Douglas Emmett Inc. 2009 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Douglas Emmett, Inc.
Filing Type: Form 10-K
Period Ended: December 31, 2009
Business Overview: Douglas Emmett is a self-administered and self-managed 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 year-end 2009, the consolidated portfolio included 49 office properties (approx. 11.9 million sq. ft.) and 9 multifamily properties (2,868 units). The company also manages an unconsolidated fund, Fund X, which holds 6 additional office properties.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Total Revenues | $571.1 million | $608.1 million |
| Operating Income | $148.4 million | $154.2 million |
| Net Loss (Attributable to Common Stockholders) | $(27.1) million | $(28.0) million |
| Loss Per Share (Basic & Diluted) | $(0.22) | $(0.23) |
| Dividends Declared Per Share | $0.40 | $0.75 |
| Total Assets | $6.06 billion | $6.76 billion |
| Total Indebtedness | $3.26 billion | $3.69 billion |
| Cash and Cash Equivalents | $72.7 million | $8.7 million |
| Office Portfolio Occupancy (Total) | 90.3% | N/A (Consolidated 91.7%) |
| Multifamily Portfolio Occupancy | 99.0% | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 6.1% to $571.1 million. This was primarily driven by the deconsolidation of six office properties contributed to Fund X in February 2009, which removed approximately $29.5 million in rental revenue and $4.4 million in parking income from the consolidated results.
- Debt Reduction: Total indebtedness decreased by approximately $414 million to $3.26 billion. This reduction was largely due to the transfer of a $365 million term loan to Fund X and the repayment of all outstanding borrowings under the revolving credit facility.
- Dividend Reduction: The annual dividend rate was reduced from $0.75 per share in 2008 to $0.40 per share in 2009 to align with cash flow expectations and maintain REIT qualification.
- Operating Expenses: Depreciation and amortization decreased by $21.4 million (8.6%) due to the deconsolidation of the Fund X properties. General and administrative expenses increased slightly by $1.2 million.
- Gain on Disposition: The company recognized a $5.6 million gain in Q1 2009 related to the disposition of the interest in Fund X not retained.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the impact of the global financial crisis on credit markets and tenant businesses. While no new properties were acquired in 2009, the company focused on maintaining high occupancy levels and managing costs. The company expects to meet short-term liquidity needs through operating cash flows and its $350 million revolving credit facility (which had zero drawn balance at year-end).
Risks and Contingencies:
- Geographic Concentration: All properties are located in Los Angeles County and Honolulu, exposing the company to local economic downturns and natural disasters (e.g., earthquakes).
- Debt and Refinancing: The company carries substantial indebtedness. A significant portion of interest rate swaps maturing in 2010 ($1.11 billion and $545 million) creates refinancing risk. The revolving credit facility matures in October 2010 with an extension option that may not be available or may have reduced capacity.
- REIT Qualification: Failure to qualify as a REIT would result in significant corporate taxation. The company must distribute at least 90% of taxable income to maintain status.
- Lease Expirations: Approximately 13.3% of the total office portfolio square footage is scheduled to expire in 2010, creating re-leasing risk in a competitive market.
Key Facts for Investor Verification
- Debt Maturity Profile: Verify the ability to refinance or extend the $350 million revolving credit facility maturing in October 2010 and the significant interest rate swaps maturing in August and December 2010.
- Fund X Performance: Review the equity method accounting results for the unconsolidated Fund X investment ($97 million carrying value) and the remaining $24 million capital commitment.
- Occupancy Trends: Monitor the re-leasing of the 13.3% of office space expiring in 2010 to ensure rental rates do not decline significantly (lease roll-down).
- Dividend Sustainability: Assess whether the reduced dividend of $0.40 per share is sustainable given the net loss and the requirement to distribute 90% of taxable income.
- Environmental Liabilities: Note the presence of asbestos in 19 properties and the potential for future remediation costs, though no specific liability has been accrued due to indeterminable settlement dates.