J.P. Morgan Reiterates Overweight Rating on Douglas Emmett (DEI)

J.P. Morgan is out with a research report this morning, where it reiterates its Overweight rating on shares of Dougles Emmett Inc. (NYSE: DEI); it has a $19.00 price target on the stock.

The JPM analysts said, “After market close, Douglas Emmett announced that it acquired Bishop Square, a 91%-leased 960k square foot class “A” office project in Honolulu’s CBD, for $232 million ($242/SF). The acquisition does not come as a surprise since it has been speculated upon in various industry publications recently. However, until now, we were not aware of the $232 million price tag on the deal.”

They noted, “Bishop Square is comprised of two towers totaling 960k sf of space. One tower (the American Savings Bank Tower) was built in the early 1970s, and the second tower (Pauahi Tower) was built in the early 1980s. We understand the average tenant size, lease lengths, and near-term expirations are all consistent
with DEI’s existing office portfolio. The Honolulu CBD office market is less than five million square feet in total; thus, this transaction is about 20% of the market. Given DEI’s existing assets there, it now owns about 36% of the market. According to the Pacific Business Report, the seller was a partnership between Northwestern Mutual and Calpers. As for market fundamentals, vacancy rates appear to be a bit north of 10% and landlord pricing power appears weak at the moment.”

The JPM analysts closed by saying, “DEI did not disclose the economics of this deal, but given market statistics from Hawaii Commercial Real Estate, LLC, we estimate a going-in yield in the high 6s. Market rents appear to be in the high $2s/sf/month (almost $3) with expenses running in the low $1s/sf/month. The annual NOI/sf should thus equate to somewhere in the mid-to-high teens, and at 91% occupied on a basis of $242/sf, it would equate to a cap rate in the high 6s. (See our table below.) To note, however, is that Honolulu market rents have been declining as in the rest of the country, so we would not be surprised if the in-place rents (especially after contractual bumps) are a bit higher than the quoted market, resulting in a going-in cash/cash yield close to 7%.”