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Douglas Emmett’s Net Operating Income Growth—Too Flat for Comfort?

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Douglas Emmett sees moderate FFO growth

FFO (funds from operations) is a measure used by REITs (real estate investment trusts) to define the cash generated from their operations. Douglas Emmett’s (DEI) FFO has increased consistently over the past five years. Its FFO increased from $194.4 million in 2010 to $271 million in 2014, which is the highest FFO recorded by the company during the past ten years.

The company achieved a diluted FFO per share of $1.54 in 2014, compared to $1.49 in 2013. This is lower than some of its competitors, which recorded higher FFOs per share. For example, SL Green Realty’s (SLG) FFO per share was $5.9 in 2014, and Boston Properties’ (BXP) was $5.3. Highwoods Properties (HIW) had an FFO per share of $2.9.

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Key performance measures

A company’s FFO, AFFO (adjusted funds from operations), and NOI (net operating income) are the key measures of its operating performance. These measures are important in evaluating the operating performance of the company’s portfolio and provide a basis for comparison with other real estate companies.

Flat net operating income

Douglas Emmett’s NOI remained flat over the past five years. In 2010, the company reported NOI of $393.4 million while in 2014 it was at $397.7 million. This is the highest NOI reported by the company during the past five years.

Notably, the company is finding it difficult to ramp up its NOI from existing properties. In order to do this, Douglas Emmett would need to foray into new markets or acquire high-quality properties that can generate higher income in the years ahead.

Explaining net operating income

NOI is computed by deducting a company’s operating expenses from its gross operating income. These operating expenses can be property taxes, maintenance costs, and salary, among others. NOI is used to measure operating performance of the company’s properties, whereas FFO is used measure an REIT’s (real estate investment trust) operating performance.

Douglas Emmett forms approximately 1% of the total holdings of the iShares Cohen & Steers REIT ETF (ICF).

Continue to the next part of this series for a look at Douglas Emmett’s FFO payout ratio.

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