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Douglas Emmett’s Leverage: A Tale of Dependence, or of Improvement?

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Dec. 4 2020, Updated 10:52 a.m. ET

Douglas Emmett’s moderately declining debt

As of the end of fiscal 2014, Douglas Emmett’s (DEI) consolidated debt was $3.4 billion, up by 6% over the previous year. Over the last five years, Douglas Emmett’s total debt has experienced a moderate decline, although its debt to equity has remained at higher levels. Notably, the company’s total debt declined from $3.7 billion in 2010 to $3.5 billion as of September 2015.

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Higher debt-to-equity ratio

Douglas Emmett’s debt-to-equity ratio reached its high of 1.6 in 2010. Since then, it has declined a bit to reach at 1.5 in 2014. As of September 2015, Douglas Emmett’s debt-to-equity ratio at 1.5 is much higher than the industry average of 1.1.

A peer group comparison shows that Douglas Emmett’s debt-to-equity ratio is higher than that of its competitors. Highwoods Properties (HIW) reported a debt-to-equity ratio of 1.4, followed by Boston Properties (BXP) at 1.2, and SL Green Realty (SLG) at 1.0. The iShares US Real Estate ETF (IYR) invests approximately 0.7% of its total portfolio in Douglas Emmett.

The importance of leverage

As mentioned earlier, REITs like Douglas Emmett have to pay at least 90% of taxable income to investors as dividends. Higher dividend payout by many REITs forces the management to go for higher leverage to expand real estate holdings. This results in higher interest outgo, thereby reducing their earnings. On the other hand, expansion in real estate holdings creates additional sources of income for leveraged REITs. What matters, then, is how good company management is in converting higher leverage to its advantage.

The higher leverage of Douglas Emmett could be due to lower cash flow generation because the company isn’t very keen on fund raising through property dispositions. At the same time, the company is continuously acquiring properties, which require substantial cash outflows.

Higher share of fixed-rate debt

As of 3Q15, 92%—or $3.2 billion—of company’s debt was on a fixed-rate basis while the remaining was on a floating rate basis. The fixed-rate debt had a weighted average interest rate of 3.8% with a weighted average maturity of 4.2 years. The higher percentage of fixed-rate debt provides the company hedge against a rise in interest rates, capitalization rates, and inflation.

It’s time now to check out Douglas Emmett’s valuation.

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