DEI

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
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 March 31, 2009, the portfolio consisted of 49 office properties and nine multifamily properties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 8.3% to $151.4 million, driven by a 10.3% increase in office revenues ($134.1 million) due to incremental rent from seven properties acquired in 2008. Multifamily revenues declined 5.1% to $17.3 million due to lower amortization of below-market leases.
• Expense Increases: Operating expenses rose to $112.3 million (from $102.3 million), primarily due to incremental costs from new acquisitions and higher property taxes. Interest expense increased 19.5% to $49.2 million due to higher borrowings and non-cash amortization of interest rate swaps.
• Deconsolidation of Fund X: In February 2009, the company contributed six Class A office properties to an unconsolidated real estate fund (Fund X). This resulted in a recognized gain of $5.6 million on the disposition of the interest not retained and a reduction in consolidated assets and debt.
• Liquidity Improvement: Cash and cash equivalents increased significantly from $8.7 million to $29.8 million, aided by a $5.6 million gain on Fund X disposition and improved operating cash flows.

Guidance, Outlook, and Risks

• Dividend Reduction: The quarterly dividend was reduced from $0.1875 to $0.10 per share, reflecting an annualized rate of $0.40 compared to $0.75 in the prior year.
• Capital Resources: The company maintains a $370 million secured revolving credit facility with no borrowings outstanding as of March 31, 2009. Management anticipates cash from operations and the credit facility will meet liquidity needs for the next 12 months.
• Debt Hedging: Approximately 99% of outstanding debt ($3.2 billion) is hedged via interest rate swaps, effectively fixing the weighted average rate at 5.10%.
• Risk Factors: Key risks include adverse economic conditions in Southern California and Honolulu, potential tenant defaults, increased vacancy rates, and the impact of the economic downturn on long-term capital availability. The company notes that forward-looking statements are subject to uncertainties regarding market conditions and credit availability.

Investor Verification Checklist

• Dividend Sustainability: Verify the company's ability to maintain the reduced dividend payout given the net loss position and high interest expense.
• Debt Maturity Profile: Review the schedule of debt maturities, noting that while 99% is hedged, the revolving credit facility matures in October 2009 (with extension options).
• Fund X Performance: Monitor the performance of the unconsolidated Fund X, in which the company holds a $100.8 million equity interest, as it represents a significant portion of the portfolio's future growth.
• Occupancy and Rental Rates: Assess current occupancy levels and rental rate trends in the Los Angeles and Honolulu markets to gauge future revenue stability.
• Interest Rate Exposure: Confirm the effectiveness of interest rate hedges and the potential impact of a 50 basis point change in LIBOR on earnings (estimated at $90,000 annually).