Douglas Emmett, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. Douglas Emmett is a REIT focused on office and multifamily properties in Los Angeles County and Honolulu. Its consolidated portfolio included 17.6 million square feet of office space and 4,528 apartments; the total portfolio, including its unconsolidated Fund, included 18.0 million office square feet.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $245.0 million | $252.4 million | Down 2.9% |
| Net income attributable to common stockholders | $8.9 million | $18.4 million | Down 51.5% |
| Basic and diluted EPS | $0.05 | $0.10 | Down $0.05 |
| FFO, non-GAAP | $90.1 million | $98.6 million | Down 8.7% |
| Same Property NOI, non-GAAP | $148.9 million | $148.5 million | Up 0.3% |
| Cash provided by operating activities | $139.0 million | $145.5 million | Down 4.4% |
Revenue pressure primarily reflected lower office occupancy and tenant recoveries, and reduced multifamily revenue following the removal of Barrington Plaza from service and the absence of prior-year fire insurance proceeds. Higher parking revenue and new multifamily units partly offset the declines. Lower property taxes, utilities, and repairs helped reduce property expenses; interest expense rose $9.8 million, or 21.6%, to $55.3 million, primarily due to higher rates on floating-rate debt and higher debt.
Balance sheet, debt and liquidity
- At March 31, 2024, cash and cash equivalents were $556.7 million. Total assets were $9.64 billion and total equity was $3.82 billion.
- Consolidated secured debt principal was $5.57 billion, compared with $5.57 billion at year-end; carrying value, net of loan costs and premium, was $5.54 billion. The company reported $3.83 billion of fixed or swap-fixed debt, with a 2.66% weighted-average annual rate and a 3.8-year weighted-average remaining life, including extension options.
- At quarter-end, 69% of consolidated borrowings were fixed or swap-fixed, 15% were capped, and 16% were floating. A 100-basis-point increase in benchmark rates would raise annual interest expense on unhedged floating debt by an estimated $9.3 million; capped-rate debt could add up to $14.5 million of annual interest expense.
- The earliest term-loan maturity was a $400 million consolidated JV loan due December 2024. Some extension options require minimum financial thresholds. Management expects short-term liquidity needs, excluding acquisitions and refinancings, to be met from cash on hand and operating cash flows.
- Q1 investing cash use was $62.4 million, including $48.1 million for real estate improvements, $9.7 million for development, and $5.2 million to acquire an additional Fund interest. Financing cash use was $43.0 million. The declared quarterly dividend was $0.19 per common share.
Operating trends and material developments
- Total-portfolio office occupancy was 80.9%, compared with 82.6% average occupancy in Q1 2023; leased rate was 82.6%. Multifamily occupancy was 96.9%, versus 96.8% average occupancy in Q1 2023.
- Same-property office NOI declined 0.1%; multifamily NOI increased 2.5%. Total same-property NOI rose 0.3%, as lower property costs largely offset weaker office revenue.
- Office rent on comparable new and renewed leases was reported 1.9% higher on a cash basis and 23.8% higher on a straight-line basis. The filing cautions that results were affected by a large tenant renewal and that period-to-period lease averages vary with the spaces and terms involved.
- Douglas Emmett acquired an additional 20.2% interest in Partnership X in February, bringing its ownership to 74.0%; the Fund remained unconsolidated. The Fund’s Q1 revenue and operating income declined year over year, and it recorded a net loss.
- The Residences at Bishop Place conversion in Honolulu had delivered 91% of planned apartments, with 99% of delivered units leased. Conversion of the final office-occupied floors will proceed as tenants vacate.
- Barrington Plaza was removed from the rental market in 2023. Reconstruction is expected to take several years and cost several hundred million dollars. A construction-completion guarantee was signed in January 2024; the company says estimated loss risk is low. Litigation with insurers seeks recovery of certain reconstruction costs.
Outlook, risks and contingencies
The filing provides no specific earnings or FFO guidance. Management expects long-term funding needs to be met through secured debt, equity or OP Unit issuance, property dispositions, and joint-venture transactions. It states that approximately 45% of the total office portfolio was unencumbered. Development and other remaining contractual commitments were approximately $19.9 million and $11.8 million, respectively, at quarter-end.
Principal risks include office demand and remote-work trends, lower rents or occupancy, tenant defaults, higher interest rates and operating costs, refinancing and capital-raising needs, and economic, regulatory, and natural-disaster exposure in Los Angeles and Honolulu. The company also disclosed guarantees related to a $175 million JV loan, Barrington Plaza construction completion, and the unconsolidated Fund’s loan and swaps; management estimated the risk of loss on these guarantees to be low. No material change to the risk factors in the 2023 Form 10-K was reported.
Investor verification points
- Track office leasing, occupancy, tenant recoveries, and the durability of reported rent increases, including the effect of the large renewal.
- Review the December 2024 JV maturity and 2025 debt maturities, extension conditions, refinancing plans, and interest-rate hedge expirations.
- Monitor Barrington Plaza reconstruction costs, tenant-vacating schedule, construction guarantee, and insurance litigation or recoveries.
- Assess operating cash flow after capital spending and dividends, and the funding plan for long-term debt, development, and other commitments.
- Verify the financial and accounting effects of the increased Partnership X ownership, given that the Fund remains unconsolidated.