Business Context and Reporting Period
Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: Douglas Emmett is 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 September 30, 2009, the portfolio consisted of 49 office properties and nine multifamily properties. The company also holds an equity interest in an unconsolidated real estate fund, Douglas Emmett Fund X, LLC (Fund X).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 | Balance Sheet (Sept 30, 2009) |
|---|---|---|---|
| Total Revenues | $140,427 | $431,639 | - |
| Operating Income | $36,062 | $112,381 | - |
| Net Loss | $(11,112) | $(22,880) | - |
| Net Loss Attributable to Common Stockholders | $(8,806) | $(18,155) | - |
| Net Loss Per Share (Basic & Diluted) | $(0.07) | $(0.15) | - |
| Cash Provided by Operating Activities | - | $144,656 | - |
| Cash and Cash Equivalents | - | - | $63,834 |
| Total Debt (Secured Notes Payable) | - | - | $3,274,743 |
| Total Assets | - | - | $6,112,899 |
| Total Equity | - | - | $2,286,912 |
Dividends: Declared $0.10 per share for the quarter ended September 30, 2009 (annualized $0.40), compared to $0.1875 per share in the prior year quarter.
Material Changes Versus Prior Period
- Revenue Decline: Total revenues decreased 10.9% for the three months ended September 30, 2009, compared to the same period in 2008. This was primarily driven by the deconsolidation of six office properties contributed to Fund X in February 2009, which removed approximately $12.2 million in rental revenue from the consolidated results.
- Operating Expenses: Total operating expenses decreased 11.1% for the three-month period, largely due to the removal of expenses associated with the deconsolidated properties.
- Interest Expense: Interest expense decreased 13.8% to $45.3 million for the quarter, attributed to lower outstanding debt levels and the deconsolidation of the $365 million term loan associated with the Fund X properties.
- Net Loss Improvement: Net loss attributable to common stockholders narrowed to $8.8 million for the quarter (from $9.7 million in 2008) and $18.2 million for the nine-month period (from $21.6 million in 2008).
- Cash Flow: Net cash provided by operating activities increased to $144.7 million for the nine months ended September 30, 2009, up from $136.8 million in the prior year period, reflecting improved cash flow from existing properties.
Guidance, Outlook, and Risks
- Liquidity and Capital Resources: The company maintains a $350 million secured revolving credit facility (reduced from $370 million) with no borrowings outstanding as of September 30, 2009. The facility was extended through October 2010. Management anticipates that cash from operations and the credit facility will meet liquidity needs for at least the next 12 months.
- Debt Structure: Approximately 99% of outstanding debt ($3.2 billion) is hedged via interest rate swaps, effectively fixing the weighted average interest rate at 5.10%. No term loans with swapped rates mature until 2012.
- Market Risks: The company faces risks related to adverse economic conditions in Southern California and Honolulu, potential decreases in rental rates, increased vacancy, and tenant defaults. The filing notes that the current economic downturn could impact the availability and cost of capital.
- Unconsolidated Fund: The company recorded a loss of $1.9 million for the quarter and $4.7 million for the nine months from its equity interest in Fund X. The company remains liable for swap agreements related to Fund X if the fund fails to perform.
- Legal and Environmental: The company is subject to ordinary course legal proceedings, none of which are expected to be material. There are conditional asset retirement obligations regarding asbestos in 23 properties, but fair value cannot be reasonably estimated due to indeterminable settlement dates.
Key Facts for Investor Verification
- Deconsolidation Impact: Verify the specific impact of the February 2009 deconsolidation of six properties into Fund X on year-over-year revenue and expense comparisons.
- Dividend Coverage: Assess the sustainability of the $0.10 quarterly dividend given the reported net losses and reliance on operating cash flow.
- Debt Maturities: Review the concentration of debt maturities, specifically the $2.69 billion principal payment due in 2012, and the company's refinancing strategy.
- Interest Rate Hedging: Confirm the effectiveness of the 99% hedged debt position and the potential exposure to counterparty credit risk on derivative instruments.
- Occupancy and Rental Rates: Monitor trends in occupancy levels and rental rates in the Los Angeles and Honolulu markets, as these are primary drivers of future revenue.