Credit Suisse Downgrades West Coast Office REIT Douglas Emmett - Big Picture

On May 6, Credit Suisse published a research report downgrading SoCal office REIT Douglas Emmett Inc.

to Underperform, after its Q1 earnings release, but prior to the DEI conference call as of this writing. DEI owns 62 west coast office properties containing over 15 million SF in Los Angeles and a growing Honolulu presence; as well as 3,336 multifamily units.

Pacific coast focused office peers include:  Hudson Pacific Properties

- $2.7 billion cap, 1.7 percent dividend yield.  Kilroy Realty

- $6.1 billion cap, 2 percent dividend yield.  Douglas Emmett - $4.1 billion cap, 3 percent dividend yield. Tale Of The Tape - Past Year

The Vanguard REIT Index ETF

is a good proxy for the broader equity REIT sector. Douglas Emmett - Q1 Guidance Update

Credit Suisse - Douglas Emmett: Downgrade - Underperform, $29 PT Unchanged The CS price target represents a potential 3.1 percent upside based upon May 5, close of $28.12 per share; projected total return of 6.1 percent, including annual dividend.  The CS PT was derived from NAV (net asset value) model with a 5 percent management premium (75 percent) and CS dividend discount model (25 percent).  After updating their model, CS lowered its 2015E FFO per share by a penny to $1.59 vs. company guidance $1.59 - $1.63 per share.  CS FFO estimates for FY 2016 and FY 2017 are $1.62 and $1.73, respectively. Credit Suisse - Douglas Emmett: Rationale  CS believes the Warner Center Portfolio, "which is 83.5% leased, down 30 bps from 4Q14," continues to an overhang on DEI shares, "both from an operating and perception perspective."  CS "strongly believes" that there is a potential $2 - $4 per share NAV upside if DEI were to sell the Warner Center property.  CS is concerned that same store NOI growth was slightly negative in Q1, while the LA office leasing market has been "red hot."  However, CS believes "NOI growth will pick-up in the balance of the year as positive leasing spreads (5.2% in 1Q), strong in-place rent bumps (3.5%), and average 91% occupancy will drive 2.4% NOI growth for its core office portfolio…" Douglas Emmett - Big Picture Q1 2015

Investor Takeaway The Warner Center/Woodland Hills submarket accounts for 13 percent of DEI office rents. The Douglas Emmett portfolio is highly concentrated in a West Los Angeles office market that is evolving away from growth in traditional users such as attorneys and insurance companies; with strong demand for creative office space in sub-markets such as Silicon Beach (Santa Monica and surrounding areas) -- as is the case in many coastal metro markets. The DEI office portfolio is notably looking at 2016 and 2017 lease renewals of 13.3 and 14.9 percent, respectively. The Douglas Emmett targeted return of 6.1 percent places DEI in the bottom 10 percent of CS coverage universe, and that combination led to the downgrade.