DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Douglas Emmett is a fully integrated, self-administered Real Estate Investment Trust (REIT) specializing in high-quality office and multifamily properties. The portfolio is concentrated in premier submarkets in Los Angeles County, California, and Honolulu, Hawaii. As of December 31, 2008, the portfolio consisted of 55 office properties (approximately 13.3 million square feet) and 9 multifamily properties (2,868 units).
Key Strategic Move: In October 2008, the company completed the initial closing of "Fund X," a new institutional fund with $300 million in equity commitments. The company contributed six recently acquired office properties and a related $365 million loan to this fund.

Key Financial Metrics

Liquidity: The company maintains a $370 million senior secured revolving credit facility, with approximately $320.7 million available as of December 31, 2008. Approximately 98% of the company's debt was effectively fixed via interest rate swaps at an overall rate of 5.14%.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.7% to $608.1 million, driven primarily by a 14.7% increase in office revenues ($537.4 million) due to acquisitions and higher rental rates. Multifamily revenues remained relatively flat, decreasing slightly by 0.5%.
• Net Loss Expansion: Net loss widened to $28.0 million from $13.0 million in 2007. This was primarily due to a 20.6% increase in interest expense ($193.7 million) resulting from increased borrowings to fund acquisitions, and a 18.3% increase in depreciation and amortization ($248.0 million).
• Debt Increase: Total indebtedness increased by approximately $592 million to $3.67 billion, reflecting financing for property acquisitions, including the six-property portfolio contributed to Fund X.
• Stock Performance: The common stock price declined significantly during 2008, closing at $13.06 on December 31, 2008, compared to a high of $24.97 in the third quarter. The stock price dropped to $8.53 by February 17, 2009.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Guidance: The filing contains forward-looking statements but does not provide specific numerical guidance for 2009. Management anticipates meeting short-term liquidity needs through operating cash flows and the revolving credit facility. Long-term needs will be met through Fund X commitments, operations, and potential debt/equity issuances.

Material Risks:

• Economic Downturn: The company highlights significant exposure to the global financial crisis, which has tightened credit markets and increased the risk of tenant defaults and vacancies.
• Refinancing Risk: With a substantial amount of debt maturing in the coming years (including a $370 million revolver maturing in October 2009), the company faces risks regarding the ability to refinance on favorable terms or at all.
• Geographic Concentration: All properties are located in Los Angeles County and Honolulu, exposing the company to local economic downturns and natural disasters (earthquakes).
• REIT Qualification: Failure to maintain REIT status would result in significant corporate taxation and reduced cash available for dividends.

Unusual Items:

• Acquisitions: In March 2008, the company acquired a 1.4 million square foot office portfolio for approximately $610 million, which was subsequently contributed to Fund X.
• Repositioning: Ongoing repositioning efforts on three office properties (representing 3.1 million square feet) continue to impact operating results with depressed rental revenue and occupancy levels during the transition.

Investor Verification Checklist

• Debt Maturity Profile: Verify the specific terms and extension options for the $370 million revolving credit facility maturing in October 2009 and the $365 million term loan maturing in 2013.
• Occupancy Trends: Monitor the 93.1% office occupancy rate and 99.1% multifamily occupancy rate for signs of deterioration due to the economic downturn.
• Lease Expirations: Review the lease expiration schedule, noting that 13.4% of office square footage expires in 2009, creating re-leasing risk in a soft market.
• Fund X Performance: Assess the performance and capitalization status of the newly formed Fund X, which holds a significant portion of the company's recent acquisitions.
• Dividend Sustainability: Confirm that cash flow from operations remains sufficient to cover the $0.75 per share annual dividend requirement to maintain REIT status.