Douglas Emmett(US:DEI)2020-11-06 21:11markdown PART I. FINANCIAL INFORMATION [Financial Statements (unaudited)](index=8&type=section&id=Item%201.%20Financial%20Statements) The unaudited financial statements for the period ended September 30, 2020, show a decrease in total assets and equity compared to December 31, 2019, with revenues, operating income, and net income all declining significantly due to the COVID-19 pandemic's adverse impacts on rental and parking income [Consolidated Balance Sheets](index=8&type=section&id=Consolidated%20Balance%20Sheets) As of September 30, 2020, total assets were $9.29 billion, a slight decrease from $9.35 billion at year-end 2019, while total liabilities increased to $5.29 billion from $4.98 billion, primarily due to higher interest rate contract liabilities, leading to a decrease in total equity from $4.37 billion to $4.00 billion Consolidated Balance Sheet Summary (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | **Total Assets** | **$9,289,373** | **$9,349,301** | | Investment in real estate, net | $8,876,752 | $8,960,218 | | Cash and cash equivalents | $202,166 | $153,683 | | **Total Liabilities** | **$5,289,005** | **$4,978,367** | | Secured notes payable, net | $4,708,312 | $4,619,058 | | Interest rate contract liabilities | $241,960 | $54,616 | | **Total Equity** | **$4,000,368** | **$4,370,934** | [Consolidated Statements of Operations](index=9&type=section&id=Consolidated%20Statements%20of%20Operations) For the three months ended September 30, 2020, total revenues decreased to $217.0 million from $238.1 million, and net income attributable to common stockholders fell sharply to $3.8 million ($0.02/share) from $22.5 million ($0.13/share), with similar declines for the nine-month period Three Months Ended September 30 (in thousands, except per share data) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $216,987 | $238,069 | | Operating Income | $34,297 | $60,691 | | Net Income Attributable to Common Stockholders | $3,773 | $22,488 | | EPS (basic and diluted) | $0.02 | $0.13 | Nine Months Ended September 30 (in thousands, except per share data) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Total Revenues | $676,133 | $692,789 | | Operating Income | $128,526 | $194,799 | | Net Income Attributable to Common Stockholders | $32,726 | $85,155 | | EPS (basic and diluted) | $0.18 | $0.49 | [Consolidated Statements of Cash Flows](index=14&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2020, net cash provided by operating activities remained stable at $356.7 million, while net cash used in investing activities significantly decreased to $201.3 million, and net cash used in financing activities reversed to $106.9 million from a prior-year inflow Cash Flow Summary - Nine Months Ended September 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $356,729 | $358,968 | | Net cash used in investing activities | ($201,294) | ($539,067) | | Net cash (used in) provided by financing activities | ($106,879) | $215,382 | | **Increase in cash and cash equivalents** | **$48,556** | **$35,283** | [Notes to Consolidated Financial Statements](index=16&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on the company's real estate portfolio, revenue recognition policies impacted by COVID-19, debt and derivatives, segment performance, and commitments, highlighting its office and multifamily segments concentrated in Los Angeles County and Honolulu - As of September 30, 2020, the company's consolidated portfolio included **17.9 million square feet of office space** and **4,258 multifamily units**[40](index=40&type=chunk) - Charges for uncollectible amounts, primarily due to the COVID-19 pandemic, reduced office revenues by **$38.5 million** for the nine months ended September 30, 2020[52](index=52&type=chunk) - Total consolidated debt stood at **$4.74 billion** as of September 30, 2020, with the vast majority swapped to a fixed rate[88](index=88&type=chunk)[93](index=93&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the significant negative impact of the COVID-19 pandemic on business operations, particularly rent collections and parking revenue, due to local ordinances, detailing a decline in FFO and Same Property NOI for both Q3 and the nine-month period ended September 30, 2020, while maintaining adequate liquidity and proceeding with development projects - The COVID-19 pandemic and tenant-friendly local ordinances in Los Angeles, Beverly Hills, and Santa Monica have negatively impacted rent collections and leasing activity[148](index=148&type=chunk)[149](index=149&type=chunk) - For the nine months ended September 30, 2020, FFO decreased by **11.4%** to **$279.0 million**, and Same Property NOI decreased by **12.8%**, primarily due to the pandemic's impact on the office portfolio[187](index=187&type=chunk)[198](index=198&type=chunk) - The company maintains short-term liquidity with **$202.2 million** in cash and **$360 million** available on its revolving credit facility as of September 30, 2020[202](index=202&type=chunk) [Impacts of the COVID-19 Pandemic on our Business](index=43&type=section&id=Impacts%20of%20the%20COVID-19%20Pandemic%20on%20our%20Business) The COVID-19 pandemic has materially and adversely affected the company's business, with punitive local ordinances allowing rent deferrals and leading to significant write-offs of tenant receivables, reducing rental revenues by $38.5 million for the nine months ended September 30, 2020, and causing a 1% decline in the total office portfolio leased percentage to 89.8% - Local ordinances in Los Angeles, Beverly Hills, and Santa Monica prohibit evictions and allow rent deferral for residential, retail, and office tenants, impacting collections[149](index=149&type=chunk) - For the nine months ended September 30, 2020, charges for uncollectible amounts related to the pandemic reduced rental revenues and tenant recoveries by **$38.5 million**[150](index=150&type=chunk) - The total office portfolio leased percentage declined by **1%** to **89.8%** due to new leasing volume remaining below pre-pandemic levels[151](index=151&type=chunk) [Results of Operations](index=49&type=section&id=Results%20of%20Operations) Comparing the third quarter of 2020 to 2019, office rental revenue decreased by 3.1% and office parking income dropped 37.4%, primarily due to the COVID-19 pandemic's impact on collections and property utilization, with office parking income falling 21.7% for the nine-month period, driving lower net income in both periods Q3 2020 vs Q3 2019 Revenue Changes (in thousands) | Revenue Category | Q3 2020 | Q3 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office rental revenue | $169,571 | $175,017 | ($5,446) | (3.1)% | | Office parking & other | $19,324 | $30,883 | ($11,559) | (37.4)% | | Multifamily revenue | $28,092 | $32,169 | ($4,077) | (12.7)% | Nine Months 2020 vs 2019 Revenue Changes (in thousands) | Revenue Category | 9M 2020 | 9M 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Office rental revenue | $514,211 | $513,926 | $285 | 0.1% | | Office parking & other | $71,562 | $91,453 | ($19,891) | (21.7)% | | Multifamily revenue | $90,360 | $87,410 | $2,950 | 3.4% | [Non-GAAP Supplemental Financial Measures: FFO and Same Property NOI](index=57&type=section&id=Non-GAAP%20Supplemental%20Financial%20Measures) The company's key non-GAAP metrics, Funds From Operations (FFO) and Same Property Net Operating Income (NOI), both showed significant declines due to the COVID-19 pandemic, with FFO decreasing 20.3% and Same Property NOI falling 18.3% year-over-year for Q3 2020, and similar declines for the nine-month period driven by lower collections, write-offs, and reduced parking income in the office portfolio FFO Reconciliation Summary (in thousands) | Period | FFO 2020 | FFO 2019 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $82,753 | $103,888 | (20.3)% | | Nine Months Ended Sep 30 | $279,043 | $314,787 | (11.4)% | Same Property NOI Summary (in thousands) | Period | Total NOI 2020 | Total NOI 2019 | % Change | | :--- | :--- | :--- | :--- | | Three Months Ended Sep 30 | $119,692 | $146,437 | (18.3)% | | Nine Months Ended Sep 30 | $381,729 | $437,547 | (12.8)% | [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) The company expects to meet its short-term liquidity needs through its $202.2 million cash balance, $356.7 million in cash from operations (YTD), and its $400 million revolving credit facility, with no debt maturities until February 2023, and long-term needs for acquisitions and development planned to be met through debt, equity, or dispositions, with approximately 41% of the total office portfolio unencumbered - As of September 30, 2020, the company had **$202.2 million** in cash and cash equivalents and **$360 million** of availability on its revolving credit facility[202](index=202&type=chunk) - The company's earliest debt maturity is **February 28, 2023**[202](index=202&type=chunk) - Long-term liquidity needs are planned to be met through secured non-recourse debt, equity issuances (including a **$400 million ATM program**), property dispositions, and JV transactions[203](index=203&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=54&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's primary market risk is interest rate risk on its floating-rate debt, which it manages through interest rate swaps, with all floating-rate debt hedged as of September 30, 2020, while also monitoring the market transition from LIBOR to SOFR due to its debt and derivative instruments being indexed to USD-LIBOR - As of September 30, 2020, the company had no outstanding unhedged floating-rate debt[212](index=212&type=chunk) - The company is exposed to risks related to the planned discontinuation of LIBOR after 2021, as its floating rate borrowings and derivative instruments are indexed to USD-LIBOR[214](index=214&type=chunk) [Controls and Procedures](index=54&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2020, with no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2020, the company's disclosure controls and procedures were effective[215](index=215&type=chunk) - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, internal controls[216](index=216&type=chunk) PART II. OTHER INFORMATION [Legal Proceedings](index=66&type=section&id=Item%201.%20Legal%20Proceedings) The company is not currently a party to any legal proceedings that are expected to have a materially adverse effect on its business, financial condition, or results of operations, excluding ordinary, routine litigation - The company reports no material legal proceedings outside of the ordinary course of business[220](index=220&type=chunk) [Risk Factors](index=66&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors disclosed in the company's 2019 Annual Report on Form 10-K, except for the previously disclosed risk factor related to the COVID-19 pandemic - No material changes to risk factors are reported, other than the COVID-19 risk factor disclosed in the Q1 2020 10-Q[221](index=221&type=chunk)