Douglas Emmett, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; balance-sheet amounts are as of March 31, 2011. Financial amounts below are in millions of dollars unless stated otherwise. The company is a REIT focused on office and multifamily properties in Los Angeles County and Honolulu.
Business context
At quarter-end, Douglas Emmett owned 50 consolidated office properties and nine multifamily properties; its managed funds owned seven additional office properties. Consolidated office occupancy was 89.8% (total office portfolio, including funds: 88.7%) and multifamily occupancy was 99.6%. No property acquisitions or dispositions occurred in the quarter. A managed fund acquired a Beverly Hills office building after quarter-end for $42 million.
Financial results and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $142.6 | $137.8 | +3.5% |
| Operating income | $32.6 | $35.9 | −9.3% |
| Operating margin | 22.9% | 26.1% | −3.2 percentage points |
| Net loss attributable to common stockholders | $0.35 | $8.29 | Loss narrowed |
| Net loss per common share, basic and diluted | $0.00 | $0.07 | Loss narrowed |
| Cash provided by operating activities | $61.2 | $48.7 | +$12.5 |
Office revenue rose 3.8% to $125.4 million, while multifamily revenue rose 1.1% to $17.2 million. Total segment profit was nearly flat at $97.2 million. Office and general and administrative expenses increased, contributing to lower operating income. Interest expense fell 29.8% to $31.7 million, largely due to expired swaps and debt-related accounting effects; this drove the substantial improvement in net loss. Dividends declared were $0.10 per common share, unchanged year over year.
At March 31, cash and cash equivalents were $308.5 million, versus $272.4 million at year-end 2010. Net cash used in investing activities was $11.1 million, and net cash used in financing activities was $14.0 million. Total assets were $6.27 billion, total liabilities $3.96 billion, and total equity $2.32 billion.
Debt, liquidity, and financing
Secured loan principal was $3.665 billion (balance-sheet carrying amount, including loan premium: $3.670 billion). About 68% of debt, or $2.495 billion, was effectively fixed at a weighted average 4.54% rate through swaps or other arrangements. Weighted-average remaining debt life was 4.6 years. The company reported no loans maturing within 12 months; approximately $1.4 billion remained scheduled to mature on August 31, 2012.
Q1 financing included a $350 million secured loan, largely used to repay a $319.6 million loan due in 2012, and a $510 million loan used to repay a $531.8 million loan also due in 2012. The $510 million borrowing was effectively fixed at 4.12% through April 2016. Management said it intended to refinance the remaining 2012 maturities during 2011 and expected cash on hand and operating cash flows to meet operating liquidity needs for at least 12 months, excluding acquisitions and debt refinancings. Long-term needs may exceed available funds and may require borrowings, securities issuance, dispositions, or joint ventures.
Outlook, risks, and unusual items
The filing provides no numerical earnings or revenue guidance. Management cited weaker occupancy and average rental rates across the remainder of the portfolio, partly offset by contributions from a property acquired in 2010. It also reported higher utility and property-tax expenses and increased legal accruals and equity compensation.
Risks include adverse real estate and economic conditions in Southern California and Honolulu, lower rents or occupancy, tenant defaults or lease terminations, higher interest rates and operating costs, refinancing and capital-raising needs, REIT qualification, environmental matters, and natural disasters. A 50-basis-point LIBOR change was estimated to affect annual earnings by approximately $4.2 million, based on quarter-end debt and hedges.
Derivative liabilities were $76.7 million and derivative assets $52.8 million at quarter-end; management estimated $65.6 million would be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months. The company had $47.2 million of remaining capital-contribution commitments to its funds. It also remained contingently liable for up to $20.5 million under a fund-related swap agreement, although the fund had performed its obligations. Asbestos was identified at 20 properties; the related removal obligations could not be reasonably estimated because settlement dates were indeterminable. The company said ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Investor facts to verify
- Progress on refinancing the approximately $1.4 billion scheduled to mature in August 2012, including the timing and terms of any additional financing.
- Trends in office occupancy, rental rates, tenant recoveries, and operating expenses, which affected same-portfolio performance.
- Interest-rate exposure, swap maturities, and the potential earnings impact of the $65.6 million expected reclassification to interest expense.
- Cash needs and funding for the $47.2 million fund commitment, capital expenditures, dividends, and longer-term debt repayment.
- Any developments affecting the contingent swap guarantee or the unquantified asbestos-removal obligations.