DOUGLAS EMMETT, INC. 
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 DescriptionDouglas Emmett, Inc. is a fully integrated, self-administered and self-managed REIT. Through our interest in ourOperating 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 inLos Angeles County, California and inHonolulu, 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 ofMarch 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%
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(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 endedMarch 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
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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 , andSanta 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 ofMay 6, 2020 , our collections for the month ofApril 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
•
InWest 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 onWilshire 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 downtownHonolulu , 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 inHonolulu 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 inJune 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
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%
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(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
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
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%
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(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
development in
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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Table of Contents Office Lease Expirations
As of
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(1) Average of the percentage of leases atMarch 31, 2017 , 2018, and 2019 with the same remaining duration as the leases for the labeled year had atMarch 31, 2020 . Acquisitions are included in the prior year average commencing in the quarter after the acquisition. 36
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Table of Contents Results of Operations Comparison of three months endedMarch 31, 2020 to three months endedMarch 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
tenant
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
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)$0.4 million of rental expenses from retail space at the residential community we Office rental
acquired in
expenses$ 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. 37
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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
