Douglas Emmett Posts In-Line Fundamental Quarter

Douglas Emmett DEI reported headline 3Q results that were above our and consensus estimates. However, the majority of the upside was due to higher tenant recoveries that more than offset higher OpEx. Bundy acquisition was likely neutral. Behind the noise of these transactions, underlying fundamentals were as expected and consistent with mgmt's comments at investor day in early October. Occupancy declined and rent spreads deteriorated sequentially, as DEI's markets have not yet “turned the corner.” FFO of 36c were 3c above our estimate and consensus. While OpEx was higher, tenant recoveries were much higher and drove the majority of the beat vs. our estimate. Tenant recoveries were $12.1m vs. the trailing 4 Qtr avg. of $7.5m. Unclear what the driver was, but the increase seems one-time in nature. Citi rates DEI shares High Risk, reflecting its increased concern over REIT sector valuations. All of the REITs in its coverage universe have High Risk or Speculative ratings. Continued concerns regarding reduced liquidity, wider credit spreads, lack of transactions to validate Citi's beliefs that REITs are trading at a discount, though still well above historical valuation metrics, causes Citi to be more cautious as REITs will likely continue to be volatile. DEI closed Tuesday at $17.88