Douglas Emmett, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in listen-only mode. After management's prepared remarks, you'll receive instructions for participating in the question and answer session. And I'll turn the conference over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

Thank you. Joining us today on the call are Jordan Kaplan, our president and CEO, Kevin Crummey, our CIO, and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the investor relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website. When we reach the question and answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.

Good morning, everyone. I know we're competing with the election news. Don't worry. If either candidate for president concedes during the call, we'll let you know. Our third quarter results still reflect major challenges from the pandemic, though we did see some incremental improvement in rent collection, tenant utilization, and leasing activity compared to second quarter. As of today, we have collected 91.4% of our combined second and third quarter rent, including 95.9% of our residential rent, 93.7% of our office rent, and 39.7% of our retail rent. Once the eviction moratoriums in our markets expire, or even just come in line with other major U.S. cities, we expect current collections to improve and to collect a large portion of the past due amounts. In prior downturns, the impact of personal guarantees and small business owners' commitment to their companies have kept our defaults very low. Compared to last quarter, we increased our deal flow from 125 deals to 175 deals, with increases in both new and renewal transactions. We accomplished this despite the fact that many tenants are deferring their decisions during this uncertain period. We have not observed a trend toward tenants giving up space to work from home, and in fact, we are seeing more tenants coming back into the office. Our small tenants don't face significant mass transit, parking, or vertical transportation concerns, making it much easier for them to reoccupy their offices. While cash rent spreads are down and straight line growth is slower, tenants have become less focused on TIs, which has enhanced our net effective rent. Having managed through three prior recessions, each of which seem unique, We are confident that we will emerge from this downturn stronger than we entered it. With that, I will turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone. Lease enforcement moratoriums remain in effect in California and are considerably more restrictive than those in place in most other major U.S. cities. While we continue to work towards making these orders less onerous, they are likely to remain in place for the foreseeable future. Turning to construction, We remain focused on our two large multifamily development projects, which are progressing nicely. We are now fully leased in our first phase of 98 units of our office to residential conversion project in downtown Honolulu. The demand for this new high quality product in the center of the CBD has been outstanding. We hope to complete the next phase, which is comprised of 76 units and building amenities in the next few months. Our Brentwood high-rise apartment construction remains on schedule to deliver our first units in 2022. We also continue to work on securing additional entitlements to build more apartment units on sites we already own. In September, we successfully increased the allowable density at our Wayanna apartment community in Honolulu. The 12-acre parcel sits a short walk from the CBD and currently has 468 apartment units. The new zoning increased our height limit to 400 feet and allows us to build up to 2,800 additional units on the site. As I discussed last quarter, property sales in our markets remain significantly below normal levels. Reflecting today's low interest rate environment, we have seen a few smaller trades at record prices for long-term leased office properties. I will now turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. In Q3, we signed 175 office leases, 40% more than during Q2. These leases covered 735,000 square feet, including 171,000 square feet of new leases and 564,000 square feet of renewal leases. As Jordan mentioned, we are seeing tenants more willing to trade tenant improvements for competitive office rents. As a result, we reduced our annualized office leasing costs per square foot this quarter by 30% from a year ago, and 20% from last quarter. Cash leasing spreads for the third quarter were 14.7% for straight-line rent roll-up and negative 0.7% for cash roll-up. While our tenant retention was in line with long-term averages, our office lease percentage declined 1% to 89.8% as new leasing volume remained below pre-COVID levels. On the multifamily side, our lease rate declined from 98.7% to 97.5% as continued university closures and military deployments in Hawaii have caused slightly higher than usual vacancy at a couple of our properties. I'll now turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning, everyone. First, to show the gross impacts of the pandemic in very tenant-oriented lease enforcement moratoriums in Los Angeles, I'll compare this quarter to Q3 2019. FFO was $0.40, down $0.11 per share from Q3 2019. Major items contributing to this decline were the following. Write-offs from slower office collections reduced our FFO by about $0.08 per share. Parking utilization, though up from last quarter, reduced our FFO by about $0.045 per share. Slower office leasing resulting in lower occupancy reduced our FFO by about $0.02 per share. Uncollected insurance recoveries related to this quarter from an apartment fire reduced our FFO by just over one cent per share. These negative FFO impacts were offset by about three cents from higher average in-place rent and about three cents from operating expense savings. AFFO declined 26.6% to $69.2 million and same property cash NOI declined by 15.5% as lower revenue was partly offset by office operating expense savings. Now I will compare Q3 2020 to Q2 2020 to highlight the most recent trends. FFO was down a net one cent per share from last quarter, largely as a result of the following. Better office collections, lower write-offs, and slightly higher parking income increased our FFO by about four cents per share. Normal seasonality in our utilities and higher insurance premiums reduced our FFO by about 4 cents per share. And the uncollected insurance recoveries reduced our FFO by just over 1 cent per share. At only 4.4% of revenues, our G&A for the third quarter remains well below that of our benchmark group. Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance. Although it's still early in Q4, the trends in cash collections and parking so far appear to be consistent with the trends in Q3. We expect occupancy to continue to decline until leasing volume improves. Once the eviction moratoriums in our markets are allowed to expire or come in line with other major U.S. cities, we expect collections to improve and to collect some of the past due amounts. That is unlikely to have a material impact on the current year. I will now turn the call over to the operator so we can take your questions.

Now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. As a reminder, please limit yourself to one question and one follow-up. This time, we'll pause momentarily to assemble the roster. First question comes from Dave Rogers of Barron. Please go ahead.

Yeah, good morning out there. Jordan, maybe start with you or Stuart. I wanted to talk a little bit about pricing power and the pricing that you saw in the quarter. You guys talked at length there just about how customers were trading the TIs and LCs, I guess, for the lower face rent. But what do you expect to see in terms of pricing power as you move forward, both on the renewals and the new leases? One, I guess overall, and then two, I guess as you divide it up between the Valley of the West Side and maybe a lesser extent Honolulu, what type of pressure do you expect to see in those particular areas?

Well, I mean, pricing power, that's a great way to put it. I don't know if we have pricing power. I mean, we're always reacting to the market that we're facing. But just to back up a little bit, in general, What we want to do is keep occupancy as high as possible because that puts pressure on rental rates, right? I mean, vacancy puts pressure off. Occupancy keeps pressure up. We're in markets that are relatively well-occupied, so that has allowed us to hold our own pretty well. We're doing even better than that in Hawaii. So put Hawaii to the side where it's a very tight market, but if you look at our markets here in L.A., We've been able to do fairly well in terms of what I think you're calling rental rates, but you're seeing a little bit of slippage each quarter, and that's as a result of the fact that while we're holding our own on renewals, it's hard to get the new deal flow all the way up to where we need it to be. Now, say, and I say this all the time, I mean, I'm just so happy with the response from our operations because We were off about a point and a half in the second quarter. We've now started narrowing that and working that number down. Hopefully, we can keep working it down because that's kind of the game until the thing turns around and heads back up, which I'm optimistic will happen sometime in 2021.

Maybe to ask that slightly differently, just in LA, what's the difference in your new rents on a new versus renewal basis? If you had said that or give that, I didn't see it. But is there a meaningful delta between those two right now?

Well, it's very, you know, since you don't do an office lease, you know, two years in a row, the best stats that we can give you that are based on stats, not a feeling, are the roll-up, roll-down stats, which we give. And we're still obviously rolling on leases. I think the straight line is about 14%. So if you were to say, wow, it used to be up in the high 20s. Now it's 14%. That would give you some instinct that things are moving off a bit, which is why we tried to say during the call, which you would expect that they are. But in fact, the overall lease economics seem to be holding on pretty well because as you heard in Stuart's section, Our other leasing costs are down dramatically compared to last year and even down compared to last quarter.

Okay, thanks. And then maybe just a follow-up for Peter. Can you break down the write-off that you talked about between anything accounts receivable related, the straight line rent write-offs, and then any security deposits you applied in the third quarters? Those details would be helpful. Thank you.

Yeah. A lot of the impact, we said it's four cents better than the previous quarter. That includes the better collections. It includes a small amount of write-offs for new tenants. There's very little straight line in that number this quarter. It also includes the small positive impact from improved parking.

Thank you. The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.

Hey, morning out there. Hey, how are you, Jordan? So just a few questions here, or two questions. First, on the rent collections, as you guys look at your portfolio, especially now that you've been through two quarters of the COVID, what percent of the depressed collections are people just ghosting you, like choosing voluntarily to not pay the rent versus people who literally have gone under. So I'm assuming on the retail side, there are probably a lot of tenants who have either closed or just don't have literally the means to pay the rent, but there's still occupying the space trying to provide an amenity. And then there are probably a bunch of other tenants who have decided, hey, we don't need to pay. We'll just keep occupying it and we'll settle up with the house whenever the moratoriums are lifted. I'm trying to understand from a rent collection what the snapback would be once the eviction moratoriums end?

Well, you probably got it pretty good. First of all, I would say if you go back, and we believe that these numbers will hold for this recession, if you go back to the last big recession, which was in 2008, our actual default loss ran around 2%. If you look at what's going on right now and you look at the collections that we're missing from our office tenants, we have a very strong feeling that we'll be able to collect that money and most of that money. But, you know, we'll see. It's very hard to see through the fact that the moratoriums, I mean, you can tell when people just have a horrible attitude towards you and it's like, stop bugging me. I'm told I don't have to pay and therefore I'm just planning not to pay. And we're definitely getting that. On the retail side, especially small retail, not large retail, it's pretty easy to see what's going on with them. And they represent, as we've told you in the past, about half of the money that we aren't collecting. And you might take a guess at some portion of that we're going to make deals on. That's where we're trying to make deals because Most of that retail acts as an amenity to our office. Retail is only 5% of our portfolio anyway, and we want to protect that group, right, because we don't want to lose the amenity.

Okay, so on the office side, Jordan, it sounds like most of the people who aren't paying you are just ghosting you, whereas on the retail side it's legit.

I don't know how much of the retail side is legit, but I can tell you if you look at our office buildings and our tenants, I suspect our collections would be dramatically higher if we did not have the moratoriums. I mean, I see people that aren't paying us. It's super aggravating. I mean, super aggravating. Some of them are managing more capital, and many of them are managing more capital than we are.

Okay. Second question is, Peter, on the effective rent, Can you just give us a sense of the impact? So lower TIs for lower rent, but when you boil it down on an effective rent basis, where do you stand for third quarter leasing versus prior quarters? So are net effectives improved a little bit, a lot, the same? Just trying to get a comparison for the net effectives now with the new lease economics versus prior periods.

We were talking about, I don't know if Peter can answer, but I can just tell you quickly. We were talking about that and looking at it, and I think our net effectives are still as strong as they were like pre-pandemic, we'll call it. So if you look at the net effectives before any pandemic, end of last year, whatever, we're hitting those numbers because of the big drop-off on the TI side.

Okay.

Thank you, Jordan.

All righty. Thank you. Next question is from Jamie Feldman of Bank of America. Please go ahead.

Great. Thanks, guys. So I guess you talked about how you think occupancy continues to slip until you see leasing volumes pick up. Where are tenants going? Obviously, that implies that you're just going to continue to see move outs. What are you hearing from people that are moving out and why?

I think what we're seeing is kind of a normal course of business from a retention standpoint. So we've had a drop-off in the volume of our new business that we're doing relative to what we're used to, and we kind of just have our normal course of move-outs. So we're not seeing any trends. Like we said, we're not seeing trends of, hey, I want to go work from home or anything like that. We're just seeing the normal level of move-outs that we would normally see, and we're seeing less backfill on the new side that we usually rely on to hold on to occupancy and grow occupancy.

Okay. And then, you know, if you read some of the press reports or the broker reports, you know, there's definitely different pockets on the west side that seem to have larger spikes in sublease. Can you just talk about across the different markets where you think things are maybe better or worse in L.A.?

Yeah. Yeah, we've seen those reports. Definitely sub-lease space, if you read those reports, is picking up. But from everything we're reading through, that's largely concentrated in the larger spaces. So it doesn't tend to impact the smaller tenant that we service. There are some, you know, we have seen some pockets of larger space in Santa Monica and Century City taken up a little bit. But again, those are concentrated in the very large tenant spaces.

Are you seeing any of those get broken up, though, to become more competitive with smaller?

No, I mean, they tend to. We're hearing, you know, full floors, multiple floors come back, stuff like that, so bigger spaces. But I don't think people are proactively breaking up space. I mean, that tends to be something that we do that most of our competitors do not, is break up larger spaces and go after smaller guys.

I think some of that space is also in buildings that would not be very breakable, you know.

Okay. And if I could just ask a follow-up to one of the earlier questions, like what would you say your current mark-to-market is in terms of portfolio rents to market rents?

It's about 6%.

Below? Portfolio is 6% below?

No. We have a 6% mark-up to market, yes.

Okay. All right. Thank you.

Yep.

Thank you. Next question comes from Frank Lee of BMO.

Please go ahead. Hey, morning, everyone. Jordan, you mentioned in the past that 1132 Bishop conversion was going to cause some disruption in the market and possibly create some tightness from an office vacancy standpoint. Just wondering how you think that is playing out, or is there anything else to read into the lease percentage being down in Honolulu during the quarter?

Well, I don't know about the slight lease percent reduction, but I can tell you the 1132 Bishop plan that we've been going through in terms of occupancy in downtown Honolulu has worked spectacularly. I mean, maybe one of the few best ideas that's come out of this company, quite frankly. I mean, it completely changed the market metrics in terms of office leasing in that downtown market. But even more... Importantly, it's starting something. I mean, obviously, we're in front of the city council a lot. We're talking to them about what we're doing. And it's starting to change the face and feel of downtown because of not just that project, the work there, but other work we're doing around that building and now what's happening more in the center of town. So it's been just spectacularly successful and exciting. both on the off-site and, I mean, boy, we brought out almost 100 units and leased all of them within a quarter. That was, I have to almost say, unexpected. It moved so fast. So our feel for demand, our feel for rental rate, all extremely well confirmed. Our feel for the impact on downtown, extremely well confirmed. There's a little bit of movement from tenants moving in and out in that market, but Still, the occupancy is high and the pressure on rental rates is good.

Yeah, we still need to move out from 1132. Way more office tenancy than we have availability in our remaining building. So you are going to see some timing noise quarter to quarter, but there's a good up arrow.

Okay. The second question, you noticed some incremental increase in office utilization rates from last quarter. Do you have a sense of what percentage of your tenant base are back in the office now and where we can see that increase as we close out the year?

Well, we think, I'll tell you, we think it's around 30% to 40% is the utilization numbers, but it's spotting and on and off and whatever. But more importantly, and I mean, I particularly see it, I think we all see it, is that while offices are not maybe formally open, they're not all showing up at 8.30 or 9 and leaving. We're seeing at all different times people coming into the office, including weekends and all the rest of it. So if you were to say, oh, I'm going to do a consensus count at a specific time in the week and see where we stand, you're going to come to a 30% to 40% number. But if you said to me across our portfolio of office tenants, how many of our tenants have some people coming in at different times, it seems like You know, at one point, we were able to turn one elevator off. We had floors that we didn't think were being addressed. I mean, now we have people all through the buildings.

That's great. Thank you.

All righty. Thank you. The next question comes from Manny Gortzman of Citi. Please go ahead.

Hey, it's Michael Billiman here with Manny. Jordan, I was wondering if you can talk a little bit about sort of your eagerness for external growth. And look, I recognize that your stock price doesn't allow you to sort of go raise capital today to make those deals accretive. But can you talk a little bit about sort of how private landlords are sort of dealing with the struggles that you have? As a large organization, a public company, you can weather the storm pretty well, but I've got to assume a lot of your private landlords that may have leverage, may have rent collection issues, may have CapEx issues, may have a larger desire to flip those assets into an entity like yours. and you've done OP unit deals before, the difficulty is your stock's at $25, $26, and I think you would believe that NAV is a hell of a lot higher. So is there some way to structure transactions where one plus one is greater than two, or is that just not really a focus of yours today?

We are working. I can't tell you how hard. So the foundation of what you're asking is, Do we still believe in the market so much that we want to continue to grow in the market? And the answer is absolutely yes. And we're doing everything we can to acquire assets. Believe me. Every trick, every figure out a way for, obviously, I don't want to do an OP unit deal where I'm selling my building for $500 a foot and I'm buying theirs for $1,000 a foot. But we are working on that on every front that we can. Now, I will tell you, if we're successful, that the market, as would be the case for you or anybody else, right? If you own a building in this market and you've weathered a lot of recessions, you know about the sort of long-term strength of the market, and you're not going to sit there and do a deal on the recession that you feel has what I'll put quotes on recessionary pricing. But even if we can just break these people loose at the normal good pricing, we would do it. and we are working on it, but it's even slower now than usual, but yeah, we're doing our best. I don't think we have, the stock being down hasn't been that big of a problem. People with OP unit deals, they understand that, and we have plenty of other ways to access capital. But we're working on it the best we can. Certainly there are some older families that could be wearing out, but they also have been emboldened by living through many recessions, and especially this one where they feel like, wow, why would I take any kind of discount or anything at a time when I'm pretty sure that next year we're going to be back to where we were in 2019? And so it's just fine. I'm willing to take those assumptions if we can get them to make deals. So, you know, we're doing our best.

I guess if you take those two comments, one, just your enthusiasm for staying invested in the market, but then also potentially sellers wanting to hold on because they sort of view the other side positively. Why aren't you using some capital more aggressively to buy into your portfolio, which you know extraordinarily well and you know on the screen where it trades on a per foot and a yield basis?

Well, you're just saying why aren't we buying back stock? And I would say this, I don't believe the way you're kind of implying it's that simple of a decision for a company to buy back its own stock. It has a lot of other ramifications, what your debt levels are. And frankly, when you buy back stock, if I was to buy back the stock at 25 and it went to 20, would you say I was a smart guy at 25? Probably not, right? So it puts me in the business. And I'm not saying I'm against buying back stock, by the way, but it puts me in the business, in your guy's business, right? Now I'm making the decision about the stock price and where it's moving around as opposed to the decision about real estate where I have a lot more confidence. I'm not against buying back stock. Personally, I've been buying the stock. But it's a very different decision for the company than it is for me personally. And so, I mean, I'm slow and careful to make that decision, but I'm not necessarily against that either.

Right. I guess the difficulty is if you do find an acquisition, the story about it, right? If you're not going to be paying 500 bucks a foot, right? You're not going to be paying where your stock's trading. It's going to be something higher, right? Where you said, I want to get good pricing, not pre-recession pricing. It's going to be able to demonstrate the value of that acquisition and to the street relative to purchasing your own portfolio. Their capital allocation decisions are linked together.

I don't think they're linked as tightly as you're saying, but that could be a longer conversation. I would always add good quality real estate in the markets where we're focused, which I think we get great long-term gains on. I think you have to have tremendous, extraordinary confidence to trade within your stock against where, not where my real estate's going, but where the stock market's going. And stock market trades, you know, remark to its own drum, not the drum of a real estate market, which I have a lot more confidence around directionally and supply-demand characteristics and industries driving demand. and all the rest of that.

Just last one. I assume joint venture capital is one of the arrows in your quiver that you can use. Can you talk a little bit about their desire to partner with you today to buy office assets?

They have a high desire to partner to buy office assets, and it's killing me that we're not able to provide them with more product. I want to provide them with more product. We're trying to provide them with more product, And when you hear me discussing, you're saying, I know you're trying to buy assets. Believe me, in our conversations with them, we're saying that double. I mean, we're going to get it. We are doing our best. We're trying to shake anything loose we can.

And I think it's great that you're buying stock personally. I don't want to make it seem as though that's not a good thing. That's certainly demonstrating your ability um obviously focus you obviously own a lot of the stock already so um it was just much more talking about sort of capital allocation at the at the firm level so um thank you um and have a great afternoon thanks you too thank you next question steve cockball of evercore isi please go ahead hi um i guess two quick questions uh you know i noticed the um

The income multifamily was down. The other income, I guess, and Peter talked about the insurance payment. I'm just curious sort of what happened there. And if it's just a timing issue, is there a reason that wasn't booked in the quarter? And I guess, what are you expecting for fourth quarter? Is there kind of a catch-up payment where you'll get two? Or how does that sort of work going forward?

Yeah, it's Peter. Insurance is always unpredictable. Things move a little slower than we would have liked, and we hope it moves fast and we catch up, but it's too early to tell.

So we should not expect any additional payments, or this was just kind of an off quarter?

No, no. We're going to recover this. It's just a question of when, and is it this quarter, and do we double up this quarter? Do we end up with one quarter's worth? Yeah.

You realize we can't book it until we get it.

Yeah.

So we know each quarter money's owed to us, But then you have a bigger negotiation with the insurance company by getting checks out of them. And the checks could come and they could go, oh, this is for your work in the units, not for the rent. You're still arguing about how much rent they owe you. So it's not such an obvious – I mean, it just comes in in a – I don't want to say a bad way, but in a way that wouldn't be – smooth to match up perfectly with the quarters of income that you go to because you can't book it till you get it.

Yeah. So it's coming.

It's just a question of when. Got it. Okay. And then, you know, I was a little surprised that your office expenses were up. They were a lot higher than what we were assuming. And I know there's some seasonality in the business on expenses, but, you know, given still the low utilization rates of the buildings, you know, any thoughts on maybe what expenses do in the fourth quarter and maybe in the first half of next year? I guess I would have thought they would have been a little bit lower.

Well, so, I mean, let's start with just the seasonality. We typically get about 30% of our utility cost in the third quarter. It's the summer months, right? So, you know, July, August, September, people are running the air conditioning. And You know, at the utilization rates that we've been talking about, you know, 30% to 40%, you know, you can't run the air conditioning just for one person. You're running for the entire suite. You know, so that kind of pushes us. You know, the numbers are down versus the prior year, so we're still saving money versus prior year on utilities. As far as the fourth quarter goes, Yeah, I mean, typically we see utilities come back down, but we have other things. We've got some political spending. I would expect to see about a $0.02 impact or so of that in Q4. We also had in those expenses an increase in our insurance premiums, and we only had two months' worth in the quarter, so we'll get the full impact of that in the fourth quarter. So we're going to see some offsets there on expenses in the fourth quarter.

Okay, thanks.

Thank you. The next question is from Nick Ulico of Scotiabank. Please go ahead.

Thanks. So this first question is on the write-off, the $0.08. I just wanted to be clear if that's a new receivable write-off in the quarter and what drove that happening third quarter versus the second quarter and how we should think about you know, going forward, you know, the chance that there would be additional write-offs on the office side.

Yeah, so what we gave you is, Peter, what we gave you with the $0.08 is a comparison to last year. And, you know, what we're really focused on there, as I said earlier in the call, that there's very little in terms of new write-offs of new tenants. So most of that is just the impact of, you know, continued non-collection, you know, against the people that we wrote off last quarter.

Okay, that's helpful. Thanks. My second question is just about, you know, your portfolio and, you know, I guess any lessons you're learning or hearing from tenants as they are doing renewals or contemplating, you know, changing their space now in a COVID world going forward. I mean, what you're kind of learning about your buildings and, you know, whether you think they are, well set up and well positioned for the office environment that could change now post-COVID?

I have to say, I mean, one of the things that's allowed us, because obviously we listen to other people's calls and we hear occupancies of 15% and lesser numbers. And one of the reasons I think we're at such high numbers is that in general, not the very large tenant giant floor plates, but in general, our tenants across our portfolio are And I think actually most of the Westside, since it's a small tenant market, they're already built out of like 225 feet per person. So I don't think there's a lot of GI or rebuilding needing to go on. And you're seeing it in our renewals. They're not coming in and saying, I need to renew and I need to rebuild my space. I think people's space has been pretty much built for a little bit of a more relaxed environment, and it already accommodates to six feet or eight feet or whatever you want to go to in terms of occupancy. So, I mean, I think, frankly, if I was guessing, the occupancy would be even higher if we were in markets where they were saying people could go back into work in the office. And even without that, they seem to be coming in.

Okay, thanks. That's helpful. Just last question is on Prop 15. What have you guys spent? Some of you guys are spending money to fight this. What have you spent? Have you already incurred any charges to FFO? Is there another charge to come in the fourth quarter? And then I guess the other question is, are you guys still... Let's say there's a scenario where this does pass. Are you guys still going to take the approach of... you know, not giving an estimate on what your tax liability would be if this passes?

So, all right, I'll just answer them both. So the question of what we spent, which Peter said in the last call, it's probably about two cents. On that and some other political stuff in the fourth quarter, maybe like a little less than a penny in the third quarter. In terms of not giving an estimate, It's not that there's a number we know and we're keeping it close in because we don't want to leak it out. We really don't think, even when people do give estimates, there's any way to give any kind of estimate. I don't think functionally it's operational. I don't think they're functionally would be able to do it if it passed. So start out with for how many years is it going to be before someone figures out some way to do this or does someone... come up and say, hey, this just doesn't work, and there's another proposition or something like that. That's number one. And then number two is, across all these properties telling me where you're going to end up in a board of three judges of figuring out a new value for it when there hasn't been any market transaction related to that property, there's huge swings in that process all the time, right now, even without all the properties needing to be reappraised. I just don't think it's reasonable to make any kind of an estimate. It's not that we have a secret estimate. We're not giving it out.

Okay. Thanks, Jordan. All right.

Thank you. Next question is from Rick Anderson, SMBC. Please go ahead.

Thanks. Good morning. So on the issue of moratoriums, I guess it's true that there's no credit impact if they take advantage of it, regardless of their circumstances. But is there a kind of a credit black market where their reputation would precede them among the landlords in the area? Is that a real dynamic that could happen to folks that are sort of playing this card?

You know, I don't. You can only hope, right? I mean, there's not going to be any great way to know until we're in recovery and to see to what degree landlords start saying to people, yeah, I got it, you're saying your credit, but we saw the way you acted and therefore we're going to require whatever it is, a bigger LC, a bigger this, a bigger that. You will see the market reconcile that. You'll probably see Some reaction from long-term owners, maybe short-term owners, you'll see less of a reaction. That's always been the case. I would say for Douglas Emmett, we've always been such a hawk on credit anyway that it is unfortunate that it more speaks to the morality of these people than anything that they're choosing not to pay, but I do think in the end they'll end up paying because I have confidence in the way we evaluate credit and when I look at the tenant base. I'm not sure whether there's a shadow mark on their credit profile or not. We'll see what happens.

Your commentary about work from home not being a factor in your tenant's decisions And I guess you're seeing that in the numbers, just by the way, you know, the cadence of your renewals and all that sort of stuff seems kind of normal. But are you asking the question? I mean, you've got all these tenants that can provide you a lot of information about just mindset centered around work from home and how it might change. I know all your peers are kind of saying the same thing, and I happen to agree. that work from home will perhaps be the exception, not the rule, but maybe an option here or there, but not as big as the motions of the moment are suggesting. I'm wondering if you're really asking the question to sort of form a really informed opinion about it.

So we track when we lose a tenant out of our portfolio, and we also track new tenants that we chase and don't get. Okay? And what you saw in the prepared remarks was nothing I've overseen is any kind of trend of work from home is playing a factor in that, okay? Obviously, new tenants, I mean, they're saying, we're looking to leave space. We're trying to get them on our portfolio. When we don't get them, they went somewhere else, right? And on the renewals, I mean, you said it yourself. You know, there's a lot of, levels of work from home? Are people going to just take, you know, I don't think many people are so extreme to go, you know, the office market's going away because everyone's going to work from home. But you see stuff as, well, we'll be a little less because there's some kind of, you know, some percent of people work from home or some percent of people do this thing of sharing office or hot seating. And I have to tell you, the only mechanical thing that makes sense when you address work from home, at least in our markets, would be for tenants, because we're not hearing anybody say, you know, I'm going to have a group of people working for me that are never going to come in the office. So mechanically, the only thing that makes sense is there's going to be a complete conversion of people going, we've really embraced hot seating, even when it comes to offices, which is that, you know, Kevin, you're in Monday and Tuesday. Peter, you're in Wednesday and Thursday. And Stuart, have at it on Friday. And everything we're hearing is the opposite. I mean, everything. People don't like sharing space. They want their own space. And people want them in the office the entire week. And certainly COVID doesn't encourage people towards a hot seating type of environment. So You know, when you look at the mechanics of, for some percent, reducing the amount of office demand, just speaking for our market, there are mechanics that nobody likes. I mean, nobody. So I don't know how a work-from-home scenario would have more, would be particularly impactful. In fact, I think it might be the reverse a little bit of people appreciating the space, being back in their office, wanting to be back in the office. When they feel like they can come back in, I think you will have people looking forward to getting back to that routine of going to work. I think a lot of people miss it.

I was going to say, I don't want to be the one to lace all the feet after Stuart's been sitting in it anyway.

Absolutely. But also, you don't want to be the one that gets told, hey, everyone's coming back except for you. I mean, I actually think people take that, you know, poorly.

Yeah. All right. I agree. Thanks very much.

All right. Thank you. Next question is from Craig Mailman, KeyBank Capital. Please go ahead.

You know, you guys were very successful at keeping CapEx down on renewals this quarter, and you kind of mentioned that on an effective basis. You're still kind of positive here. I'm just curious. As new leasing kind of revs back up here and the market may be getting used to kind of lower face rents, I mean, what's your prediction or expectation on your ability to maintain positive net effectives even in kind of a negative face rate environment?

I think that, I mean, I think that all depends on how long, how many quarters we go into with a negative number and how well we're able to hold our own in terms of occupancy. If we, if the world starts, you know, if we go through fourth quarter, first quarter next year, and then things start backing, you know, backing, you know, improving, improving again, and people sort of come out and start focusing on growth, I think we should be able to do pretty well. I mean, if this thing becomes an all-of-2021 experience, then I don't know how any markets hold their own against it. It's going to be very tough. But I'm optimistic that, especially considering the performance of the company, particularly operations, leasing, property management, the way it's operated in second quarter, third quarter, what I see going on right now, that we certainly can hold our own well for the next couple of quarters and be very well positioned to come out of it with a lot of strength. And that's what I'm hoping.

That's helpful. Then, you know, maybe taking the other side of Prop 15, assuming maybe it doesn't pass today, you know, do you think this issue ever dies or does it just come back in a new iteration at the midterms and maybe next presidential election? Can the market ever or California ever kind of shake this overhang?

Yeah. Yeah, I think it can. Yeah, I think if it gets beaten, then I think that it will not be something that you see again and again. But I hate to make a prediction about it. Who knows? There's certainly a trend towards taxation. But at the moment, it's so heavily discussed, it might be an overstated trend. So we actually have to see what happens. I think people are even more on guard than what the reality will be, but I don't know. Okay. California was in a very, before the pandemic, California was in a very strong cash positive position in terms of taxation. Like we were adding money to savings. I think we were at like $25 billion plus in terms of taxes versus the expenses. So, We're not a state that, you know, we need to recover from what we've spent on the pandemic, but we're not a state that has a permanent negative – it's in a permanent negative or deficit spending situation the way the federal government is.

Understood. And then just one quick one. Peter, did you say that $0.02 of political spending was in operating expenses or G&A?

I expect that to run through operating expenses in the fourth quarter, yeah.

Okay. So margins should get better once all the spending on the election goes away.

We would hope so.

We would hope so. All right. Thanks.

Thank you. Next question comes from Venkat Komanani of Mazzello. Please go ahead.

Hi. Good morning. On eviction moratorium, is there any update in terms of carving out exclusions for office tenants in Santa Monica and Beverly Hills? And it seems like commercial tenants in Santa Monica are now required to pay 50% of rent owed, sorry, 50% of rent due during 4Q. If that applies, do you think that leads to an incremental improvement in rent collection in 4Q?

Well, Santa Monica, look, our collections in Santa Monica are very good. Santa Monica, frankly, has already carved out most office. Beverly Hills is the place where we have our largest problems because they've included all office. And, of course, so has, functionally, so has L.A. And then our collections are good again in Hawaii, which has much less of the moratoriums. I don't know about the 50%. I think you might be talking about residential, but in terms of the office collections, we don't need any improvement in Santa Monica. There's still a little bit that's covered, but basically what's covered now in Santa Monica is retail.

Okay, that's helpful. And in the multifamily segment, it looks like Santa Monica seems to be outperforming West L.A. in terms of occupancy and rental rate. Any color you can provide there?

I talked a little bit about it on the call. I mean, we're having some university closures and some military deployment issues in Hawaii. So those are impacting kind of the properties that we have closer to UCLA and obviously the Hawaii stuff more.

Okay. Thank you.

Thank you. Next question comes from Bill Crow, Raymond James. Please go ahead.

Hey, good morning. Jordan, I want to get back into the political question and ask if by looking at Prop 15 and work from home, we're not missing the bigger picture, which is, you know, higher state income taxes, potentially a wealth tax, maybe an exit tax. And you've been outspoken on these things in the past. I'm just, you know, the number of headlines indicating move outs is from California is picking up speed. Could you give us a picture of the environment out there and the challenges it may pose?

Well, I'll tell you, Kevin. I think the... I know there was talk about a well tax and, you know, we're not even going to let people leave. We're going to trap the well. I mean, I saw some of that. I think that talk was bigger than the walk. In terms of people... exiting or leaving. I think there's more anecdotal, you know, people that are leaving out of frustration, maybe making more noise about it than people that are coming and working. I just have a hard time believing an economy as large as ours that still has pretty strong population growth is going to, well, everybody's frustrated by the tax situation, but I also think that the state is focused on business recovering and getting back to being able to employ people. And so while I know there's been a lot of conversation about additional taxes and focus on taxes. I also think that in every area, people are focused on creating a better environment for jobs and employment recovery. So that's why I just don't think it's so obvious what's going to happen in the next year or so following as the pandemic is relieved and following the election. I just don't think it's that obvious.

Okay. Appreciate that. And then my follow-up is focused on the multifamily portfolio. Can you kind of give us an estimate of what percentage of your tenant base is in the kind of restaurant, retail, hospitality area that's been particularly a hard hit?

Well, about 5% of our tenants are retail.

Bill, I think you're asking of our multifamily tenants?

Correct.

Correct.

Employed in those industries? Correct. I don't know that we have a good feel for that. My guess is that the rent levels we're talking about in Santa Monica and West L.A., that we're not, you know, most of our tenants are not in the service industry.

No. No, they're not. If you're saying, like, working at Starbucks and stuff, I'd say we have very little of that.

Okay. All right. That's it. Thank you.

Thank you. Next, we have a follow-up question from Jamie Feldman of Bank of America. Please go ahead.

Thank you. I think you guys said your rent collections are improving, and then you provided rent collection data. That's 2Q and 3Q combined, if I heard that right. Do you have a breakout for 2Q versus 3Q versus even October?

Jamie, it's Peter. You know, we actually combine them because – You get a lot of noise based on when you collect the cash, you're putting it against the old balance, the April balance, the July balance, the September balance, and so on. And rather than do that and then try to explain why one month looks like this and another month looks like that, we think the best picture is just to do the average since the pandemic started. And you can see that if the average as a whole is slightly better, then that gives you a sense that we're trending better.

We did give you that we collected more cash, but It does get applied backwards, and so if you get beyond just did you collect more cash, it gets very complicated.

Okay. So I guess to boil it all down, how much better is it? Can you say basis point-wise or gut feel?

We probably collected about $6 million more cash this quarter than we did the previous quarter. Okay. So it's moving in the right direction, but obviously there's a lot of work to do.

Okay. All right. Thank you.

Thank you. Again, to ask a question, please press star, then 1. Next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Hey, thanks. Just a quick one from me. Can you talk about any interesting trends you're seeing in your valley markets? Are you seeing any incremental demand from companies that may want to have a location in less of an urban environment or kind of less density? Is utilization any higher in the valley than what you're seeing on the west side? And, you know, I guess just generally, how do you see those submarkets faring throughout the pandemic and the recovery relative to the west side?

I don't think we've seen big differences, quite frankly. I mean, there are maybe a few, but not many anymore, larger tenants in our Valley portfolio than there are in the Westside portfolio, which is overwhelmingly small tenants. But when you say utilization... and kind of responses to the pandemic in terms of kind of the market, I don't think there's a big difference. Maybe it's purely a tell. I don't know. All righty.

This concludes our question and answer session. And I'll turn the conference back over to Mr. Jordan Kaplan for closing remarks. Please go ahead.

All right, well, thank you all for joining us this quarter, and we will speak to you again in three months.

This concludes the conference. Thank you for attending today's presentation. You may now disconnect.