Business Context and Reporting Period
Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended March 31, 2010
Business Overview: Douglas Emmett is a fully integrated, self-administered Real Estate Investment Trust (REIT) focused on owning, managing, and developing office and multifamily properties. As of March 31, 2010, the consolidated portfolio consisted of 49 office properties and 9 multifamily properties, primarily located in Los Angeles County, California, and Honolulu, Hawaii. The company also manages six additional office properties owned by an unconsolidated fund (Fund X).
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $137.8 million | $151.4 million |
| Operating Income | $35.9 million | $39.2 million |
| Net Loss | $(10.5) million | $(2.3) million |
| Net Loss Attributable to Common Stockholders | $(8.3) million | $(1.9) million |
| Diluted EPS | $(0.07) | $(0.02) |
| Net Cash Provided by Operating Activities | $48.7 million | $55.7 million |
| Total Assets | $6.02 billion | $6.06 billion |
| Total Liabilities | $3.73 billion | $3.77 billion |
| Secured Notes Payable | $3.27 billion | $3.27 billion |
| Cash and Cash Equivalents | $94.3 million | $72.7 million |
| Dividends Declared Per Share | $0.10 | $0.10 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $13.6 million (9.0%) year-over-year. This was primarily driven by the deconsolidation of six office properties contributed to Fund X in February 2009, which removed approximately $7.6 million in rental revenue, $0.7 million in tenant recoveries, and $1.2 million in parking income from the consolidated results. Remaining portfolio revenue also declined slightly due to lower accretion of below-market rents and lower occupancy.
- Operating Expenses: Total operating expenses decreased by $10.4 million (9.3%), largely due to the exclusion of expenses related to the deconsolidated Fund X properties ($3.2 million in property expenses and $4.9 million in depreciation/amortization).
- Net Loss Increase: The net loss attributable to common stockholders widened from $(1.9) million to $(8.3) million. This was influenced by the absence of a $5.6 million gain on the disposition of an interest in Fund X recorded in Q1 2009 and a shift from a $2.8 million gain to a $1.5 million loss from unconsolidated real estate funds.
- Interest Expense: Interest expense decreased by $4.1 million (8.3%) to $45.1 million, reflecting lower average debt levels following the deconsolidation of Fund X debt.
Outlook, Risks, and Management Commentary
- Liquidity and Capital Resources: The company maintains a $350 million secured revolving credit facility with no borrowings outstanding as of March 31, 2010. Management anticipates that cash provided by operations and the credit facility will be sufficient to meet liquidity requirements for the next 12 months. Total indebtedness was $3.3 billion, representing 58.9% of total market capitalization.
- Interest Rate Risk: Approximately 99% of outstanding debt ($3.24 billion) was hedged via interest rate swaps to fixed rates. However, significant swap maturities are approaching: $1.11 billion matures August 1, 2010, and $545 million matures December 1, 2010. If not renewed, a 50 basis point change in LIBOR could impact earnings by an additional $2.6 million annually.
- Dividends: The company declared a quarterly dividend of $0.10 per share, maintaining an annualized rate of $0.40 per share.
- Risk Factors: Key risks include adverse economic conditions in Southern California and Honolulu, potential failure to maintain REIT status, environmental liabilities (specifically asbestos removal obligations at 19 properties), and the inability to extend the revolving credit facility or refinance maturing debt on favorable terms.
- Unusual Items: The Q1 2009 results included a one-time gain of $5.6 million from the disposition of an interest in Fund X, which is not present in the current period.
Investor Verification Checklist
- Debt Maturity Wall: Verify the company's strategy for refinancing or extending the $1.655 billion in interest rate swaps maturing in August and December 2010.
- Credit Facility Extension: Confirm the status of the $350 million revolving credit facility, which matures in October 2010, and the likelihood of securing the one-year extension option.
- Occupancy Trends: Monitor occupancy rates and rental rate trends in the Los Angeles and Honolulu submarkets, as revenue declines were partially attributed to lower occupancy in the remaining portfolio.
- Environmental Liabilities: Review the status of the 19 properties with identified asbestos and the potential future costs associated with asset retirement obligations.
- Fund X Performance: Assess the operating performance of the unconsolidated Fund X, as the company's equity interest in this fund resulted in a net loss of $1.5 million for the quarter.