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Stock Strategist Industry Reports

This REIT Is Not Worth Its Skyscraper Price

We like Douglas Emmett's near- and medium-term prospects, but the market likes them even more.


Although there are reasonable ways to justify  Douglas Emmett's (DEI) current share price, we think the downside risk outweighs the upside potential. We have a positive view on Douglas Emmett's near- and medium-term operating prospects, but the market appears to be anticipating an even rosier outlook. The stock is trading 65% higher than our $13 fair value estimate.

We share the sentiment reflected in recent commercial real estate research that the Los Angeles office leasing market is near or just past a bottom; however, we do not expect Douglas Emmett to immediately enjoy the full benefit of its main market's improving fundamentals, due to in-place, above-market rents. Roughly 30% of its office portfolio is subject to expiring leases through 2013. Most of these leases were written during peak cycle years, and we expect the portfolio to experience negative re-leasing spreads through 2013, as in-place rents roll down to the level of lower market rents.

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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