Add
DEI to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| DEI > SEC Filings for DEI > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Forward Looking Statements.
This Quarterly Report on Form 10-Q (Report) contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange
Act). You can find many (but not all) of these statements by looking for words
such as "approximates," "believes," "expects," "anticipates," "estimates,"
"intends," "plans," "would," "may" or other similar expressions in this
Report. We claim the protection of the safe harbor contained in the Private
Securities Litigation Reform Act of 1995. We caution investors that any
forward-looking statements presented in this Report, or those that we may make
orally or in writing from time to time, are based on the beliefs of, assumptions
made by, and information currently available to us. Such statements are based on
assumptions and the actual outcome will be affected by known and unknown risks,
trends, uncertainties and factors that are beyond our control or ability to
predict. Although we believe that our assumptions are reasonable, they are not
guarantees of future performance and some will inevitably prove to be
incorrect. As a result, our actual future results can be expected to differ from
our expectations, and those differences may be material. Accordingly, investors
should use caution in relying on past forward-looking statements, which are
based on known results and trends at the time they are made, to anticipate
future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include the following: adverse economic or real estate developments in Southern California and Honolulu; decreased rental rates or increased tenant incentive and vacancy rates; defaults on, early termination of, or non-renewal of leases by tenants; increased interest rates and operating costs; failure to generate sufficient cash flows to service our outstanding indebtedness; difficulties in identifying properties to acquire and completing acquisitions; failure to successfully operate acquired properties and operations; failure to maintain our status as a Real Estate Investment Trust (REIT) under the Internal Revenue Code of 1986, as amended; possible adverse changes in rent control laws and regulations; environmental uncertainties; risks related to natural disasters; lack or insufficient amount of insurance; inability to successfully expand into new markets and submarkets; risks associated with property development; conflicts of interest with our officers; changes in real estate, zoning laws and increases in real property tax rates; and the consequences of any future terrorist attacks. For further discussion of these and other factors, see "Item 1A. Risk Factors" in our 2007 Annual Report on Form 10-K.
This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.
Critical Accounting Policies
Our discussion and analysis of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements in conformity with GAAP requires us to make estimates of certain items and judgments as to certain future events, for example with respect to the allocation of the purchase price of acquired property among land, buildings, improvements, equipment, and any related intangible assets and liabilities, or the effect of a property tax reassessment of our properties. These determinations, even though inherently subjective and prone to change, affect the reported amounts of our assets, liabilities, revenues and expenses. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences-positive or negative-could be material. Some of our accruals are subject to adjustment, as we believe appropriate based on revised estimates and reconciliation to the actual results when available.
In addition, we identified certain critical accounting policies that affect certain of our more significant estimates and assumptions used in preparing our consolidated financial statements in our 2007 Annual Report on Form 10-K. We have not made any material changes to these policies during the periods covered by this Report.
Historical Results of Operations
Overview
We are a fully integrated, self-administered and self-managed REIT and one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and in Honolulu, Hawaii. Our presence in Los Angeles and Honolulu is the result of a consistent and focused strategy of identifying submarkets that are supply constrained, have high barriers to entry and exhibit strong economic characteristics such as population and job growth and a diverse economic base. In our office portfolio, we focus primarily on owning and acquiring a substantial share of top-tier office properties within submarkets located near high-end executive housing and key lifestyle amenities. In our multifamily portfolio, we focus primarily on owning and acquiring select properties at premier locations within these same submarkets. Our properties are concentrated in nine premier Los Angeles County submarkets-Brentwood, Olympic Corridor, Century City, Santa Monica, Beverly Hills, Westwood, Sherman Oaks/Encino, Warner Center/Woodland Hills and Burbank-as well as in Honolulu, Hawaii.
Significant Transactions
Acquisitions and Dispositions. During the first nine months of 2008, we completed the following transactions (see Note 3 to our consolidated financial statements included in this Report):
† In March 2008, we acquired a 1.4 million square foot office portfolio consisting of six Class "A" buildings located in our core Los Angeles submarkets - Santa Monica, Beverly Hills, Sherman Oaks/Encino and Warner Center/Woodland Hills - for a contract price of approximately $610 million.
† In February 2008, we acquired a 78,298 square-foot office building located in Honolulu, Hawaii. As part of the same transaction, we also acquired all of the assets of The Honolulu Club, a private membership athletic and social club, which is located in the building. The aggregate contract price was approximately $18 million and the purchase was made in a consolidated joint venture with our local partner. In May 2008, we transferred the operations of the athletic club to a third party for a nominal cost and incurred an immaterial loss on disposition.
Financings. During the first nine months of 2008, we completed the following transactions (see Note 7 to our consolidated financial statements included in this Report):
† In August 2008, we obtained a $365 million term loan to repay a $380 million bridge loan obtained from an affiliate of the seller in the March 2008 acquisitions described above. The term loan bears interest at a floating rate equal to one-month LIBOR plus 165 basis points; however, we entered into interest rate swap contracts that effectively fix the interest at 5.515% (based on an actual/360-day basis) until September 4, 2012. This loan facility matures on August 18, 2013.
† In March 2008, we obtained a non-recourse $340 million term loan secured by four of our previously unencumbered office properties. This loan bears interest at a floating rate equal to one-month LIBOR plus 150 basis points, however we entered into interest rate swap contracts that effectively fix the interest rate at 4.77% (based on an actual/360-day basis) until January 2, 2013. This loan facility matures on April 1, 2015.
† The joint venture, in which we have a two-thirds interest, obtained an $18 million loan that financed the February 2008 acquisition described above.
Comparison of three months ended September 30, 2008 to three months ended September 30, 2007
Revenues
Total Office Revenue. Total office revenue consists of rental revenue, tenant recoveries and parking and other income. For the reasons described below, total office portfolio revenue increased by $21.1 million, or 18.4%, to $135.8 million for the three months ended September 30, 2008 compared to $114.7 million for the three months ended September 30, 2007.
Rental Revenue. Rental revenue includes rental revenues from our office properties, percentage rent on the retail space contained within office properties, and lease termination income. Total office rental revenue increased by $18.2 million, or 19.2%, to $112.8 million for the three months ended September 30, 2008 compared to $94.6 million for the three months ended September 30, 2007. The increase is due to $14.7 million of incremental rent from the eight properties we acquired subsequent to the beginning of the third quarter of 2007, as well as increases in average rental rates for new and renewal leases across our existing office portfolio.
Parking and Other Income. Total office parking and other income increased by $2.5 million, or 21.0%, to $14.7 million for the three months ended September 30, 2008 compared to $12.1 million for the three months ended September 30, 2007. The increase is primarily due to incremental revenues of $1.8 million from the eight properties we acquired subsequent to the beginning of the third quarter of 2007, as well as increases in parking rates implemented across the portfolio and increases in ground rent income.
Total Multifamily Revenue. Total multifamily revenue consists of rent, parking income and other income. Total multifamily revenue decreased by $0.3 million, or 1.8%, to $17.4 million for the three months ended September 30, 2008, compared to $17.7 million for the three months ended September 30, 2007. The decrease is primarily due to $1.0 million in amortization of below-market leases for certain multifamily units initially recorded at the time of our IPO and formation that were fully amortized during the second quarter of 2008, thus causing a decline when comparing the third quarter of 2007 to 2008. This decrease was partially offset by an increase of $0.6 million resulting from increased occupancy and an increase in rents charged to both new and existing tenants, including increases for select Santa Monica multifamily units. These units were under leases signed prior to a 1999 change in California Law that allows landlords to reset rents to market rates when a tenant moves out. Therefore, a portion of the multifamily increase was due to the rollover to market rents of several of these rent-controlled units, or "Pre-1999 Units", since October 1, 2007.
Operating Expenses
Office Rental Expenses. Total office rental expense increased by $5.8 million, or 17.1%, to $39.9 million for the three months ended September 30, 2008, compared to $34.1 million for the three months ended September 30, 2007. The increase was due primarily to $6.4 million of incremental operating expenses from the eight properties we acquired subsequent to the beginning of the third quarter of 2007, slightly offset by lower expenses at our existing portfolio.
Depreciation and Amortization. Depreciation and amortization expense increased $13.0 million, or 25.6%, to $63.6 million for the three months ended September 30, 2008, compared to $50.6 million for the three months ended September 30, 2007. The increase is primarily due to incremental depreciation and amortization of $8.6 million from the eight properties we acquired subsequent to the beginning of the third quarter of 2007, as well as the finalization of the purchase price allocation and related lives of real estate assets combined at the time of our IPO and incorporation transactions.
Non-Operating Income and Expenses
Interest Expense. Interest expense increased $11.1 million, or 26.7%, to $52.6 million for the three months ended September 30, 2008, compared to $41.5 million for the three months ended September 30, 2007. The increase for the comparable periods was primarily due to an increase in additional borrowings during 2008 to fund property acquisitions and for general corporate purposes.
Comparison of nine months ended September 30, 2008 to nine months ended September 30, 2007
Revenues
Total Office Revenue. For the reasons described below, total office portfolio revenue increased by $50.2 million, or 14.9%, to $386.8 million for the nine months ended September 30, 2008 compared to $336.6 million for the nine months ended September 30, 2007.
Rental Revenue. Total office rental revenue increased by $43.9 million, or 15.7%, to $323.0 million for the nine months ended September 30, 2008 compared to $279.1 million for the nine months ended September 30, 2007. Rent increased due to $32.4 million of incremental rent from the nine properties we acquired subsequent to the beginning of the first quarter of 2007, as well as increases in average rental rates for new and renewal leases across our existing office portfolio.
Tenant Recoveries. Total office tenant recoveries decreased by $0.6 million, or 2.7%, to $22.5 million for the nine months ended September 30, 2008 compared to $23.1 million for the nine months ended September 30, 2007. This is due in part to a reduction in the accrual of property tax expense during the third quarter of 2007. This reduction was partially offset by a $2.6 million increase in incremental recoverable operating expenses from the nine properties we acquired subsequent to the beginning of the first quarter of 2007.
Parking and Other Income. Total office parking and other income increased by $6.9 million, or 20.1%, to $41.3 million for the nine months ended September 30, 2008 compared to $34.3 million for the nine months ended September 30, 2007. The increase is primarily due to incremental revenues of $3.8 million from the nine properties we acquired subsequent to the beginning of the first quarter of 2007, as well as increases in parking rates implemented across the portfolio and increases in ground rent income.
Operating Expenses
Office Rental Expenses. Total office rental expense increased by $9.3 million, or 9.3%, to $109.4 million for the nine months ended September 30, 2008, compared to $100.1 million for the nine months ended September 30, 2007. The increase is primarily due to $13.7 million of incremental operating expenses from the nine properties we acquired subsequent to the beginning of the first quarter of 2007. The increase was partially offset by a reduction in the accrual of property tax expense during the third quarter of 2007.
Multifamily Rental Expenses. Total multifamily rental expense decreased by $1.4 million, or 10.3%, to $12.5 million for the nine months ended September 30, 2008, compared to $13.9 million for the nine months ended September 30, 2007. This is primarily due to a reduction in the accrual of property tax expense during the third quarter of 2007.
Depreciation and Amortization. Depreciation and amortization expense increased $32.0 million, or 21.0%, to $184.2 million for the nine months ended September 30, 2008, compared to $152.2 million for the nine months ended September 30, 2007. The increase is primarily due to $18.7 million of incremental depreciation and amortization from the nine properties we acquired subsequent to the beginning of the first quarter of 2007, as well as the finalization of the purchase price allocation and related lives of real estate assets combined at the time of our IPO and formation transactions,
Non-Operating Income and Expenses
Interest Expense. Interest expense increased $27.5 million, or 23.2%, to $145.6 million for the nine months ended September 30, 2008, compared to $118.1 million for the nine months ended September 30, 2007. The increase for the comparable periods was primarily due to an increase in outstanding borrowings during 2008 to fund property acquisitions and for general corporate purposes.
Liquidity and Capital Resources
Available Borrowings, Cash Balances and Capital Resources
On October 29, 2008, we completed the initial closing of $300 million of equity commitments for our newly formed institutional fund, Douglas Emmett Fund X, LLC, of which we have committed $150 million. Upon its final closing, the Fund is expected to range from $500 million to $1 billion in equity commitments. With limited exceptions, the Fund will be our exclusive investment vehicle, and will follow our identical investment strategy, focusing primarily on real estate opportunities within the same markets and pursuing the same disciplined underwriting and leverage principles which have governed acquisitions at Douglas Emmett for more than 20 years. The Fund contemplates an investment period of up to four years followed by a ten-year value creation period.
In connection with the initial closing, we contributed to the Fund the six Class "A" office properties which we acquired on March 26, 2008. In August, we replaced the original bridge financing on the contributed properties with a non-recourse 5-year term loan in the amount of $365 million. As part of the contribution of the properties, this loan has been transferred to the Fund. The loan facility matures on August 18, 2013. See Note 3 to our consolidated financial statements included in this Report for further description of the acquisition and Note 7 to our consolidated financial statements included in this Report for further description of the debt.
We had total indebtedness of $3.7 billion at September 30, 2008, excluding a loan premium representing the mark-to-market adjustment on variable rate debt assumed from our predecessor. Please see Note 7 to our consolidated financial statements included in this Report.
We have a revolving credit facility with a group of banks led by Bank of America, N.A. and Banc of America Securities LLC totaling $370 million. At September 30, 2008, there was approximately $280.8 million available to us under this credit facility. We have used our revolving credit facility for general corporate purposes, including acquisition funding, redevelopment and repositioning opportunities, tenant improvements and capital expenditures, share equivalent repurchases, recapitalizations and working capital.
We have historically financed our capital needs through short-term lines of credit and long-term secured mortgages at floating rates. To mitigate the impact of fluctuations in short-term interest rates on our cash flow from operations, we generally enter into interest rate swap or interest rate cap agreements. At September 30, 2008, 97% of our debt was effectively fixed at an overall rate of 5.14% (on an actual / 360-day basis) by virtue of interest rate swap and interest rate cap agreements in place at the end of the reporting period. See Notes 7 and 8 to our consolidated financial statements included in this Report.
None of our term loans with swapped-to-fixed interest rates mature until 2012. Our other loan obligations, which remain at variable rates, are the $370 million revolving credit facility described above, whose maturity can be extended, under certain conditions, by two years to October 30, 2011, and an $18 million secured acquisition loan, whose maturity can be extended, under certain conditions, by one year to March 1, 2011.
At September 30, 2008, our total borrowings under secured loans, excluding the portion of consolidated debt attributable to our minority partner on the Honolulu Club joint venture, represented 50.7% of our total market capitalization of $7.3 billion. Total market capitalization includes our portion of the consolidated debt and the value of common stock and operating partnership units each based on our common stock closing price at September 30, 2008 on the New York Stock Exchange of $23.07 per share.
The nature of our business, and the requirements imposed by REIT rules that we distribute a substantial majority of our income on an annual basis, will cause us to have substantial liquidity needs over both the short term and the long term.
We expect to meet our short-term liquidity requirements generally through cash provided by operations and, if necessary, by drawing upon our senior secured revolving credit facility. However, recent economic events have led to tighter and more uncertain credit markets. As a result, although we have been successful in financings during 2008, disruptions in the credit markets could impact the availability of credit in the future or could impact the rates of any borrowings we do obtain. At September 30, 2008, we had approximately $89.2 million of principal payments under our senior secured revolving credit facility maturing by the end of 2009. This credit facility contains two renewal options of one year each. Subsequent to the end of the quarter, as mentioned above, we completed the initial closing of the Fund and a portion of that capital was used to reimburse us for a portion of the value of the properties contributed. We used this cash to repay amounts outstanding on our revolving credit facility, reducing the amount outstanding on that facility to approximately $40 million just prior to filing this Quarterly Report on Form 10-Q. We anticipate that cash provided by operations and borrowings under our senior secured revolving credit facility will be sufficient to meet our liquidity requirements for at least the next 12 months.
Our long-term liquidity needs consist primarily of funds necessary to pay for acquisitions, redevelopment and repositioning of properties, non-recurring capital expenditures, and repayment of indebtedness at maturity. We will seek to satisfy these needs through cash flow from the Fund, as well as from operations, long-term secured and unsecured indebtedness, the issuance of debt and equity securities, including units in our operating partnership, property dispositions and joint venture transactions. We have historically financed our operations, acquisitions and development, through the use of our revolving credit facility or other short-term acquisition lines of credit, which we subsequently repay with long-term secured floating rate mortgage debt. To mitigate the impact of fluctuations in short-term interest rates on our cash flow from operations, we generally enter into interest rate swap or interest rate cap agreements at the time we enter into term borrowings.
Contractual Obligations
During the third quarter of 2008, there were no material changes outside the ordinary course of business in the information regarding specified contractual obligations contained in our 2007 Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
At September 30, 2008, we did not have any off-balance sheet arrangements.
Cash Flows
Net cash provided by operating activities increased $12.5 million to $136.8 million for the nine months ended September 30, 2008, compared to $124.3 million for the nine months ended September 30, 2007. The increase reflects higher net cash flow from existing properties that generated improved results, as well as incremental cash flow from acquired properties.
Net cash used in investing activities increased $584.2 million to $656.8 million for the nine months ended September 30, 2008 compared to $72.6 million for the nine months ended September 30, 2007. The increase was primarily due to a higher level of spending on property acquisitions in the 2008 period compared to the 2007 period. See Note 3 to our consolidated financial statements included in this Report.
Net cash provided by financing activities totaled $516.3 million for the nine months ended September 30, 2008 compared to net cash used in financing activities totaling $54.2 million for the nine months ended September 30, 2007. The comparative difference was primarily due to the increased level of borrowings associated with property acquisitions in 2008, as described in Note 3 to our consolidated financial statements included in this Report, as compared to the use of funds primarily for equity repurchases in 2007.
|
|