page 143
48. Please indicate how much each of your directors and officers
earned through their interests in DECO in 2005 and the first
quarter
of 2006.
Pre-Closing Cash Payments..., page 144
49. Please disclose briefly the purpose of these payments.
Structure and Formation of Our Company, page 145
Benefits of the Formation Transactions..., page 151
50. For assets acquired by the sellers within the last five years,
please disclose the aggregate depreciation claimed by the sellers
for
federal income tax purposes. Refer to Item 24 of Form S-11.
Shares Eligible for Future Sale, page 178
Lock-up Agreements and Other..., page 179
51. Please clarify whether continuing investors other than your
predecessors` principals may short (or similarly hedge) your stock
during the 180-day lock-up period and, if so, explain briefly how
this may be done without involving shares acquired in the
formation
transactions.
Federal Income Tax Considerations, page 181
52. As you will need to file the legal opinion prior to
effectiveness, please revise to reflect the legal opinion rather
than
an expected opinion.
Underwriting, page 201
53. We note that the underwriting obligation is subject to there
being "no material change in...the financial markets." Please
provide us with a copy of the underwriting agreement and tell us
whether this constitutes a "market out" clause. We may have
further
comment.
Unaudited Pro Forma Consolidated Financial Information
General, page F-3
54. We note in the first paragraph that you refer to the nine
California limited partnerships consolidated into DERA. However,
the
DERA financial statements only refer to eight California limited
partnerships. Please advise.
55. Present in separate columns in the pro forma balance sheet the
pro forma impact of each acquisition. Follow this with a subtotal
column presenting the balance sheet of the combined entity before
the
impact of the offering. Please then present separate adjustment
columns giving effect to the receipt and application of offering
proceeds and other financings followed by a final column reporting
the pro forma entity after the offering.
Adjustments to the Pro Forma Consolidated Balance Sheet
56. Related to note (F), please explain how you concluded that
interests in the institutional and investment funds held by
Affiliates other than directly by DERA should be accounted for a
reorganization of entities under common control. In your
response,
please tell us how you applied EITF 02-5 in determining that there
was common control.
57. Regarding Note (H), we note that you have accounted for the
acquisition of the predecessor principals` interests in DECO and
PLE
as a reorganization of entities under common control and thus
reflected the acquisition at historical cost. Please explain your
basis in GAAP for accounting for this transaction as a
reorganization
of entities under common control and tell us how you have
determined
that the principals represent a control group under EITF 02-5.
Please provide a similar analysis as it relates to the acquisition
of
the Single Asset Entities in Note (G).
Adjustments to the Pro Forma Consolidated Statements of Operations
58. We note that you have adjusted revenues and depreciation and
amortization expenses due to the purchase accounting adjustments
made
related to the acquisition of interests of non-affiliate investors
in
DERA. Please explain why the amounts of the Pro Forma adjustments
in
Note (BB) for the three month period ended March 31, 2006 don`t
represent approximately one-fourth of the amounts of the
adjustments
made to the full year ended December 31, 2005.
59. Related to note (GG), please revise your adjustment to only
include the impact of stock compensation expense that will have
recurring effect beyond the initial twelve months. The note
should
still disclose the impact of the fully-vested units.
Financial Statements
Douglas Emmett Inc. and Subsidiaries
Organization and Description of Business, page F-25
60. Please disclose the ownership and initial capitalization
transactions for Douglas Emmett, Inc. and Subsidiaries.
Douglas Emmett Realty Advisors, Inc.
Commitments and Contingencies, page F-64
61. We note that you are unable to reasonably estimate the fair
value
of the conditional asset retirement obligation related to
environmental regulations in place for the handling and disposal
of
asbestos at certain of your real estate assets because the date
that
you might incur such costs is indeterminate because you would only
incur such costs if you undergo a major renovation or demolish an
asset. With respect to providing a description of your obligation
under FIN 47, please advise us and disclose in your filing the
number
of your properties that are known to contain asbestos and are
therefore subject to conditional asset retirement obligations
related
to environmental regulations currently in place.
As appropriate, please amend your registration statement in
response to our comments. You may wish to provide us with marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendments that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings to be certain that the
filing includes all information required under the Securities Act
of
1933 and that they have provided all information investors require
for an informed decision. Since the company and its management
are
in possession of all facts relating to a company`s disclosure,
they
are responsible for the accuracy and adequacy of the disclosures
they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendments for further
review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Howard Efron at 202-551-3439 or Steve
Jacobs,
Accounting Branch Chief, at 202-551-3403 if you have questions
regarding comments on the financial statements and related
matters.
Please contact Geoffrey Ossias at 202-551-3404 or me at 202-551-
3780
with any other questions.
Sincerely,
Elaine Wolff
Branch Chief
cc: Gregg A. Noel (via facsimile)
William Kamer
Douglas Emmett, Inc.
July 14, 2006
Page 1