REIT Focus: Douglas Emmett, Inc.

Jun.16.13 | About: Douglas Emmett, (DEI)

This REIT Focus is on Douglas Emmett, Inc. (NYSE:DEI), a publicly traded REIT that owns 59 Class A office buildings with 14.9 million sq. ft. and nine apartment properties with 2,868 units, all located in CA and HI. Major office building tenants include Time Warner, William Morris Endeavor and Bank of America. DEI owns an approximate 83% general partner interest in its UpReit general partnership, Douglas Emmett Properties, LP.

As of 3/31/13, the average occupancy and rent of its office portfolio was 89% and $35 per sq. ft. and for the apartment portfolio was 98% and $1,979 per month respectively. DEI was formed as a Maryland Corporation in 2005, is traded on the NYSE and is based in Santa Monica, CA. state.

DEI has 142.6 million common shares outstanding and a market capitalization of approximately $3.56 billion. DEI has an experienced management team that includes Dan A. Emmett, Chairman of the Board and Founder of the predecessor company to DEI in 1991 and Jordan L. Kaplan, President and CEO who joined a predecessor company of DEI in 1986.

Select financial data for DEI as of the 3/31/13 10Q and for the period 1/1-3/31/13 is as follows (in millions where applicable):

Real Estate Assets, Gross $6,962
Total Assets $6,008
Secured Notes Payable $3,351
Stockholders' Equity $2,383
Revenue $145
Net Income $12
Net Income Per Share $.08
Cash Flow from Operations $72
Revolving Credit Facility (none) $0
Market Capitalization $3,565
Debt to:
Gross Real Estate Assets 48%
Market Capitalization 94%
Dividend and Yield ($.72/sh.) 2.9%
Valuation Methodology:
First Quarter Revenue Per Above Annualized $580
Less: Operating Expenses Annualized (excluding depreciation, amortization & interest expense, plus G&A expenses and other income) 212
Annualized Net Operating Income 2013 $368
Projected Inflation Rate at 3.5% x103.5%
Projected Forward NOI for Next Year $381
Projected Cap Rate 7%
Projected Value of Real Estate Assets $5,443
Add: Net Operating Working Capital 122
Add: Investment in Unconsolidated Real Estate Funds (at book value) 157
Total Projected Asset Value $5,722
Less: Total Debt Per Above (3,351)
Projected Net Asset Value $2,371
Shares Outstanding 173.7M (common stock, 142.6M shares plus 31.1M partnership units and option shares )
Projected NAV Per Share $14
Closing Market Price Per Share on 6/14/13 $25
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The gross real estate assets, net income and funds from operations for the years 2010 through 2012 are shown in the table below:

(millions) 2010 2011 2012
Gross Real Estate Assets $6,782 $6,843 $6,935
Net Income ($26) $1 $23
Funds from Operations $194 $221 $235
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As shown above, our net asset value per share for DEI is $14 per share versus a market price of $25 per share. Current average cap rates for office properties in CA per CBRE are in the 5% to 8.5% range, depending on the tenancy, location and quality of the property and 3.75% to 7% for apartment properties depending on the location and quality of the property. We have used a blended cap rate of 7% due to DEI's portfolio being approximately 90% office and 10% multi-family.

DEI's strengths include; adequate leverage and solid management team. Weaknesses include; low office occupancy of 89%, portfolio is not diversified geographically, minimal asset growth during the last few years and low dividend yield of 2.9%. DEI does not have a revolving line of credit to tap for acquisitions and major renovations and is one of the only major REITs we're aware of without one.

We do not recommend the purchase of this stock at the current price of $25/sh. and would only buy at a significant discount to the current price. The stock is trading at a cap rate of approximately 5.5%, which we consider well below market cap rates.

A five year price chart of DEI is shown below:

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.