DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Douglas Emmett is a fully integrated, self-administered Real Estate Investment Trust (REIT) focused on high-quality office and multifamily properties in Los Angeles County, California, and Honolulu, Hawaii. The company completed its Initial Public Offering (IPO) and formation transactions on October 30, 2006, acquiring its predecessor and non-predecessor entities. As of year-end, the portfolio consisted of 46 office properties (11.6 million rentable square feet) and 9 multifamily properties (2,868 units).

Key Financial Metrics

Note: 2006 financial results include the predecessor's operations for the period Jan 1 - Oct 30, 2006, and the Company's operations for Oct 31 - Dec 31, 2006. The significant increase in assets and debt reflects the IPO and formation transactions.

Material Changes vs. Prior Period

• Capital Structure Transformation: The company transitioned from a private predecessor structure to a public REIT via an IPO on October 30, 2006, raising approximately $1.52 billion in net proceeds. This was accompanied by the assumption of $2.54 billion in indebtedness and preferred equity.
• Debt Increase: Total indebtedness increased to $2.79 billion (from $2.22 billion in 2005) primarily due to a $545 million increase in the term loan facility and the assumption of debt in formation transactions.
• Revenue Fluctuation: While total revenue for the full year 2006 ($346.7M) was lower than 2005 ($393.8M), this is largely due to the timing of the IPO and the inclusion of different entities. Office rental revenue increased 5.9% year-over-year when comparing comparable periods, driven by repositioning and acquisition properties.
• One-Time Expenses: General and administrative expenses surged to $48.1 million in 2006 (compared to $6.5 million in 2005) due to one-time non-cash compensation costs ($27.7 million) and discretionary cash bonuses ($13.2 million) related to the IPO.
• Portfolio Expansion: The portfolio grew to 55 properties (46 office, 9 multifamily) from 47 properties in 2005, including the acquisition of The Villas at Royal Kunia and several single-asset entities.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Growth Strategy: Management expects internal cash flow growth through lease rollovers to higher rents, lease-up of vacant space, and fixed annual rental increases. The company is actively repositioning six office properties (approx. 4.6 million sq. ft.) to upgrade character and tenant mix.
• Dividends: The company intends to pay regular quarterly dividends based on an annual rate of $0.70 per share. A prorated dividend of $0.12 per share was paid in January 2007 for the Q4 2006 period.
• Liquidity: The company maintains a $250 million senior secured revolving credit facility (expandable to $500 million) with only $10 million outstanding as of year-end, providing significant financial flexibility.

Risks and Contingencies:

• Geographic Concentration: All properties are located in Los Angeles County and Honolulu, exposing the company to local economic downturns, natural disasters (earthquakes), and regulatory changes (rent control).
• REIT Qualification: Failure to maintain REIT status would result in corporate taxation, significantly reducing cash available for dividends.
• Interest Rate Risk: While 99.6% of debt is fixed via swaps, the company remains exposed to variable rates on its revolving credit facility.
• Repositioning Impact: Ongoing repositioning efforts may temporarily depress rental revenue and occupancy levels for affected properties.

Investor Verification Checklist

• REIT Compliance: Verify the company's ability to meet the 90% distribution requirement to maintain tax-advantaged REIT status.
• Debt Maturity Profile: Review the maturity schedule of the $2.79 billion debt, noting the $2.3 billion term loan matures in 2012.
• Repositioning Progress: Monitor the lease-up rates and rental rate increases for the six office properties currently undergoing repositioning.
• Dividend Sustainability: Assess whether operating cash flows are sufficient to support the declared $0.70 annual dividend without excessive reliance on the revolving credit facility.
• Property Tax Reassessment: Evaluate the potential impact of property tax reassessments resulting from the IPO and formation transactions on future operating expenses.