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MarketScreener Homepage  >  Equities  >  Nyse  >  Douglas Emmett, Inc.    DEI

DOUGLAS EMMETT, INC.

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DOUGLAS EMMETT : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/08/2020 | 04:21pm EDT
The following discussion should be read in conjunction with our Forward Looking
Statements disclaimer, and our consolidated financial statements and related
notes in Part I, Item 1 of this Report. Our results of operations were affected
by transactions during the respective period - see Financings, Developments and
Repositionings further below.

Business Description

Douglas Emmett, Inc. is a fully integrated, self-administered and self-managed
REIT. Through our interest in our Operating Partnership and its subsidiaries,
our consolidated JVs and our unconsolidated Fund, 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,
acquiring, developing and managing 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. As of March 31, 2020, our portfolio consisted of the following
(including ancillary retail space):

                               Consolidated      Total
                               Portfolio(1)   Portfolio(2)
             Office
  Class A Properties                70             72
  Rentable Square Feet (in
  thousands)(3)                   17,939         18,324
  Leased rate                     92.3%          92.2%
  Occupancy rate                  90.9%          90.8%

          Multifamily
  Properties                        11             11
  Units                           4,161          4,161
  Leased rate                     98.0%          98.0%
  Occupied rate                   96.1%          96.1%


______________________________________________________________________

(1) Our Consolidated Portfolio includes the properties in our consolidated
results. Through our subsidiaries, we own 100% of these properties, except for
seventeen office properties totaling 4.3 million square feet and one residential
property with 350 apartments, which we own through four consolidated JVs. Our
Consolidated Portfolio also includes two land parcels from which we receive
ground rent from ground leases to the owners of a Class A office building and a
hotel.
(2) Our Total Portfolio includes our Consolidated Portfolio as well as two
properties totaling 0.4 million square feet owned by our unconsolidated Fund.
See Note 5 to our consolidated financial statements in Item 1 of this Report for
more information about our unconsolidated Fund.
(3) During the three months ended March 31, 2020, we removed approximately
223,000 Rentable Square Feet of vacant space at an office building that we are
converting to residential apartments.

Revenues by Segment and Location

During the three months ended March 31, 2020, revenues from our Consolidated Portfolio were derived as follows:

[[Image Removed: chart-177751ac0d44529bac4.jpg]]____[[Image Removed: chart-2479e6311335576781d.jpg]]

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Impacts of the COVID-19 Pandemic


Beginning late in the first quarter, our tenants have been struggling with the
impacts of the current pandemic on their business. In addition, the cities where
we primarily operate, Los Angeles, Beverly Hills, and Santa Monica, have passed
unusually punitive ordinances prohibiting evictions and allowing rent deferral
for residential, retail, and office tenants, regardless of financial distress.
The ordinances cover our residential, retail and office tenants (with some carve
outs for large tenants) and generally prohibit landlords not only from evicting
tenants but also from imposing any late fees or interest. Under the ordinances,
tenants are required to pay back the deferred rent within 3 to 12 months after
the end of the emergency. By eliminating any fees or interest and providing long
payback periods, tenants essentially have the option of a free loan.

As of May 6, 2020, our collections for the month of April 2020 were 87% of
aggregate base rent billed without any new abatements, consisting of residential
at 95%, office at 90% and our small retail component at 22%. We don't know how
this pandemic will impact collections in subsequent months. We have also seen a
slowdown in leasing, and we don't know how long that will last or how it will
affect occupancy. We have seen low attendance at our office properties, which
will likely continue until at least the lifting of the stay at home orders.
During this time, we expect some savings from variable expenses to help offset
expected declines in parking revenue.

Many things could change even before the stay in place orders begin to be
lifted:
•Many of our small tenants have applied for Federal assistance, which can be
forgiven if they pay their rent by June.
•      The local governments that have authorized rent deferrals are considering

excluding office tenants, which would reduce or eliminate that headwind.



•Leasing could start to recover as tenants come closer to the end of their
existing leases.
•On the other hand, we could see more tenants stop paying rent if the impact to
their business grows.

These uncertainties are compounded by many other critical variables on which we
have little information: how long the current "stay in place" orders remain, how
they are phased out, how businesses react after they are phased out, and whether
there is another pandemic wave or waves in the future.

On the capital front, construction is continuing on our two large multifamily
development projects, although it may take a little longer under current
conditions. For the moment, we have suspended work on new office repositioning
projects, and acquisitions in our markets seem to be on hold as buyers and
sellers evaluate the new conditions.

Overall, the pandemic is expected to impact many parts of our business, and those impacts could be material. For more information of the risks to our business, please see Item 1A "Risk Factors."

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Financings, Developments and Repositionings

Financings


During the first quarter of 2020:
•           We entered into forward interest rate swaps to hedge future 

term-loan

            refinancings. The forward swaps have an initial notional amount of
            $495.0 million, with effective dates ranging from June 2020 to March
            2021, and maturity dates ranging from April 2025 to June 2025, fixing
            the one-month LIBOR interest rate in a range of 0.74% to 0.91%.


See Notes 7 and 9 to our consolidated financial statements in Item 1 of this Report for more information regarding our debt and derivatives, respectively.

Developments

Residential High-Rise Tower, Brentwood, California



In West Los Angeles, we are building a 34 story high-rise apartment building
with 376 apartments. The tower is being built on a site that is directly
adjacent to an existing office building and a 712 unit residential property,
both of which we own. We expect the cost of the development to be approximately
$180 million to $200 million, which does not include the cost of the land which
we have owned since 1997. As part of the project, we are investing additional
capital to build a one acre park on Wilshire Boulevard that will be available to
the public and provide a valuable amenity to our surrounding properties and
community. Construction continues on the project, although we may face some
delays as a result of the impact of the pandemic on permitting and other
logistics. We currently expect the first units to be delivered in 2022.
• 1132 Bishop Street, Honolulu, Hawaii


In downtown Honolulu, we are converting a 25 story, 490 thousand square foot
office tower into approximately 500 apartments. This project will help address
the severe shortage of rental housing in Honolulu and revitalize the central
business district. We expect the conversion to occur in phases over a number of
years as the office space is vacated. We currently estimate the construction
costs to be approximately $80 million to $100 million, although the inherent
uncertainties of development are compounded by the multi-year and phased nature
of the conversion and potential impacts from the pandemic. The first phase of
construction commenced in June 2019 and we are on-track to deliver the first 98
units over the next few months.

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. In addition, we may
reposition properties already in our portfolio. 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. During the repositioning, the affected property
may display depressed rental revenue and occupancy levels that impact our
results and, therefore, comparisons of our performance from period to period.


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Rental Rate Trends - Total Portfolio

Office Rental Rates


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

                               Three Months Ended            Year Ended December 31,
                                 March 31, 2020       2019       2018       2017       2016

  Average straight-line
  rental rate(1)(2)                  $43.24$49.65$48.77$44.48$43.21
  Annualized lease
  transaction costs(3)               $4.70$6.02$5.80$5.68$5.74

___________________________________________________

(1) These average rental rates are not directly comparable from year to year

because the averages are significantly affected from period to period by

factors such as the buildings, submarkets, and types of space and terms

involved in the leases executed during the respective reporting period.

Because straight-line rent takes into account the full economic value of

each lease, including rent concessions and 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.

(2) Reflects the weighted average straight-line Annualized Rent.

(3) Reflects the weighted average leasing commissions and tenant improvement

allowances divided by the weighted average number of years for the leases.

Excludes leases substantially negotiated by the seller in the case of

acquired properties and leases for tenants relocated from space being

taken out of service.

Office Rent Roll

The table below presents the rent roll for new and renewed leases per leased square foot executed in our total office portfolio:


                             Three Months Ended March 31, 2020

                     Expiring
  Rent Roll(1)(2)    Rate(2)    New/Renewal Rate(2)   Percentage Change

  Cash Rent           $39.11$42.74                9.3%
  Straight-line Rent  $35.26$43.24                22.6%


___________________________________________________

(1)         Represents the average annual initial stabilized cash and
            straight-line rents per square foot on new and renewed leases signed
            during the quarter compared to the prior leases for the same space.
            Excludes Short-Term Leases, leases where the prior lease was
            terminated more than a year before signing of the new lease, leases
            for tenants relocated from space being taken out of service, and
            leases in acquired buildings where we believe the information about
            the prior agreement is incomplete or where we believe base rent
            reflects other off-market inducements to the tenant that are not
            reflected in the prior lease document.


(2)         Our office rent roll can fluctuate from period to period as a result
            of changes in our submarkets, buildings and term of the expiring
            leases, making these metrics difficult to predict.





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Multifamily Rental Rates

The table below presents the average annual rental rate per leased unit for new
tenants:

                                 Three Months Ended            Year Ended December 31,
                                   March 31, 2020       2019       2018       2017       2016

  Average annual rental rate -
  new tenants(1)                      $28,770$28,350$27,542$28,501$28,435

_____________________________________________________

(1) These average rental rates are not directly comparable from year to year

because of changes in the properties and units included. For example: (i) the

average for 2018 decreased from 2017 because we added a significant number of

units at our Moanalua Hillside Apartments development in Honolulu, where the

rental rates are lower than the average in our portfolio, and (ii) the

average for 2019 increased from 2018 because we acquired The Glendon where

    higher rental rates offset the effect of adding additional units at our
    Moanalua Hillside Apartments development.


Multifamily Rent Roll

The rent on leases subject to rent change during the three months ended March 31, 2020 (new tenants and existing tenants undergoing annual rent review) was 2.2% higher than the prior rent on the same unit.

Occupancy Rates - Total Portfolio

The tables below present the occupancy rates for our total office portfolio and multifamily portfolio:


                                                       December 31,
  Occupancy Rates(1) as of:   March 31, 2020   2019    2018    2017    2016

  Office portfolio                90.8%        91.4%   90.3%   89.8%  

90.4%

  Multifamily portfolio(2)        96.1%        95.2%   97.0%   96.4%   97.9%





                                   Three Months Ended      Year Ended December 31,
  Average Occupancy Rates(1)(3):     March 31, 2020     2019    2018    2017    2016

  Office portfolio                       91.1%          90.7%   89.4%   89.5%   90.6%
  Multifamily portfolio(2)               95.7%          96.5%   96.6%   97.2%   97.6%


___________________________________________________

(1)      Occupancy rates include the impact of property acquisitions, most of
         whose occupancy rates at the time of acquisition were below that of our
         existing portfolio.


(2)      The Occupancy Rate for our multifamily portfolio was impacted by an

acquisition in 2019 and by new units at our Moanalua Hillside Apartments

development in Honolulu in 2019 and 2018 - see "Financings, Developments

         and Repositionings" above.


(3)      Average occupancy rates are calculated by averaging the occupancy rates
         at the end of each of the quarters in the period and at the end of the
         quarter immediately prior to the start of the period.





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Office Lease Expirations

As of March 31, 2020, assuming non-exercise of renewal options and early termination rights, we expect to see expiring square footage in our total office portfolio as follows:

                [[Image Removed: chart-bb5918cd4ddc52debc6.jpg]]

____________________________________________________

(1) Average of the percentage of leases at March 31, 2017, 2018, and 2019 with
the same remaining duration as the leases for the labeled year had at March 31,
2020. Acquisitions are included in the prior year average commencing in the
quarter after the acquisition.


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Results of Operations

Comparison of three months ended March 31, 2020 to three months ended March 31,
2019


                   Three Months Ended March 31,        Favorable
                        2020             2019        (Unfavorable)       %                Commentary

                                    (In thousands)
  Revenues

                                                                                The increase was due to (i)
                                                                                $15.2 million of rental
                                                                                revenue and tenant recoveries
                                                                                from a JV we consolidated in
                                                                                November 2019, (ii) an
                                                                                increase of $3.3 million of
                                                                                rental revenue and tenant
                                                                                recoveries from properties
                                                                                that we owned throughout both
  Office rental                                                             

periods, due to higher rental

revenue and $ 185,827$ 167,235$ 18,592 11.1 % and occupancy rates, and (iii)

  tenant                                                                    

$1.1 million of rental revenue

  recoveries                                                                    and tenant recoveries from
                                                                                retail space at the
                                                                                residential community we
                                                                                acquired in June 2019, partly
                                                                                offset by (iv) a decrease of
                                                                                $1.0 million of rental revenue
                                                                                and tenant recoveries at an
                                                                                office building we are
                                                                                converting to a residential
                                                                                building in Hawaii.
                                                                                The increase was due to (i)
                                                                                $2.9 million of parking and
                                                                                other income from a JV we
                                                                                consolidated in November 2019,
                                                                                (ii) an increase in parking
                                                                                and other income of $1.0
                                                                                million from properties we
                                                                                owned throughout both periods,
  Office                                                                    

due to higher occupancy and

parking and $ 34,062$ 30,055$ 4,007 13.3 % rates, and (iii) $0.3 million

  other income                                                                  of parking and other income
                                                                                from retail space at the
                                                                                residential community we
                                                                                acquired in June 2019, partly
                                                                                offset by (iv) a decrease of
                                                                                $0.2 million in parking and
                                                                                other income at an office
                                                                                building we are converting to
                                                                                a residential building in
                                                                                Hawaii.
                                                                                The increase was due to (i)
                                                                                revenue of $4.3 million from
                                                                                the residential community we
                                                                                acquired in June 2019, (ii) an
                                                                                increase in revenues of $1.2
                                                                                million from the new
  Multifamily                                                               

apartments at our Moanalua

  revenue         $        31,461$  26,896$       4,565     17.0  %   Hillside Apartments
                                                                                development, partly offset by
                                                                                (iii) a decrease in revenues
                                                                                of $0.9 million from a
                                                                                residential property where 138
                                                                                units are temporarily
                                                                                unoccupied as a result of a
                                                                                fire.

  Operating expenses

                                                                                The increase was due to (i)
                                                                                rental expenses of $5.2
                                                                                million from a JV we
                                                                                consolidated in November 2019,
                                                                                (ii) an increase of $1.1
                                                                                million of rental expenses
                                                                                from properties that we owned
                                                                                throughout both periods, and
                                                                                (iii) $0.4 million of rental
                                                                                expenses from retail space at
                                                                                the residential community we
  Office rental                                                             

acquired in June 2019, partly

  expenses        $        69,664$  63,449$      (6,215 )   (9.8 )%   offset by (iv) a decrease of
                                                                                $0.5 million in rental
                                                                                expenses at an office building
                                                                                we are converting to a
                                                                                residential building in
                                                                                Hawaii. The increase in rental
                                                                                expenses from properties that
                                                                                we owned throughout both
                                                                                periods was due to an increase
                                                                                in professional fees,
                                                                                scheduled services expenses,
                                                                                property taxes and insurance
                                                                                expenses.





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                       Three Months Ended March 31,           Favorable
                         2020                 2019          (Unfavorable)        %                 Commentary

                                        (In thousands)

                                                                                         The increase was due to (i)
                                                                                         $1.5 million of rental
                                                                                         expenses from the residential
                                                                                         community we acquired in June
                                                                                         2019, (ii) an increase of $0.2
                                                                                         million from our residential
                                                                                         properties that we owned
                                                                                         throughout both periods, and
  Multifamily                                                                            (iii) an increase in rental
  rental           $        9,356$        7,555$       (1,801 )   (23.8 )%   expenses of $0.1 million from
  expenses                                                                               our new apartments at our
                                                                                         Moanalua Hillside Apartments
                                                                                         development. The increase in
                                                                                         rental expenses from our
                                                                                         properties that we owned
                                                                                         throughout both periods was
                                                                                         due to an increase in
                                                                                         personnel expenses, property
                                                                                         taxes and scheduled services
                                                                                         expenses.
  General and                                                                            The increase was primarily due
  administrative   $       10,335$        9,832     $         (503 )    (5.1 )%   to an increase in personnel
  expenses                                                                               expenses.
                                                                                         The increase due to (i)
                                                                                         depreciation and amortization
                                                                                         of $9.0 million from a JV we
                                                                                         consolidated in November 2019,
                                                                                         (ii) an increase of $8.0
                                                                                         million from an office
                                                                                         building we are converting to
                                                                                         a residential building in
                                                                                         Hawaii, due to accelerated
                                                                                         depreciation of the building,
                                                                                         (iii) $2.3 million of
                                                                                         depreciation and amortization
                                                                                         from the residential community
  Depreciation                                                                           that we acquired in June 2019,
  and              $       97,777$       79,873$      (17,904 )   (22.4 )%   and (iv) an increase of $0.6
  amortization                                                                           million from new apartments at
                                                                                         our Moanalua Hillside
                                                                                         Apartments development, partly
                                                                                         offset by (v) a decrease of
                                                                                         $1.8 million in depreciation
                                                                                         and amortization expense at
                                                                                         the properties we owned
                                                                                         throughout both periods. The
                                                                                         decrease for the properties we
                                                                                         owned throughout both periods
                                                                                         was due to accelerated
                                                                                         depreciation in the comparable
                                                                                         period for various properties
                                                                                         that we repositioned.

© Edgar Online, source Glimpses

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