DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: Douglas Emmett is a fully integrated, self-administered, and self-managed Real Estate Investment Trust (REIT). As of March 31, 2007, the company owned a portfolio of 46 office properties and 9 multifamily properties 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: Q1 2006 figures represent the "Predecessor" entity prior to the company's IPO and formation in October 2006. Comparisons are limited due to structural and accounting differences.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $24.9 million (24.3%) to $127.6 million. Office revenues rose 22.7% to $110.6 million, and multifamily revenues rose 35.9% to $17.0 million. Increases were driven by acquisitions in late 2006 and improved occupancy at repositioning properties.
• Net Loss: The company reported a net loss of $3.3 million for Q1 2007, compared to net income of $12.5 million in Q1 2006. This shift is primarily due to the absence of a $34.9 million gain on interest rate contracts recorded in 2006 and increased interest expense.
• Operating Expenses: Total operating expenses increased to $94.1 million from $61.2 million. Depreciation and amortization nearly doubled to $51.1 million due to the higher cost basis of assets recorded at market value during the IPO and new acquisitions.
• Interest Expense: Interest expense increased 36.5% to $38.3 million, driven by higher average outstanding debt ($545 million borrowed in Q4 2006) and higher effective interest rates.
• Capital Structure: The company repaid $10 million on its revolving credit facility, reducing total secured notes payable slightly. As of March 31, 2007, the revolving credit facility had no outstanding balance.

Guidance, Outlook, and Risks

• Outlook: Management expects to achieve 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 properties (e.g., Warner Center Towers, Trillium, Bishop Place) and expects to stabilize occupancy at these sites.
• Liquidity: The company maintains a $250 million senior secured revolving credit facility (expandable to $500 million) with no outstanding balance as of March 31, 2007. Management anticipates cash from operations and the credit facility will meet liquidity requirements for the next 12 months.
• Dividends: The company intends to pay an annual dividend of $0.70 per share. A quarterly dividend of $0.175 per share was paid on April 16, 2007.
• Risks: Key risks include adverse economic developments in Southern California and Honolulu, increased vacancy rates, interest rate fluctuations, and the ability to maintain REIT status. The company also faces environmental uncertainties regarding asbestos removal at 18 properties, though settlement dates are currently indeterminable.

Investor Verification Checklist

• Comparability: Verify that Q1 2006 data represents the "Predecessor" entity and is not directly comparable to the post-IPO Q1 2007 results due to accounting basis changes (fair value vs. historical cost) and asset scope.
• Repositioning Impact: Assess the timeline and cost of repositioning properties (38.3% of the office portfolio) and their impact on near-term occupancy and cash flow.
• Debt Maturity: Review the maturity schedule of the $2.75 billion in secured notes, noting significant principal payments due in 2011 and thereafter.
• Interest Rate Exposure: Confirm the effectiveness of the $2.75 billion in interest rate swaps in hedging against variable rate debt fluctuations.
• Dividend Coverage: Monitor cash flow from operations against the $0.70 annual dividend commitment to ensure sustainability.