The office REIT primarily focuses on leasing space to smaller, affluent tenants. Overall, 96% of its leases are for less than 20,000 square feet, with its median tenant lease size only 2,600 square feet. Its average tenant decision-maker lives near their office suite, leading them to be willing to pay a premium for proximity while reducing turnover. The focus on smaller tenants also reduces its exposure to any one tenant or industry.
Meanwhile, Douglas Emmett's multifamily portfolio includes:
- L.A. Westside: Eight properties with 2,120 units.
- Honolulu: Four properties with 2,167 units.
The company focuses on owning multifamily properties in high-barrier premium submarkets in West L.A. and Honolulu. These communities command higher rents, enabling the REIT to generate above-average operating margins.
Overall, the L.A. Westside market contributes 65% of its combined total annual rent, followed by L.A. Valley at 25% and Honolulu at 10%.
Douglas Emmett also selectively invests in development projects in its markets to take advantage of demand trends. It's currently converting a 25-story, 490,000-square-foot office tower in downtown Honolulu into roughly 500 rental apartments. The project will help address the severe housing shortage in the city. It's converting this building in phases as existing office tenants move out, delivering the first residential units in the second quarter of 2020.
The REIT is also building a 34-story luxury apartment tower with ocean views in the Brentwood neighborhood of Los Angeles. The building will have 376 apartment units, luxury amenities, and a new one-acre park. The company expects to finish the first units in 2022.
Douglas Emmett news
The pandemic had a noticeable impact on Douglas Emmett's results in 2020. The REIT's adjusted funds from operations (AFFO) declined from $365.4 million in 2019 to $324.9 million in 2020. Weighing on its results were lower office occupancy levels, reduced parking fees at its office properties, and lower rental collection rates, especially from retail and hospitality tenants.
Government-mandated stay-at-home orders impacted its office portfolio, as some tenants opted to continue working remotely once their leases expired. That weighed on occupancy and lease rates. While small-tenant demand picked up in the fourth quarter as the company signed 197 office leases covering 612,000 square feet of space, cash rental rates declined by 5.8% compared to expiring leases rates.
In December 2020, the REIT sold an 80,000-square-foot office building in Honolulu for $21 million. The building had a health club, which closed due to the pandemic. The buyer purchased the property with the intent to use the former club space for youth vocational training and after-school programs.
Douglas Emmett stock price
Douglas Emmett's focused strategy hasn't delivered the desired results in recent years.