Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
DEI > SEC Filings for DEI > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for DOUGLAS EMMETT INC

Form 10-Q for DOUGLAS EMMETT INC


9-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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," "could", "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 our beliefs and assumptions. 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 previously reported forward-looking statements, which were based on results and trends at the time they were 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, Hawaii; a general downturn in the economy, such as the recent global financial crisis; 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 raising capital for our institutional funds; 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, or changes to the cost of maintaining existing insurance coverage; 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; the negative results of litigation or governmental proceedings; and the consequences of any possible future terrorist attacks. For further discussion of these and other factors, see "Item 1A. Risk Factors" in our 2013 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.


Table of Contents

Executive Summary

Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. We are one of the largest owners and operators of high-quality office and multifamily properties in Los Angeles County, California and in Honolulu, Hawaii. We focus on owning and acquiring a substantial share of top-tier office properties and premier multifamily communities in neighborhoods that possess significant supply constraints, high-end executive housing and key lifestyle amenities.

Through our interest in Douglas Emmett Properties, LP (our operating partnership) and its subsidiaries, including investments in our unconsolidated Funds, we own or partially own, manage, lease, acquire and develop real estate, consisting primarily of office and multifamily properties. As of March 31, 2014:

Our consolidated portfolio of properties included fifty-two Class A office properties (including ancillary retail space) totaling approximately 13.3 million rentable square feet, nine multifamily properties including 2,868 apartment units, as well as the fee interests in two parcels of land subject to ground leases.

Our total office portfolio consisted of sixty Class A office properties aggregating approximately 15.1 million rentable square feet, consisting of both our consolidated office properties and eight office properties owned by our Funds (in which we own a weighted average of 60% based on square footage).

Our consolidated office portfolio was 91.4% leased and 89.8% occupied and our total office portfolio was 91.6% leased and 89.9% occupied.

Our multifamily properties were 99.5% leased and 98.5% occupied.

Approximately 85.7% of the annualized rent of our consolidated portfolio was derived from our office properties and the remaining 14.3% from our multifamily properties.

Approximately 85.8% of the annualized rent of our consolidated portfolio was derived from our Los Angeles County office and multifamily properties and the remaining 14.2% from our Honolulu, Hawaii office and multifamily properties.

Financings, Acquisitions, Dispositions, Development and Repositionings

Development: We are working on two multifamily projects, one in Brentwood in Los Angeles, and one in Honolulu. Each development is on land which we already own:

We expect to break ground on an additional 496 apartments at our Moanalua Hillside Apartments in Honolulu later this year. Construction should take approximately 18 months and cost approximately $100 million to $120 million, which includes the cost of upgrading the existing 696 apartments and building a brand new community center.

In Los Angeles, we are seeking to build a high rise apartment project with 376 apartments. Because development in our markets, particularly West LA, remains a long and uncertain process, even if successful, we would not expect to break ground in Los Angeles before at least mid 2015. We expect the cost of this development to be approximately $100 million to $120 million.

Financings: During the first quarter of 2014, we refinanced a $16.1 million loan that was scheduled to mature on March 3, 2014, lowering the interest rate to LIBOR + 1.60% and extending the maturity date to March 1, 2016. See Note 5 to our consolidated financial statements in Item 1 of this Report.

Acquisitions and Dispositions: We did not acquire or dispose of any properties during the first quarter of 2014.

Repositionings: We often strategically purchase properties with large vacancies or expected near-term lease roll-over and use our knowledge of the property and submarket to reposition the property for the optimal use and tenant mix. The work we undertake to reposition a building typically takes months or even years, and could involve a range of improvements from a complete structural renovation to a targeted remodeling of selected spaces. We generally select a property for repositioning at the time we purchase it, although repositioning efforts can also occur at properties that we already own. During the repositioning, the affected property may display depressed rental revenue and occupancy levels which impacts our results and, therefore, comparisons of our performance from period to period. We are currently repositioning a 79,000 square foot office property in Honolulu in which we own a two-thirds interest.


Table of Contents

Historical Results of Operations

Overview

Our results of operations for the three months ended March 31, 2014 consisted of the rental operations of fifty-two consolidated office properties and nine consolidated multifamily properties compared to fifty consolidated office properties and nine consolidated multifamily properties during the three months ended March 31, 2013.

Our share of results from our unconsolidated Funds, which owned an additional eight office properties for the three months ended March 31, 2014 and March 31, 2013, is included through income, including depreciation, from unconsolidated real estate funds. During the first quarter of 2014, we did not acquire any additional interests in our Funds. During the first quarter of 2013, we acquired an additional 3.3% interest in Fund X, and an additional 0.9% interest in Partnership X. See Note 15 to our consolidated financial statements in Item 1 of this Report.

Funds From Operations

Many investors use Funds From Operations (FFO) as a performance yardstick to compare the operating performance of REITs. FFO represents net income, computed in accordance with GAAP, excluding gains (or losses) from sales of depreciable operating property, impairments of depreciable operating property and investments, real estate depreciation and amortization (other than amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT).

Like any metric, FFO is not perfect as a measure of our performance, because it excludes depreciation and amortization, and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our results from operations. Other REITs may not calculate FFO in accordance with the NAREIT definition, accordingly, our FFO may not be comparable to the FFO of other REITs. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends. FFO should not be used as a supplement to or substitute measure for cash flow from operating activities computed in accordance with GAAP.

For the reasons described below, our FFO for the three months ended March 31, 2014 increased by $5.4 million, or 8.4%, to $69.5 million compared to $64.1 million for the three months ended March 31, 2013. The increase was primarily due to (i) increased operating income from our office and multifamily portfolios due to higher rents from our multifamily portfolio and from office properties that we acquired in the second and third quarters of 2013, (ii) lower general and administration expenses of $285,000, (iii) $2.5 million of insurance recoveries that we received related to property damage from a fire at one of our residential properties and (iv) a decrease in interest expense of $1.0 million as a result of lower debt balances. GAAP net income attributable to common stockholders increased by $894,000, or 7.4%, to $13.0 million for the three months ended March 31, 2014, compared to $12.1 million for the three months ended March 31, 2013.

The table below (in thousands) is a reconciliation of our FFO to net income attributable to common stockholders computed in accordance with GAAP:

                                                           Three Months Ended March 31,
                                                               2014              2013

Net income attributable to common stockholders           $        12,976     $   12,082
Depreciation and amortization of real estate assets               50,199         46,024
Net income attributable to noncontrolling interests                2,482          2,530
Adjustments attributable to consolidated joint venture
and investment in unconsolidated real estate funds                 3,866          3,508
FFO                                                      $        69,523     $   64,144


Table of Contents

Rental Rate Trends

Office Rental Rates: The table below presents the average effective annual
rental rate per leased square foot, and the annualized lease transaction costs
for leases executed in our total office portfolio:

                           Three Months Ended        Twelve Months Ended December 31,
Historical straight-line
rents:(1)                    March 31, 2014       2013        2012       2011       2010

Average rental rate(2)           $37.40          $34.72      $32.86     $32.76     $32.33
Annualized lease
transaction costs(3)             $4.22           $4.16       $4.06      $3.64      $3.68


___________________________________________________


(1) Because straight-line rent takes into account the full economic value of each lease, including accommodations and rent escalations, we believe that it may provide a better comparison than ending cash rents, which include the impact of the annual escalations over the entire term of the lease. However, care should be taken in any comparison, as the averages are often significantly affected from period to period by factors such as the buildings, submarkets, types of space and term involved in the leases executed during the period.

(2) Represents the weighted average straight-line annualized base rent (i.e., excludes tenant reimbursements, parking and other revenue) per leased square foot for leases entered into within our total office portfolio. For our triple net Burbank and Honolulu office properties, annualized rent is calculated by adding expense reimbursements to base rent.

(3) Represents the weighted average leasing commissions and tenant improvement allowances under each office lease within our total office portfolio that were executed during the applicable period, divided by the number of years of that lease.

During the first quarter of 2014, we experienced positive rent roll up, with the average straight-line rent of $37.40 under new and renewal leases that we signed in the quarter averaging 4.7% greater than the average straight-line rent of $35.72 under the expiring leases for the same space. This improvement reflects both (i) continuing increases in average straight-line rental rates, which were 7.7% higher for leases signed during the three months ending March 31, 2014 than the average for leases signed in all of 2013 and (ii) increasing numbers of leases containing annual rent escalations in excess of 3% per annum. Quarterly fluctuations in submarkets, buildings and term of the expiring leases make predicting the changes in rent in any specific quarter difficult.

Our average starting cash rental rate on new leases of $35.65 signed during the first quarter of 2014 was 3.8% greater than the average starting cash rental rate on the expiring leases for the same space of $34.34, although, as a result of our high annual rent escalations, less than the average ending cash rental rate of $38.45 on those expiring leases. However, net changes in our office rental rates did not have a significant impact on our revenues in recent periods, as the negative effect of rent roll downs, which affect approximately 13% of our office portfolio each year, were generally offset by the positive impact of the annual rent escalations in virtually all of our continuing in-place office leases.


Table of Contents

Over the next four quarters, we expect to see expiring cash rents in our total office portfolio as presented in the table below:

                                                        Three Months Ending
Expiring cash
rents:                  June 30, 2014       September 30, 2014       December 31, 2014       March 31, 2015

Expiring square
feet (1)                       435,808                 320,624                 512,594              487,736
Expiring rent per
square foot (2)       $          36.65     $             37.32     $             33.03     $          34.95


____________________________________________________


(1) Includes scheduled expirations for our total office portfolio, including our consolidated portfolio of fifty-two properties totaling 13.3 million square feet, as well as eight properties totaling 1.8 million square feet owned by our Funds. Expiring square footage reflects all existing leases that are scheduled to expire in the respective quarter shown above, excluding the square footage under leases where (i) the existing tenant has renewed the lease prior to March 31, 2014, (ii) a new tenant has executed a lease after March 31, 2014 that has commenced prior to March 31, 2014, (iii) early termination options are exercised after March 31, 2014, (iv) defaults occurring after March 31, 2014, and (v) short term leases, such as month to month leases and other short term leases. Short term leases are excluded because (i) they are not included in our changes in rental rate data, (ii) have rental rates that may not be reflective of market conditions, and (iii) can distort the data trends, particularly in the first upcoming quarter. The variations in this number from quarter to quarter primarily reflects the mix of buildings/submarkets involved, although it is also impacted by the varying terms and square footage of the individual leases involved.

(2) Represents annualized base rent (i.e., excludes tenant reimbursements, parking and other revenue) per leased square foot at expiration. The amount reflects total cash base rent before abatements. For our Burbank and Honolulu office properties, we calculate annualized base rent for triple net leases by adding expense reimbursements to base rent. Expiring rent per square foot on a quarterly basis is impacted by a number of variables, including variations in the submarkets or buildings involved.

Multifamily Rental Rates: With respect to our residential properties, our average rent on leases to new tenants during the first quarter of 2014 was 3.9% higher than the rent for the same unit at the time it became vacant. The table below presents the average effective annual rental rate per leased unit for leases executed in our residential portfolio:

Three Months Ended Twelve Months Ended December 31,
Rental rate - new tenants: March 31, 2014 2013 2012 2011 2010

Average annual rental rate $ 27,829 $ 27,392 $ 26,308 $ 24,502 $ 22,497

Occupancy Rates

Occupancy Rates: The tables below present the occupancy rates1 for our total
office portfolio and multifamily portfolio:
                                                      December 31,
Occupancy Rates as of:    March 31, 2014     2013     2012     2011     2010

Total Office Portfolio           89.9 %     90.4 %   89.6 %   87.5 %   86.9 %
Multifamily Portfolio            98.5 %     98.7 %   98.7 %   98.4 %   98.4 %



                         Three Months Ended              Twelve Months Ended December 31,
Average Occupancy
Rates for: (1)             March 31, 2014         2013           2012           2011         2010

Total Office
Portfolio                          90.2 %          89.7 %         88.3 %         87.0 %       88.0 %
Multifamily Portfolio              98.6 %          98.6 %         98.5 %         98.2 %       98.3 %


___________________________________________________


(1) Average occupancy rates are calculated by averaging the occupancy rates on the first and last day of the quarter, and for periods longer than a quarter, by taking the average of the occupancy rates for all the quarters contained in the respective period.


Table of Contents

Comparison of three months ended March 31, 2014 to three months ended March 31, 2013

Revenues

Office 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 $1.2 million, or 1.3%, to $98.6 million for the three months ended March 31, 2014, compared to $97.4 million for the three months ended March 31, 2013. The increase was primarily due to rental revenue of $3.2 million from properties that we acquired in the second and third quarters of 2013, partly offset by straight line rent with respect to the 50 office properties that we owned during both comparable periods, as well as the continued decline of non-cash revenue from the net accretion of above- and below-market leases, which declined by $869,000 to $2.3 million for the quarter ended March 31, 2014, compared to $3.2 million for the quarter ended March 31, 2013, largely as the result of the ongoing expiration of leases in place at the time of our initial public offering (IPO).

Office Tenant Recoveries: Total office tenant recoveries increased by $322,000, or 3.0%, to $10.9 million for the three months ended March 31, 2014, compared to $10.6 million for the three months ended March 31, 2013. The increase was primarily due to an increase of $230,000 in recoveries from the properties that we owned during both comparable periods, as well as recoveries of $92,000 from properties that we acquired in the second and third quarters of 2013. The increase in recoveries for our comparable properties primarily reflects higher recoverable operating expenses.

Office Parking and Other Income: Office parking and other income increased by $1.1 million, or 6.0%, to $19.6 million for the three months ended March 31, 2014, compared to $18.5 million for the three months ended March 31, 2013. The increase was primarily due to an increase of $609,000 in parking and other income from properties that we owned during both comparable periods, as well as parking and other income of $490,000 from properties that we acquired in the second and third quarters of 2013. The increase in parking and other income for our comparable properties reflects higher parking cash revenue primarily due to increases in rates as well as higher utilization.

Multifamily Revenue: Total multifamily revenue consists of rent, parking income and other income. Total multifamily revenue increased by $754,000, or 4.0%, to $19.8 million for the three months ended March 31, 2014, compared to $19.0 million for the three months ended March 31, 2013. The increase was primarily due to increases in rental rates.

Operating Expenses

Office Rental Expenses: Total office rental expenses increased by $2.0 million, or 5.0%, to $43.4 million for the three months ended March 31, 2014, compared to $41.3 million for the three months ended March 31, 2013. The increase was primarily due to office rental expenses of $1.4 million for properties that we acquired in the second and in the third quarters of 2013, as well as an increase in office rental expenses of $597,000 from properties that we owned during both comparable periods. The increase in office rental expenses for our comparable properties primarily reflects higher utilities expense.

Multifamily Rental Expenses: Total multifamily rental expense increased by $124,000, or 2.5%, to $5.1 million for the three months ended March 31, 2014, compared to $5.0 million for the three months ended March 31, 2013. The increase reflects higher scheduled services and utilities expense.

General and Administrative Expenses: General and administrative expenses decreased by $285,000, or 4.0% to $6.8 million for the three months ended March 31, 2014, compared to $7.1 million for the three months ended March 31, 2013. The decrease is primarily due to a decrease in employee and director equity compensation expense.

Depreciation and Amortization: Depreciation and amortization expense increased by $4.2 million, or 9.1%, to $50.2 million for the three months ended March 31, 2014, compared to $46.0 million for the three months ended March 31, 2013. The increase was primarily due to depreciation and amortization of $2.8 million from properties that we owned during both comparable periods, as well as depreciation and amortization of $1.3 million from properties that we acquired in the second and third quarters of 2013. The increase in depreciation and amortization for our comparable properties reflects accelerated depreciation of a building for a property that we plan on redeveloping in 2015 in Los Angeles.


Table of Contents

Non-Operating Income and Expenses

Other Income and Other Expenses: Other income increased by $3.5 million, or 451.7%. to $4.3 million for the three months ended March 31, 2014, compared to $777,000 for the three months ended March 31, 2013, and other expenses increased by $1.1 million, or 295.9% to $1.5 million for the three months ended March 31, 2014, compared to $367,000 for the three months ended March 31, 2013. The increase in other income was primarily due to $2.5 million of insurance recoveries related to repairs of damage from a fire at one of our residential properties. We currently expect to recognize approximately $2.6 million in additional insurance recoveries in future quarters as a result of this fire. Other income also increased as well as the inclusion of the revenues of a health club at one of our office properties in Honolulu commencing in the second quarter of 2013. In the first quarter of 2013, the club was operated by a third party tenant, that paid us rent which was included in office revenues. Since that tenant rejected the lease after going bankrupt, a subsidiary of our consolidated joint venture has been operating the club while the building is being repositioned. The increase in Other Expenses for the three months ended March 31, 2014 similarly reflects the inclusion of the expenses for the health club.

Income, Including Depreciation, from Unconsolidated Real Estate Funds: The income, including depreciation, from unconsolidated real estate funds represents our equity interest in the operating results of our Funds, including the operating income net of historical cost-basis depreciation. Our share of the income, including depreciation, from our Funds of $1.1 million for the three months ended March 31, 2014 remained relatively unchanged compared to $1.2 million for the three months ended March 31, 2013.

Interest Expense: Interest expense decreased by $1.0 million, or 3.0%, to $31.8 million for the three months ended March 31, 2014, compared to $32.8 million for the three months ended March 31, 2013. The decrease was primarily due to lower cash interest expense of $785,000 as result of lower debt balances. See Note 5 to our consolidated financial statements in Item 1 of this Report.

Acquisition Expenses: The three months ended March 31, 2013 included acquisition expenses related to the acquisition of an office property in Beverly Hills acquired in May 2013. We have not acquired any properties in the three months ended March 31, 2014.


Table of Contents

Liquidity and Capital Resources

General

. . .

  Add DEI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for DEI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.