DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: A fully integrated, self-administered Real Estate Investment Trust (REIT) owning and managing office and multifamily properties primarily in Los Angeles County, California, and Honolulu, Hawaii. As of June 30, 2008, the portfolio included 55 office properties and nine multifamily properties.

Key Financial Metrics

Dividends: Declared $0.375 per share for the six months ended June 30, 2008 (annualized rate of $0.75).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 11.5% year-over-year to $284.2 million, driven by a 13.1% increase in office revenues ($249.4 million) due to higher rental rates and acquisitions. Multifamily revenues remained relatively flat.
• Net Loss Expansion: Net loss widened to $11.9 million from $4.5 million in the prior year period. This was primarily due to a 21.4% increase in interest expense ($93.0 million) resulting from significant new borrowings to fund acquisitions.
• Acquisition Activity: Capital expenditures and property acquisitions surged to $642.8 million, compared to $58.4 million in the prior year. Key transactions included a $610 million acquisition of a 1.4 million sq. ft. office portfolio in March 2008 and an $18 million Honolulu office building acquisition in February 2008.
• Debt Levels: Total secured debt increased by approximately $629 million to $3.73 billion. The company borrowed an additional $738 million in the first six months of 2008, including a $380 million bridge loan and a $340 million term loan.

Outlook, Risks, and Management Commentary

• Liquidity and Credit Markets: Management notes that recent economic events have led to tighter and more uncertain credit markets. While the company has successfully financed acquisitions in 2008, disruptions could impact future credit availability or rates.
• Debt Maturities: Approximately $454 million in principal payments are due by the end of 2009, consisting of a $380 million bridge loan and $74 million under the revolving credit facility. Management anticipates repaying the bridge loan via refinancing, available cash, or credit facility borrowings.
• Interest Rate Risk: As of June 30, 2008, 87% of the company's debt was effectively fixed at an overall rate of 5.17% through interest rate swaps and caps.
• Future Capital Needs: The company does not expect to have sufficient funds on hand to cover all long-term cash requirements for acquisitions and debt repayment. Future needs will be met through operations, debt/equity issuance, and property dispositions.
• Risk Factors: Key risks include adverse economic developments in Southern California and Honolulu, increased vacancy rates, tenant defaults, and the potential failure to maintain REIT tax status.

Investor Verification Checklist

• Bridge Loan Refinancing: Verify the company's ability to refinance the $380 million bridge loan maturing in early 2009 given current credit market conditions.
• Acquisition Integration: Assess the performance and occupancy rates of the $610 million office portfolio acquired in March 2008.
• Interest Rate Exposure: Confirm the effectiveness of interest rate hedges and the impact of potential rate hikes on the remaining 13% of variable-rate debt.
• Dividend Coverage: Monitor cash flow from operations relative to the $0.75 annualized dividend rate to ensure sustainability amidst rising interest expenses.
• Market Concentration: Evaluate the impact of local economic downturns in Los Angeles and Honolulu on the concentrated property portfolio.