DEI

Douglas Emmett, Inc. 10-Q Summary

Business Context and Reporting Period

Company: Douglas Emmett, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 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 September 30, 2008, the portfolio included 55 office properties and nine multifamily properties.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 15.7% year-over-year for the nine months ended September 30, 2008, driven by $32.4 million in incremental rent from nine properties acquired since the beginning of 2007 and higher rental rates on new/renewal leases.
• Net Loss Expansion: Net loss widened to $21.6 million for the nine months ended September 30, 2008, compared to $7.3 million in the prior year period. This was primarily due to a $27.5 million increase in interest expense and a $32.0 million increase in depreciation and amortization resulting from new acquisitions.
• Debt Levels: Secured notes payable increased from $3.1 billion at December 31, 2007, to $3.7 billion at September 30, 2008, reflecting new term loans of $365 million and $340 million secured by property portfolios.
• Investing Activity: Net cash used in investing activities surged to $656.8 million for the nine months ended September 30, 2008, compared to $72.6 million in the prior year, due to significant property acquisitions.

Outlook, Risks, and Management Commentary

• Capital Markets: Management noted that recent economic events have led to tighter and more uncertain credit markets. While successful in securing financing during 2008, disruptions could impact future credit availability or rates.
• Liquidity: The company maintains a $370 million senior secured revolving credit facility with approximately $280.8 million available as of September 30, 2008. Subsequent to the quarter-end, the company reduced the outstanding balance on this facility to approximately $40 million using proceeds from a new institutional fund.
• Interest Rate Hedging: Approximately 97% of outstanding debt ($3.6 billion) was hedged via interest rate swaps, effectively fixing the overall rate at 5.14% as of September 30, 2008.
• Subsequent Event: On October 29, 2008, the company contributed six Class "A" office properties to a newly formed institutional fund, Douglas Emmett Fund X, LLC, in connection with an initial closing of $300 million in equity commitments.
• Risks: 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

• Debt Maturities: Verify the repayment schedule for the $3.7 billion in secured debt, noting that $2.7 billion matures in 2012 and $365 million in 2013.
• Acquisition Integration: Assess the performance of the six Class "A" buildings acquired in March 2008 (contributed to Fund X) and the Honolulu property to ensure projected rental yields are being met.
• Dividend Coverage: Confirm that cash flow from operations remains sufficient to cover the quarterly dividend of $0.1875 per share, especially given the net loss position.
• Interest Rate Exposure: Review the remaining 3% of unhedged debt ($108 million) to understand exposure to floating rate fluctuations.
• Market Conditions: Monitor occupancy rates and rental rate trends in the Los Angeles and Honolulu submarkets, as these are the sole geographic concentrations of the portfolio.