Business Context and Reporting Period
Company: Douglas Emmett, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Business Overview: Douglas Emmett is a fully integrated, self-administered Real Estate Investment Trust (REIT) focused on high-quality office and multifamily properties. The portfolio is concentrated in Los Angeles County, California, and Honolulu, Hawaii. As of December 31, 2007, the company owned 48 office properties (approx. 11.8 million rentable square feet) and 9 multifamily properties (2,868 units). The office portfolio was 95.7% leased, and the multifamily portfolio was 98.7% leased.
Key Financial Metrics
| Metric | 2007 (in thousands) | 2006 (in thousands) |
|---|---|---|
| Total Revenues | $518,220 | $86,995 (3-month post-IPO) / $346,668 (Predecessor) |
| Operating Income | $141,232 | $(3,417) (3-month post-IPO) / $113,784 (Predecessor) |
| Net Loss | $(13,008) | $(20,591) (3-month post-IPO) / $(16,362) (Predecessor) |
| Net Loss Per Share (Basic/Diluted) | $(0.12) | $(0.18) |
| Total Assets | $6,189,968 | $6,200,118 |
| Total Debt (Secured Notes Payable) | $3,105,677 | $2,789,702 |
| Cash and Cash Equivalents | $5,843 | $4,536 |
| Dividends Declared Per Share | $0.70 | $0.12 |
Note: 2006 financial data is not directly comparable to 2007 due to the company's IPO and formation transactions in October 2006. The 2006 column above reflects the post-IPO period for the company and predecessor data for the full year where applicable in the source text.
Material Changes vs. Prior Period
- Revenue Growth: Total office revenue increased by $72.1 million (19.1%) to $448.7 million in 2007 compared to 2006. This was driven by incremental rent from properties acquired at the time of the IPO, two new acquisitions in 2007 (Century Park West and Cornerstone Plaza), and gains in occupancy at repositioning properties.
- Expense Reduction: General and administrative expenses decreased significantly by $26.6 million to $21.5 million in 2007. The 2006 figure was inflated by one-time non-cash compensation costs ($27.7 million) and discretionary cash bonuses ($13.2 million) related to the IPO.
- Depreciation Increase: Depreciation and amortization increased by $81.6 million (63.8%) to $209.6 million. This was primarily due to the step-up in asset basis recorded at market value during the IPO and incremental depreciation from new acquisitions.
- Debt Levels: Total indebtedness increased by approximately $320 million to $3.1 billion, driven by $150 million in incremental long-term borrowings and $170 million drawn from the revolving credit facility.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to meet short-term liquidity requirements through cash provided by operations and the senior secured revolving credit facility. Long-term liquidity needs for acquisitions and debt repayment will be met through cash flow, long-term debt, equity issuance, and property dispositions. The company is exploring raising capital for acquisitions through an institutional fund.
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).
- Interest Rate Risk: While approximately 94.1% of debt is effectively fixed via interest rate swaps, the remaining floating rate debt exposes the company to rate fluctuations. A 50 basis point change in LIBOR would impact earnings by approximately $900,000 annually.
- REIT Qualification: Failure to qualify as a REIT would result in significant corporate taxation and reduced cash available for dividends.
- Insurance Gaps: The company carries substantial deductibles and self-insurance portions for earthquakes, terrorism, and floods. Coverage may not be sufficient to fully cover losses from such events.
- Lease Expirations: Approximately 11.4% of office square footage leases expire in 2008, creating re-leasing risk.
Unusual Items
The 2006 financial results included significant one-time costs related to the IPO (compensation and bonuses) and a net gain of $6.8 million on interest rate contracts which did not recur in 2007. The company also repurchased approximately 8.1 million share equivalents in 2007 for $194.4 million.
Investor Verification Checklist
- REIT Status Compliance: Verify the company's ability to meet the 90% distribution requirement to maintain tax-advantaged REIT status.
- Debt Maturity Profile: Review the schedule of debt maturities, noting that $2.69 billion is due in 2012, requiring refinancing.
- Lease Roll Rates: Monitor the success of re-leasing the 11.4% of office space expiring in 2008 at rates comparable to or higher than current rents.
- Repositioning Progress: Assess the stabilization of occupancy and rental rates for the three major office properties currently undergoing repositioning (Warner Center Towers, The Trillium, Bishop Place).
- Interest Rate Hedging: Confirm the effectiveness of interest rate swaps in mitigating exposure on the $180.5 million of unhedged floating-rate debt.