DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: Douglas Emmett is a fully integrated, self-administered, and self-managed Real Estate Investment Trust (REIT). As of September 30, 2007, the company owned a portfolio of 47 office properties and nine multifamily properties, primarily located in Los Angeles County, California, and Honolulu, Hawaii. The company qualified as a REIT for federal income tax purposes beginning with its initial taxable year ending December 31, 2006.

Key Financial Metrics

Note: Financial figures are in thousands unless otherwise noted. The 2006 comparative periods reflect the results of the company's predecessor prior to its IPO in October 2006, making direct comparisons limited.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 25.7% for the three months ended September 30, 2007, compared to the same period in 2006. This was driven by incremental rent from properties acquired in late 2006 and mid-2007, improved occupancy at repositioning properties, and higher average rental rates.
• Operating Expenses: Total operating expenses increased 15.2% for the three-month period, primarily due to a 60.2% increase in depreciation and amortization. This increase stems from the higher cost basis of properties recorded at market value during the IPO and formation transactions.
• Interest Expense: Interest expense rose 45.6% to $41.5 million for the quarter, attributed to increased debt levels ($545 million borrowed in Q4 2006 and $150 million in Q2 2007) to fund acquisitions and equity repurchases.
• Non-Operating Items: The predecessor reported a $54.0 million loss on interest rate contracts in Q3 2006 due to fair value changes. In Q3 2007, no comparable loss was recognized as new swaps effectively hedged these risks. Conversely, the predecessor reported a $11.6 million deficit distribution to minority partners in Q3 2006, which did not occur in 2007.

Outlook, Management Commentary, and Risks

Management Commentary:

• Portfolio Performance: As of September 30, 2007, the office portfolio was 95.7% leased, and the multifamily portfolio was 99.3% leased. Management expects to stabilize occupancy at repositioning properties to levels consistent with the rest of the portfolio upon completion of renovations.
• Capital Allocation: The company repurchased approximately 6.4 million share equivalents for $154.4 million during the first nine months of 2007. It also acquired a 50,000 sq. ft. Class A office building in Century City for $32 million in May 2007.
• Liquidity: The company maintains a $370 million revolving credit facility (increased in September/October 2007) with an accordion feature up to $500 million. Management anticipates cash from operations and borrowings will meet liquidity needs for the next 12 months.

Risks and Contingencies:

• Market Risk: Exposure to adverse economic developments in Southern California and Honolulu, including decreased rental rates, increased vacancy, and tenant defaults.
• Interest Rate Risk: While most debt is swapped to fixed rates, the company remains exposed to interest rate fluctuations on its revolving credit facility.
• REIT Status: Failure to maintain REIT qualification would subject the company to corporate-level income tax.
• Environmental: Asbestos has been identified in 18 properties; however, settlement dates are indeterminable, and no liability has been recorded.

Investor Verification Checklist

• Debt Maturity Profile: Verify the weighted average remaining life of debt (5.1 years) and the specific maturity dates of the $2.9 billion in secured notes to assess refinancing risks.
• Repositioning Timeline: Confirm the completion dates and expected stabilized occupancy rates for repositioning properties (Warner Center Towers, The Trillium, Bishop Place) to validate future revenue projections.
• Property Tax Accruals: Review the status of the property tax reassessment process related to the IPO, as management noted accruals are estimates subject to change.
• Dividend Coverage: Analyze the relationship between Net Loss (GAAP) and Funds From Operations (FFO) or cash flow from operations to ensure the $0.70 annualized dividend rate is sustainable.
• Subsequent Acquisitions: Note the acquisition of Cornerstone Plaza (174,000 sq. ft.) for $84 million on October 31, 2007, and its impact on leverage ratios.