Douglas Emmett(DEI) - 2024 Q3 - Quarterly Results

Executive Summary Summary of Q3 2024 Results The company experienced a slight revenue decrease but a significant increase in net income for Q3 2024, with FFO declining and AFFO remaining stable - The company owns and operates 18.0 million square feet of Class A office properties and 4,476 apartment units in premier coastal submarkets of Los Angeles and Honolulu[1] Key Financial Metrics for Q3 2024 | Metric | Q3 2024 | Q3 2023 | Change | | :----- | :------ | :------ | :----- | | Revenues | $250.8 million | N/A | -1.8% | | Net Income (loss) attributable to common stockholders | $4.6 million | N/A | +134.6% | | Net Income per diluted share | $0.03 | N/A | N/A | | FFO | $86.0 million | N/A | -3.8% | | FFO per fully diluted share | $0.43 | N/A | N/A | | AFFO | $68.8 million | N/A | +0.2% | | Same property Cash NOI | $139.4 million | N/A | -5.7% | Leasing Highlights Q3 2024 saw positive office absorption and a high volume of leases, increasing the portfolio leased rate, while multifamily occupancy remained strong - Approximately 90,000 square feet of positive absorption in Q3 drove a 50 basis point increase in the portfolio leased rate to 82%[2] - Signed 236 office leases covering 1,003,000 square feet, including 353,000 square feet of new leases and 650,000 square feet of renewal leases[2] - Comparing signed office leases to expiring leases for the same space, straight-line rents increased by 0.4%, while cash rents decreased by 11.2%. The multifamily portfolio remains essentially fully leased at 99.1%[3] Balance Sheet & Dividends The company maintained a strong cash position and paid a consistent quarterly dividend in Q3 2024 - Cash and cash equivalents totaled $544.2 million at quarter end[4] - A quarterly cash dividend of $0.19 per common share ($0.76 annualized) was paid on October 16, 2024[4] 2024 Guidance Update Based on strong Q3 performance, the company has raised its 2024 guidance for net income and FFO per fully diluted share - Increased guidance for Net Income Per Common Share - Diluted to be between $0.10 and $0.14[5] - Increased guidance for FFO per fully diluted share to be between $1.69 and $1.73 per share[5] COMPANY OVERVIEW Corporate Data As of Q3 2024, the company's portfolio includes 68 office properties and 14 multifamily properties, with a market capitalization of $3.56 billion and net debt of $4.98 billion Consolidated Portfolio Overview as of September 30, 2024 | Metric | Office Portfolio (Consolidated) | Multifamily Portfolio | Total | | :----- | :------------------------------ | :-------------------- | :---- | | Properties | 68 | 14 | 70 | | Rentable square feet (in thousands) | 17,595 | N/A | 17,981 | | Leased rate | 82.0% | 99.1% | 82.0% | | Occupancy rate | 79.4% | N/A | 79.4% | Corporate Financial Data as of September 30, 2024 | Metric | Amount | | :----- | :----- | | Fully Diluted Shares outstanding as of September 30, 2024 | 202,435 | | Common stock closing price per share (NYSE:DEI) | $17.57 | | Equity Capitalization | $3,556,790 | | Consolidated Debt principal (in thousands) | $5,535,368 | | Less: cash and cash equivalents and loan collateral deposits | ($558,148) | | Net Debt (Consolidated) | $4,977,220 | | Our Share of Net Debt | $4,185,618 | | Pro Forma Enterprise Value | $7,742,408 | | Our Share of Net Debt to Pro Forma Enterprise Value | 54% | | AFFO Payout Ratio (Three months ended September 30, 2024) | 56.0% | Property Map The company's property map highlights its concentration in Los Angeles and Honolulu, featuring both office and residential assets - The company's Los Angeles portfolio includes 52 office properties and 10 residential properties across the Westside and Valley regions[16] - In Honolulu, the company operates 2 office properties and 4 residential properties[16] Board of Directors and Executive Officers The company is led by a ten-member Board of Directors and a five-member Executive Officer team, including CEO Jordan L. Kaplan - The Board of Directors consists of 10 members, including Chairman Dan A. Emmett and CEO Jordan L. Kaplan[18] - The Executive Officers team includes Jordan L. Kaplan (CEO and President), Kenneth M. Panzer (COO), Peter D. Seymour (CFO), Kevin A. Crummy (CIO), and Michele L. Aronson (EVP, General Counsel and Secretary)[19] FINANCIAL RESULTS Consolidated Balance Sheets As of September 30, 2024, total assets decreased by 2.0% to $9.45 billion, while total equity decreased by 4.9% to $3.66 billion Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2024 | Dec 31, 2023 | Change | | :----- | :----------- | :----------- | :----- | | Total Assets | $9,451,764 | $9,644,218 | -2.0% | | Investment in real estate, net | $8,618,766 | $8,753,184 | -1.5% | | Cash and cash equivalents | $544,227 | $523,082 | +4.0% | | Total Liabilities | $5,794,250 | $5,798,821 | -0.1% | | Secured notes payable, net | $5,513,086 | $5,543,171 | -0.5% | | Total Equity | $3,657,514 | $3,845,397 | -4.9% | Consolidated Operating Results For Q3 2024, total revenues decreased by 1.8%, but net income attributable to common stockholders significantly improved to $4.6 million from a prior-year loss Consolidated Statements of Operations (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Change (YoY) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (YoY) | | :----- | :------------------------------ | :------------------------------ | :----------- | :----------------------------- | :----------------------------- | :----------- | | Total revenues | $250,753 | $255,409 | -1.8% | $741,499 | $761,209 | -2.6% | | Total operating expenses | $202,055 | $226,735 | -10.9% | $582,553 | $642,200 | -9.2% | | Net income (loss) attributable to common stockholders | $4,618 | ($13,362) | +134.6% | $24,405 | ($2,251) | N/A | | Net income (loss) per common share - basic and diluted | $0.03 | ($0.08) | N/A | $0.14 | ($0.02) | N/A | | Dividends declared per common share | $0.19 | $0.19 | 0.0% | $0.57 | $0.57 | 0.0% | Funds From Operations & Adjusted Funds From Operations For Q3 2024, FFO decreased by 3.8% to $86.0 million, while AFFO saw a slight increase of 0.2% to $68.8 million Funds From Operations and Adjusted Funds From Operations (in thousands) | Metric | Three Months Ended Sep 30, 2024 | Three Months Ended Sep 30, 2023 | Change (YoY) | Nine Months Ended Sep 30, 2024 | Nine Months Ended Sep 30, 2023 | Change (YoY) | | :----- | :------------------------------ | :------------------------------ | :----------- | :----------------------------- | :----------------------------- | :----------- | | FFO | $86,015 | $89,381 | -3.8% | $268,145 | $284,425 | -5.8% | | FFO per share - fully diluted | $0.43 | $0.45 | -4.4% | $1.33 | $1.40 | -5.0% | | AFFO | $68,843 | $68,706 | +0.2% | $217,794 | $224,963 | -3.2% | Same Property Statistics & Net Operating Income (NOI) Same property office metrics showed decreased leased and occupied rates, while multifamily rates increased, with mixed NOI performance across segments Same Property Office Statistics | Metric | 2024 | 2023 | Change | | :----- | :--- | :--- | :----- | | Number of properties | 66 | 66 | 0 | | Rentable square feet (in thousands) | 17,105 | 17,105 | 0 | | Ending % leased | 81.5% | 83.3% | -1.8 pp | | Ending % occupied | 78.8% | 81.3% | -2.5 pp | | Quarterly average % occupied | 79.1% | 81.8% | -2.7 pp | Same Property Multifamily Statistics | Metric | 2024 | 2023 | Change | | :----- | :--- | :--- | :----- | | Number of properties | 11 | 11 | 0 | | Number of units | 3,569 | 3,569 | 0 | | Ending % leased | 99.2% | 98.8% | +0.4 pp | Same Property Net Operating Income (NOI) (in thousands) | Metric | 2024 | 2023 | % Favorable (Unfavorable) | | :----- | :--- | :--- | :------------------------ | | Office NOI | $118,110 | $127,904 | (7.7)% | | Multifamily NOI | $24,507 | $24,013 | 2.1% | | Total NOI | $142,617 | $151,917 | (6.1)% | | Office Cash NOI | $115,792 | $125,202 | (7.5)% | | Multifamily Cash NOI | $23,561 | $22,617 | 4.2% | | Total Cash NOI | $139,353 | $147,819 | (5.7)% | Same Property NOI Reconciliation The reconciliation details adjustments from net income to Same Property NOI, clarifying property-level operating performance by isolating it from corporate overhead and non-cash items - Net income (loss) attributable to common stockholders is reconciled to NOI by adjusting for noncontrolling interests, general and administrative expenses, depreciation and amortization, other income/expenses, income from unconsolidated Fund, and interest expense[27] - Same Property NOI is derived by further adjusting for non-comparable office and multifamily revenues and expenses, and non-cash adjustments related to the definition of NOI[28] Financial Data for JVs & Fund The company manages four consolidated Joint Ventures and one unconsolidated Fund, contributing significantly to overall Cash NOI - The company manages four consolidated JVs, owning a weighted average interest of approximately 46%, which hold 16 office properties (4.2 million sq ft) and 2 residential properties (470 apartments)[30] - The company's ownership interest in one unconsolidated Fund increased to 74% in February 2024; the Fund owns two Class A office properties (0.4 million sq ft)[30] Our Share of Cash NOI from Wholly-Owned Properties, JVs, and Fund | Segment | Three Months Ended Sep 30, 2024 (in thousands) | Nine Months Ended Sep 30, 2024 (in thousands) | | :------ | :--------------------------------------------- | :-------------------------------------------- | | Wholly-Owned Properties | $114,635 | $353,474 | | Consolidated JVs | $18,599 | $57,569 | | Unconsolidated Fund | $2,361 | $6,999 | Loans As of September 30, 2024, the company reported a total consolidated loan principal balance of $5.54 billion, with a weighted average fixed interest rate of 2.68% for fixed-rate loans - Total consolidated loans principal balance is $5,535,368 thousand, with 'Our Share' being $4,521,618 thousand[31] - The unconsolidated Fund has a loan principal of $115,000 thousand, with 'Our Share' being $85,080 thousand[31] - During September 2024, the company paid down $34.0 million on a loan to meet a minimum financial threshold for an extension option[31] Fixed Interest Rate Consolidated Loans (in billions) | Metric | Value | | :----- | :---- | | Principal balance (in billions) | $3.43 | | Weighted average remaining life (including extension options) | 3.4 years | | Weighted average remaining fixed interest period | 1.2 years | | Weighted average annual interest rate | 2.68% | PORTFOLIO DATA Office Portfolio Summary As of Q3 2024, the office portfolio comprises 70 properties with 17.98 million rentable square feet, 82.0% leased, primarily concentrated in Westside and Valley regions Office Portfolio Summary by Region as of September 30, 2024 | Region | Number of Office Properties | Our Rentable Square Feet | Our Market Share | Our Percent Leased | Annualized Rent | Annualized Rent Per Leased Square Foot | | :----- | :-------------------------- | :----------------------- | :--------------- | :----------------- | :-------------- | :------------------------------------- | | Westside | 52 | 9,999,051 | 35.1% | 81.4% | $443,470,745 | $57.37 | | Valley | 16 | 6,790,777 | 44.3% | 81.2% | $194,125,342 | $36.26 | | Honolulu | 2 | 1,190,835 | 22.3% | 92.0% | $37,155,117 | $36.11 | | Total / Weighted Average | 70 | 17,980,663 | 37.7% | 82.0% | $674,751,204 | $47.81 | Table Data | Period | Amount | | :----- | :----- | | Three months ended September 30, 2024 | $0.07 | | Nine months ended September 30, 2024 | $0.16 | Office Lease Diversification The office portfolio demonstrates strong lease diversification with a median tenant size of 2,400 square feet, ensuring a balanced distribution of rentable area and annualized rent - The median office lease size is 2,400 square feet, with an average of 5,300 square feet across 2,661 office leases[36][37] Office Lease Diversification by Square Footage | Square Feet Under Lease | Number of Leases | Percent of Leases | Rentable Square Feet | Percent of Rentable Square Feet | Annualized Rent | Percent of Annualized Rent | | :---------------------- | :--------------- | :---------------- | :------------------- | :------------------------------ | :-------------- | :------------------------- | | 2,500 or less | 1,354 | 50.9% | 1,953,576 | 13.8% | $87,017,833 | 12.9% | | 2,501-10,000 | 994 | 37.4% | 4,849,175 | 34.5% | $223,599,782 | 33.2% | | 10,001-20,000 | 202 | 7.5% | 2,782,313 | 19.6% | $132,332,305 | 19.5% | | 20,001-40,000 | 82 | 3.1% | 2,249,608 | 15.9% | $106,740,289 | 15.8% | | 40,001-100,000 | 27 | 1.0% | 1,573,091 | 11.2% | $80,588,169 | 12.0% | | Greater than 100,000 | 2 | 0.1% | 703,973 | 5.0% | $44,472,826 | 6.6% | | Total | 2,661 | 100.0% | 14,111,736 | 100.0% | $674,751,204 | 100.0% | Largest Office Tenants The top six largest office tenants collectively account for 7.6% of rentable square feet and 12.5% of annualized rent, with Warner Bros. Discovery being the largest Largest Office Tenants by Annualized Rent | Tenant | Total Leased Square Feet | Percent of Rentable Square Feet | Annualized Rent | Percent of Annualized Rent | | :----- | :----------------------- | :------------------------------ | :-------------- | :------------------------- | | Warner Bros. Discovery | 456,205 | 2.5% | $27,787,941 | 4.1% | | William Morris Endeavor | 247,768 | 1.4% | $16,684,885 | 2.5% | | UCLA | 200,854 | 1.1% | $11,814,159 | 1.7% | | Morgan Stanley | 144,688 | 0.8% | $10,999,565 | 1.6% | | Equinox Fitness | 185,236 | 1.0% | $10,589,285 | 1.6% | | NKSFB | 135,066 | 0.8% | $6,756,412 | 1.0% | | Total | 1,369,817 | 7.6% | $84,632,247 | 12.5% | - Warner Bros. Discovery's lease for 456,205 square feet expired on September 30, 2024[39] Office Industry Diversification The office portfolio exhibits broad industry diversification, with Legal, Financial Services, and Entertainment sectors representing the largest portions of annualized rent Office Industry Diversification by Annualized Rent | Industry | Number of Leases | Annualized Rent as a Percent of Total | | :------- | :--------------- | :------------------------------------ | | Legal | 570 | 18.7% | | Financial Services | 359 | 15.2% | | Entertainment | 138 | 13.8% | | Real Estate | 312 | 12.6% | | Health Services | 395 | 9.5% | | Accounting & Consulting | 293 | 8.7% | | Retail | 156 | 5.1% | | Technology | 92 | 4.8% | | Insurance | 88 | 3.0% | | Educational Services | 42 | 2.7% | | Public Administration | 71 | 2.4% | | Manufacturing & Distribution | 58 | 1.4% | | Advertising | 34 | 1.0% | | Other | 53 | 1.1% | | Total | 2,661 | 100.0% | Office Lease Expirations The office portfolio has a staggered lease expiration schedule, with 13.3% of rentable square feet expiring in 2025 and 12.7% in 2026 Office Lease Expirations by Year | Year of Lease Expiration | Number of Leases | Rentable Square Feet | Expiring Square Feet as a Percent of Total | Annualized Rent at September 30, 2024 | Annualized Rent as a Percent of Total | | :----------------------- | :--------------- | :------------------- | :----------------------------------------- | :------------------------------------ | :------------------------------------ | | 2024 | 120 | 413,842 | 2.3% | $17,321,911 | 2.6% | | 2025 | 623 | 2,387,341 | 13.3% | $113,211,791 | 16.8% | | 2026 | 524 | 2,284,594 | 12.7% | $105,403,039 | 15.6% | | 2027 | 430 | 2,038,230 | 11.3% | $96,689,285 | 14.3% | | 2028 | 308 | 1,545,485 | 8.6% | $73,066,555 | 10.8% | | 2029 | 225 | 1,249,465 | 6.9% | $56,198,500 | 8.3% | | 2030 | 114 | 1,041,493 | 5.8% | $53,645,918 | 8.0% | | 2031 | 84 | 578,343 | 3.2% | $28,068,169 | 4.2% | | 2032 | 47 | 467,830 | 2.6% | $21,704,740 | 3.2% | | 2033 | 50 | 354,678 | 2.0% | $18,016,788 | 2.7% | | Thereafter | 60 | 998,785 | 5.6% | $52,095,106 | 7.7% | | Subtotal/weighted average | 2,661 | 14,111,736 | 78.5% | $674,751,204 | 100.0% | Office Lease Expirations – Next Four Quarters Over the next twelve months, 1,941,320 square feet, representing 10.7% of the portfolio, are set to expire, with the largest portion in Q3 2025 Office Lease Expirations for the Next Twelve Months | Metric | Q4 2024 | Q1 2025 | Q2 2025 | Q3 2025 | Next Twelve Months | | :----- | :------ | :------ | :------ | :------ | :----------------- | | Expiring Square Feet | 413,842 | 364,453 | 507,885 | 655,140 | 1,941,320 | | Percentage of Portfolio | 2.3% | 2.0% | 2.8% | 3.6% | 10.7% | | Expiring Rent per Square Foot | $42.03 | $43.85 | $47.52 | $52.00 | $47.17 | Office Leasing Activity Q3 2024 saw positive net office absorption of 0.50%, with 1,003,091 square feet leased, though cash rents decreased by 11.2% compared to expiring rates - Net absorption during Q3 2024 was 0.50%[47] Office Leasing Activity by Lease Type | Lease Type | Number of Leases | Rentable Square Feet | Weighted Average Lease Term (months) | | :--------- | :--------------- | :------------------- | :----------------------------------- | | New leases | 92 | 353,235 | 55 | | Renewal leases | 144 | 649,856 | 59 | | All leases | 236 | 1,003,091 | 57 | Office Lease Rent Changes (YoY) | Metric | Expiring Rate | New/Renewal Rate | Percentage Change | | :----- | :------------ | :--------------- | :---------------- | | Cash Rent | $48.99 | $43.50 | (11.2)% | | Straight-line Rent | $44.53 | $44.69 | 0.4% | Office Lease Transaction Costs | Lease Type | Lease Transaction Costs per SF | Lease Transaction Costs per Annum | | :--------- | :----------------------------- | :-------------------------------- | | New leases | $29.14 | $6.57 | | Renewal leases | $24.14 | $6.09 | | All leases | $25.86 | $6.27 | Multifamily Portfolio Summary As of Q3 2024, the multifamily portfolio consists of 14 properties and 4,476 units, with a 99.1% leased rate, primarily in Honolulu and Los Angeles Multifamily Portfolio Summary by Region as of September 30, 2024 | Region | Number of Properties | Number of Units | Units as a Percent of Total | Percent Leased | Annualized Rent | Monthly Rent Per Leased Unit | | :----- | :------------------- | :-------------- | :-------------------------- | :------------- | :-------------- | :--------------------------- | | Santa Monica | 3 | 940 | 21% | 99.1% | $50,419,296 | $4,518 | | West Los Angeles | 7 | 1,049 | 23% | 98.1% | $54,350,928 | $4,808 | | Honolulu | 4 | 2,487 | 56% | 99.4% | $69,137,436 | $2,336 | | Total / Weighted Average | 14 | 4,476 | 100% | 99.1% | $173,907,660 | $3,341 | Multifamily Recurring Capital Expenditures per Unit | Period | Amount | | :----- | :----- | | Three months ended September 30, 2024 | $198 | | Nine months ended September 30, 2024 | $573 | GUIDANCE 2024 Guidance The company has updated its 2024 guidance, narrowing office occupancy and revising Same Property Cash NOI Growth, while raising net income and FFO per share projections 2024 Guidance for Per Share Metrics | Metric | Per Share | | :----- | :-------- | | Net income per common share - diluted | $0.10 to $0.14 | | FFO per share - fully diluted | $1.69 to $1.73 | 2024 Guidance Assumptions | Metric | Assumption Range | Compared to Prior Assumption | | :----- | :--------------- | :--------------------------- | | Average Office Occupancy | 79% to 80% | Narrowed | | Residential Leased Rate | Essentially fully leased | Unchanged | | Same Property Cash NOI Growth | -3.0% to -1.5% | Revised | | Above/Below Market Net Revenue | $6 to $10 million | Unchanged | | Straight-line Revenue | $2 to $5 million | Unchanged | | G & A Expenses | $46 to $50 million | Revised | | Interest Expense | $225 to $235 million | Unchanged | | Weighted average fully diluted shares outstanding | 202.0 million | Unchanged | Reconciliation of 2024 Non-GAAP Guidance The reconciliation illustrates adjustments from net income to FFO, projecting FFO between $341.4 million and $349.5 million for 2024 Reconciliation of 2024 Net Income to FFO (in millions) | Metric | Low | High | | :----- | :-- | :--- | | Net income attributable to common stockholders | $17.4 | $24.1 | | Adjustments for depreciation and amortization of real estate assets | $395.0 | $385.0 | | Adjustments for noncontrolling interests, consolidated JVs and unconsolidated Fund | ($71.0) | ($59.6) | | FFO | $341.4 | $349.5 | 2024 Per Share Guidance Reconciliation | Metric | Low | High | | :----- | :-- | :--- | | Net income per common share - diluted | $0.10 | $0.14 | | FFO per share - fully diluted | $1.69 | $1.73 | DEFINITIONS Adjusted Funds From Operations (AFFO) AFFO is a non-GAAP measure derived from FFO by adjusting for non-cash items and subtracting recurring capital expenditures, providing a clearer view of distributable cash flow - AFFO is calculated from FFO by eliminating the impact of straight-line rent, amortization/accretion of acquired leases, loan costs, non-cash compensation expense, and subtracting recurring capital expenditures, tenant improvements, and capitalized leasing expenses[61] Annualized Rent Annualized Rent represents the annualized cash base rent from commenced leases, including expense reimbursements for triple net office properties, used to assess tenant demand - Annualized Rent represents annualized cash base rent (excluding tenant reimbursements, parking, and other revenue) under leases commenced as of the reporting date and expiring thereafter[63] - For triple net office properties, annualized rent includes expense reimbursements and estimates of normal building expenses paid by tenants[63] Funds From Operations (FFO) FFO is a non-GAAP financial measure calculated according to NAREIT standards, adjusting net income by excluding real estate gains/losses, depreciation, and impairment write-downs - FFO is calculated in accordance with NAREIT standards by excluding gains (or losses) on sales of investments in real estate, real estate depreciation and amortization, and impairment write-downs from net income (loss)[69] Net Operating Income (NOI) NOI is a non-GAAP measure representing property revenue less operating expenses, excluding corporate overhead and non-property specific items, with Cash NOI further excluding non-cash rent adjustments - NOI is calculated as revenue less operating expenses attributable to the properties, excluding general and administrative expenses, depreciation and amortization, other income/expenses, income from unconsolidated Fund, interest expense, and noncontrolling interests[76] - Cash NOI is calculated by further excluding straight-line rent and the amortization/accretion of acquired above/below market leases from NOI[76] Same Property NOI Same Property NOI includes only properties consistently owned and operated across comparable periods, facilitating a clearer comparison of operating results by removing non-comparable assets - Same Property NOI includes properties owned and operated by the company during both periods being compared, excluding those acquired, sold, undergoing major repositioning, impacted by development, or suffering significant casualty loss[82] - For 2024, same properties exclude a Honolulu office property affected by development, a Los Angeles residential property removed from the rental market due to fire, a new residential property, and a single tenant office property planned for repositioning[82]