Douglas Emmett Inc annual report, FY2023

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Douglas Emmett, Inc. — FY2023 Form 10-K

Business context and reporting period. This annual report covers the fiscal year ended December 31, 2023; it is not a standalone fourth-quarter report. Douglas Emmett is a REIT focused on office and multifamily properties in Los Angeles County and Honolulu. At year-end, its consolidated portfolio included 68 office properties with 17.6 million rentable square feet and 14 multifamily properties with 4,576 apartments. Portfolio operating statistics also include two office properties held by its unconsolidated Fund.

Financial and operating performance

  • Revenue: $1.020 billion, up 2.7% from $993.7 million in 2022. Office revenue was $829.9 million, up 0.7%; multifamily revenue was $190.5 million, up 12.7%.
  • Profit: Net loss attributable to common stockholders was $42.7 million, or $0.26 per diluted share, versus net income of $97.1 million, or $0.55 per share, in 2022. The 2023 result included an accelerated $82.1 million depreciation charge related to Barrington Plaza and a $36.2 million impairment of the unconsolidated Fund investment.
  • Property operations: Same Property NOI was $608.6 million, down 1.0%. Same Property office NOI fell 1.5% to $526.2 million; multifamily NOI rose 2.9% to $82.4 million. Total segment profit was $658.9 million, compared with $659.8 million.
  • FFO: $377.3 million, down 10.1% from $419.7 million. Management attributed the decline chiefly to higher interest expense and lower office NOI, partly offset by higher interest income and multifamily NOI. FFO is a non-GAAP measure and is not a measure of liquidity or cash available for dividends.
  • Cash flow and liquidity: Operating cash flow was $427.0 million, down 14.1%; investing cash outflow was $233.6 million; financing cash inflow was $60.9 million. Cash and cash equivalents were $523.1 million at year-end. Management expected short-term needs, excluding acquisitions and refinancings, to be met with cash on hand and operating cash flow.
  • Debt and interest-rate exposure: Consolidated debt principal was $5.57 billion ($5.54 billion net carrying amount). Approximately 69% of consolidated borrowings was fixed or swap-fixed, 15% capped, and 16% floating. Unhedged floating-rate interest expense would rise about $9.3 million annually for each 100-basis-point benchmark-rate increase; capped-rate debt had up to $14.3 million of annual interest-cost exposure. The earliest term-loan maturity was December 2024; $400.9 million of principal was scheduled for 2024, including extension options where applicable.
  • Dividends and shares: 2023 dividends were $0.76 per share, down from $1.03 in 2022. The company repurchased 9.1 million shares for $109.1 million at an average $12.03 per share. Year-end closing share price was $14.50.

Material changes versus 2022

  • Office occupancy weakened: year-end total-portfolio occupancy was 81.0%, versus 83.7% in 2022; leased rate was 83.3%. Multifamily occupancy was 96.7%, versus 98.1%.
  • Office rental revenue and tenant recoveries declined 1.3%, reflecting lower occupancy and collections, lower below-market lease accretion, and the Bishop Place office-to-residential conversion. Higher office operating expenses also weighed on NOI.
  • Interest expense increased 39.5% to $209.5 million, primarily due to higher rates on floating-rate debt, increased debt, and less capitalized development interest.
  • Operating cash flow declined $69.9 million. Cash increased from $268.8 million to $523.1 million, helped by net borrowing and lower dividends, despite share repurchases.
  • The company acquired an additional 20.2% interest in its unconsolidated Fund on December 31, 2023, raising ownership to 53.8%; the Fund remained unconsolidated. A $36.2 million impairment was recorded on the investment.

Outlook, risks and unusual items

  • Outlook: The filing provides no numeric earnings or FFO guidance. Management expects to fund long-term needs through secured non-recourse debt, equity or OP Unit issuance, property dispositions, and joint-venture transactions.
  • Leasing and demand: 16.7% of total office square footage was available for lease and 15.9% was scheduled to expire in 2024. Cash rent on comparable new and renewed office leases was 7.6% below expiring rent, although straight-line rent was 4.4% higher. Remote work, tenant demand, renewals and leasing costs remain important risks.
  • Barrington Plaza: Removed from the rental market in 2023, the property is expected to require reconstruction over several years at a cost of several hundred million dollars. The company recorded $82.1 million of accelerated depreciation, deposited $13.3 million with the lender, and signed a construction-completion guarantee in January 2024. It is litigating with insurers over recovery of reconstruction-related costs.
  • Development: The Bishop Place conversion had delivered 90% of planned apartments by year-end, with 97% of delivered units leased; completion is phased through 2025 and remaining spending timing is uncertain. Remaining contractual commitments were approximately $17.9 million for development projects and $12.7 million for repositioning, capital projects and tenant improvements. These commitments do not represent the full expected Barrington Plaza reconstruction cost.
  • Other risks and contingencies: The portfolio is geographically concentrated in Los Angeles County and Honolulu, and exposed to office-market weakness, inflation, high rates, refinancing risk, natural disasters, insurance availability and costs, rent regulation, and tenant credit risk. The company also guaranteed the portion of a $175 million consolidated JV loan principal needed to meet a minimum debt-yield requirement; management estimated loss risk as low. No other non-routine legal proceeding was identified as reasonably expected to have a material adverse effect.
  • Controls and audit: Management and the independent auditor reported effective internal control over financial reporting. The financial statement audit opinion was unqualified; impairment assessment of real estate was identified as a critical audit matter.

Important facts for investors to verify

  1. Debt maturities, extension conditions, refinancing plans, and actual sensitivity to rates as hedges and caps expire.
  2. Office leasing progress, 2024 expirations, occupancy, collections, and renewal economics in the company’s concentrated markets.
  3. Updated Barrington Plaza reconstruction budget and schedule, lender requirements and guarantee exposure, and the status and potential recovery from insurance litigation.
  4. The valuation assumptions and performance of the unconsolidated Fund following the impairment and increased ownership stake.
  5. Cash available for dividends after debt service, capital spending and REIT distribution requirements, particularly given the lower 2023 dividend.