Douglas Emmett, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; comparative results are for 2009. Amounts are U.S. dollars. The filing was signed February 25, 2011.
Business context
Douglas Emmett is a REIT focused on Class A office and multifamily properties in Los Angeles County and Honolulu. At year-end, its consolidated portfolio comprised 50 office properties with approximately 12.8 million square feet and nine multifamily properties with 2,868 units. Including properties held by unconsolidated funds, its office portfolio comprised 57 properties and approximately 14.6 million square feet.
Key financial metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $570.8 million | $571.1 million |
| Operating income | $140.0 million | $148.4 million |
| Net loss attributable to common stockholders | $26.4 million; $0.22 per share | $27.1 million; $0.22 per share |
| Cash from operating activities | $188.9 million | $180.3 million |
| Cash and cash equivalents at year-end | $272.4 million | $72.7 million |
| Consolidated debt principal at year-end | $3.658 billion | $3.258 billion |
| Dividends declared per common share | $0.40 | $0.40 |
Office segment profit was $343.5 million, down from $348.5 million; multifamily segment profit was $49.8 million, down from $50.4 million. These are supplemental segment measures, not GAAP operating income or cash flow. The filing does not report a single consolidated operating margin or a conventional liquidity ratio.
Material changes versus 2009
- Revenue was essentially unchanged. Office rental revenue fell 1.7%, while office tenant recoveries rose 19.1%; multifamily revenue declined slightly.
- Operating income fell $8.3 million, while the common-stockholder net loss narrowed by $0.6 million. Lower interest expense—down $17.9 million—partly offset higher office and general and administrative expenses.
- Operating cash flow increased $8.5 million. Investing cash use rose to $304.6 million, primarily reflecting the Bishop Square acquisition; financing activities provided $315.4 million, principally reflecting new borrowing.
- Cash increased substantially, but debt principal also rose. Year-end debt was approximately 58.5% of reported market capitalization.
- Comparisons are affected by the June 2010 acquisition of Bishop Square for a contract price of $232 million and the 2009 deconsolidation of six properties contributed to an unconsolidated fund.
Outlook, risks, and unusual items
- Management expected cash on hand and operating cash flow, excluding acquisitions and refinancing, to cover operating liquidity requirements for at least 12 months. It did not expect available funds alone to meet all long-term needs; possible sources included borrowing, securities issuance, asset sales, and joint ventures.
- A major refinancing concentration remained: $2.30 billion of term loans matured August 31, 2012. The company said it was seeking refinancing during the first half of 2011. After year-end, it obtained a $350 million loan and used $319.6 million to repay part of that 2012-maturity debt.
- At year-end, 54% of debt was effectively fixed at an overall 4.65% rate. Management estimated that a 50-basis-point LIBOR change would affect annual earnings by approximately $8.5 million, based on year-end variable-rate debt and hedges.
- Office occupancy was 89.6% for the consolidated portfolio and 88.6% including fund properties; multifamily occupancy was 99.2%. For the total office portfolio, 11.6% of square footage was scheduled to expire in 2011 and 11.4% was available for lease.
- The company cited concentrated exposure to Southern California and Honolulu, tenant defaults and vacancies, rent and occupancy pressure, refinancing and interest-rate risk, rent regulation, earthquakes and other uninsured or underinsured losses, environmental liabilities, and maintaining REIT qualification.
- Unusual items included $4.4 million of higher general and administrative expense, primarily from multi-year equity grants, and an approximately $12 million cash payment to terminate swaps in November 2010. No property dispositions or qualifying repositioning projects occurred in 2010. Management reported no impairment charges in 2010.
- The company reported no legal proceedings expected to have a material adverse effect. Management and the auditor concluded internal control over financial reporting was effective; the financial statement audit opinion was unqualified.
Important facts for investors to verify
- Refinancing progress and final repayment or extension terms for the remaining 2012-maturity debt.
- Leasing, renewal, and tenant-improvement costs for 2011 expirations and currently available office space.
- Whether higher cash balances and operating cash flow are sustainable, considering acquisition spending, dividends, and debt service.
- Actual interest-rate exposure and hedge costs, including the expected reclassification of accumulated hedge losses to interest expense.
- Fund commitments, contingent swap-related exposure, property-level debt, and the effects of rent control and disaster-insurance limitations.