Douglas Emmett(DEI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Unaudited consolidated financial statements for Q2 2023 reflect a decrease in total assets, a net loss of $15.1 million, and reduced operating cash flow Consolidated Balance Sheets Total assets decreased to $9.61 billion, driven by reduced real estate investment, while liabilities slightly increased and equity declined | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $9,614,864 | $9,747,446 | | Investment in real estate, net | $8,892,889 | $8,993,608 | | Cash and cash equivalents | $263,184 | $268,837 | | Total Liabilities | $5,540,546 | $5,471,663 | | Secured notes payable and revolving credit facility, net | $5,264,652 | $5,191,893 | | Total Equity | $4,074,318 | $4,275,783 | Consolidated Statements of Operations Q2 2023 revenues increased to $253.4 million, but higher operating and interest expenses resulted in a net loss of $15.1 million Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $253,407 | $246,970 | $505,800 | $485,852 | | Total operating expenses | $221,693 | $187,482 | $415,465 | $365,634 | | Interest expense | ($50,305) | ($36,264) | ($95,816) | ($71,166) | | Net (loss) income | ($15,069) | $23,837 | $1,093 | $50,096 | | Net (loss) income per share | ($0.04) | $0.14 | $0.06 | $0.28 | - The significant increase in depreciation and amortization for Q2 2023 was primarily due to an accelerated depreciation expense of $27.4 million related to the removal of the Barrington Plaza Apartments property from the rental market[57] Consolidated Statements of Cash Flows Net cash from operations decreased to $241.7 million, while investing activities used less cash, and financing activities shifted to a net use due to share repurchases Cash Flow Summary (in thousands) | Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $241,723 | $255,490 | | Net cash used in investing activities | ($119,934) | ($444,813) | | Net cash (used in) provided by financing activities | ($127,442) | $124,461 | | Decrease in cash and cash equivalents | ($5,653) | ($64,862) | Notes to Consolidated Financial Statements Notes detail portfolio, accounting policies, and financial components, highlighting accelerated depreciation, consolidated debt, and a new $350 million term loan - As of June 30, 2023, the company's consolidated portfolio consisted of 68 office properties (17.6 million sq. ft.) and 14 multifamily properties (4,809 units)[38] - In Q2 2023, the company recorded an additional $27.4 million in depreciation expense due to accelerating the removal of its Barrington Plaza Apartments property from the rental market for safety improvements[57] Consolidated Debt Summary (as of June 30, 2023) | Debt Type | Principal Balance (in thousands) | | :--- | :--- | | Aggregate swapped to fixed rate loans | $3,805,000 | | Aggregate fixed rate loans | $28,076 | | Aggregate floating rate loans | $1,457,400 | | Total Debt | $5,290,476 | - In July 2023, the company closed a new $350 million secured, non-recourse term loan maturing in 2033, using part of the proceeds to pay off its revolving credit facility[139] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2023 net loss drivers, including higher interest rates and accelerated depreciation, noting mixed segment performance and decreased FFO - The company is converting a 493,000 sq. ft. office tower in Honolulu into 493 rental apartments, with 85% of units delivered and 98% of delivered units leased as of June 30, 2023[145] - The Barrington Plaza Apartments property is being removed from the rental market for safety upgrades, a multi-year project expected to cost several hundred million dollars, resulting in a $27.4 million accelerated depreciation charge in Q2 2023[147] FFO Reconciliation Summary (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net (loss) income attributable to common stockholders | ($7,262) | $24,374 | | Depreciation and amortization of real estate assets | $121,573 | $93,947 | | Other adjustments | ($17,879) | ($12,997) | | FFO | $96,432 | $105,224 | Same Property NOI Change (Q2 2023 vs Q2 2022) | Segment | Q2 2023 NOI (in thousands) | Q2 2022 NOI (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Office | $131,639 | $134,192 | (1.9)% | | Multifamily | $20,542 | $19,777 | 3.9% | | Total | $152,181 | $153,969 | (1.2)% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with 72% of debt fixed or swap-fixed, and ongoing LIBOR to SOFR transition - A 100 basis point increase in interest rates would increase annual interest expense on unhedged floating-rate debt by $14.8 million[188] - The company is in the process of transitioning its debt and derivative contracts from LIBOR to SOFR, expecting to complete the process in the third quarter of 2023[189] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[190] PART II. OTHER INFORMATION Legal Proceedings The company is not currently involved in any legal proceedings expected to have a materially adverse effect on its operations - Excluding ordinary routine litigation, the company reports no material legal proceedings[191] Risk Factors No material changes to risk factors were reported compared to the company's 2022 Annual Report on Form 10-K - No material changes to risk factors from the 2022 Form 10-K were reported[192] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 7.64 million shares for $92.6 million in Q2 2023 under its $300 million program, with $190.9 million remaining Common Stock Repurchases (Q2 2023) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2023 | 4,564,811 | $12.57 | | May 2023 | 1,770,961 | $11.37 | | June 2023 | 1,300,991 | $11.61 | | Total Q2 | 7,636,763 | N/A | - As of June 30, 2023, $190.9 million remained available under the company's share repurchase program[194] Exhibits This section lists exhibits filed with the Form 10-Q, including corporate governance documents and CEO/CFO certifications