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spk14: Ladies and gentlemen, thank you for standing by, and welcome to the Douglas Emmett Quarterly Earnings Call. Today's call is being recorded, and at this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. I would now like to turn the conference over to Stuart McElhenney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.
spk02: 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.
spk04: Good morning, everyone. Thank you for joining us. I'm pleased to report that our rent collection and leasing activity improved during the fourth quarter, despite continued headwinds from the pandemic and tenant-oriented lease enforcement moratoriums. In recent months, we have started to see movement on tenant payment plans for rent deferred under the pandemic. To date, we have reached agreements with tenants who owed about 15% of the outstanding balances. These deals are exempt from the moratorium protections, and we have already begun collecting deferred rent under them. Except for immaterial amounts, we have not forgiven rent, and we still expect to collect the large majority of all past due amounts. In prior downturns, The impact of personal guarantees and small business owners' commitment to their companies have kept our default rate extremely low. Our cash collections have also improved. As of today, we have collected 92.7% of our rent from the three quarters affected by the pandemic, including 96% of our residential rent, 95% of our office rent, and 45% of our retail rent. We saw stronger leasing demand last quarter. driven primarily by small tenants. We signed an impressive 197 leases, and retention was also above average. We see the economy beginning to recover, with tenants increasingly confident about their future. As more tenants engage, we should shift back to positive absorption. Of course, predicting the pace of recovery remains challenging at this early stage. And because occupancy is a lagging indicator, we expect to see some further decline during the first half of this year. Overall, we remain confident over the longer term. As I've said throughout the pandemic, I believe that companies will return to the office. Our tenants generally have short commutes, and they don't face significant mass transit, parking, or vertical transportation barriers to reoccupancy. In the meantime, Douglas Summit remains well capitalized, with no debt maturities before 2023. We own a dominant share of the best buildings in the best markets in LA, and there is no threat of material new office supply in the near future. Our integrated operating platform is built to withstand recessions, and our team continues working to get better every day. With that, I will turn the call over to Kevin. Thanks, Jordan, and good morning, everyone. Our two multifamily development projects continue to make impressive headway. The demand for new units at 1132 Bishop, our office to residential conversion project in downtown Honolulu, remains robust. As I previously mentioned, we have fully leased the first phase of 98 units, and by year end, had already leased 29 out of the 76 units in the second phase. Construction at our Brentwood high-rise apartment has nearly topped off and delivery of the first units remains on schedule for early 2022. In December, one of our joint ventures sold an 80,000 square foot Honolulu office property for $21 million. Our decision to close the health club as a result of the pandemic triggered interest from a number of owner users targeting that type of space. The buyer will use the club for space for youth vocational training and after-school programs. Property transactions in our markets remain slow, as many potential sellers are in a watch-and-wait mode given current uncertainties. I will now turn the call over to Stuart. Thanks, Kevin.
spk02: Good morning, everyone. In Q4, we signed 197 office leases covering 612,000 square feet, including 202,000 square feet of new leases, and 410,000 square feet of renewal leases. As Jordan said, the recovery in demand from our tenants last quarter was led by our smaller tenants. As a result, the average size of the leases we signed last quarter was 3,100 feet, compared to our overall portfolio average of 5,600 square feet. This resulted in our office lease percentage declining to 88.6%. The leases we signed during the fourth quarter will provide almost 10% more rent than the expiring leases for the same space, although the initial cash rents were 5.8% lower as a result of large annual rent bumps over the term of the prior leases. On the multifamily side, our lease rate improved to 98.2% from 97.5%, with gains in both West LA and Hawaii. I'll now turn the call over to Peter to discuss our results.
spk03: Thanks, Stuart. Good morning, everyone. The fourth quarter reflected the continuing impacts from the pandemic. FFO was 46 cents per share, down 15% from Q4 2019. AFFO declined 16% to $76 million, and same property cash NOI declined by 20%. Compared to the third quarter, FFO increased by six cents from fire insurance proceeds and two cents from better collections and lower expenses. Those increases were partly offset by two cents of issue advocacy expenses for the November election. As a result, FFO increased by a net six cents per share compared to Q3. At only 4.6% of revenues, our GNA for the fourth 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. However, I do want to share some general observations based on what we currently see. We expect further improvements in collections and parking revenue as the economy opens up and local moratoriums are loosened. These will be gradual at first, but prior history suggests that we will collect a large majority of past due amounts in the end. We expect that leasing will recover over the course of the year. Because it is a lagging indicator, we expect occupancy to decline at least through the first half of the year. We expect straight line rent to be minimal in 2021, largely as a result of tenants who were put on a cash basis in 2020. We expect revenue from above and below market leases to resume its normal decline. As usual, these observations do not assume the impact of future acquisitions, dispositions, or financings. I will now turn the call over to the operator so we can take your questions.
spk14: We will now begin the question and answer session. To ask a question, you may press the star then one on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press stars and two. Again, in consideration of other participants, please limit your queries to one question and one follow-up. At this time, we'll pause momentarily to assemble the roster. And our first question today will come from Nick Uliko with Scotiabank. Please go ahead.
spk06: Hey there, this is Josh Perron with Nick. So I was hoping you could dig into kind of what drove the decision not to provide 2021 guidance, and then maybe you could provide some of your assumptions a little deeper on office occupancy, such as, like, retention rates on upcoming lease expirations and then new leasing volumes versus pre-COVID levels.
spk04: So, okay, that's a lot of questions, but I'll hit them all. We didn't provide guidance because we don't have – confidence in the way the pandemic is going to kind of withdraw and the economy is going to recover. And that just plays a huge role in it, more so even in our markets, because when, you know, all the stay at home and the moratoriums are off, we think we're going to see a big change. You saw, you know, and we said it in our in our prepared remarks that we're happy with what we're seeing on the leasing because as you look at the last three quarters where the impacted quarters, you saw 125 new deals the second quarter, 150 the third, and now 200 new deals the fourth quarter. That's a very good trajectory, and it gives us confidence that when the market loosens up, when the stay-at-home orders are off, when people are feeling more confident about going out, we're going to do a lot of leasing. We know we have a strong market here. But the question of when that happens plays such a huge role in the way we lease and what our numbers end up being that we don't feel confident that we can give you good information and guidance to the way the year is going to roll out. So that's why we didn't give guidance. In terms of the leasing, it depends on that same set of issues. What was your last question?
spk06: Yeah, it was just your thoughts on retention rates and then on what level of new leasing you would need for occupancy to actually improve.
spk04: Well, I would say that retention usually runs in the very high 60s up to 70s. So when you get above 70, you're doing very good on retention. I would say that what kind of leasing do we need to reverse things? You know, our history has been 750,000 to a million square feet. And when we were running at those kinds of numbers and even plus, you saw our lease rate go up. And even at the 93 plus level, we were still moving up. When we're operating down in the six to 700,000, okay, now you start slowly sliding backward, even with good retention. So it's somewhere in that range that we need to get to to reverse things. I feel the reason I'll say again that I feel good about all that is the last quarter was brutal, right? Everybody got sent. The ones that were poking their head up got sent back home again, right, because it was so tough vis-a-vis the pandemic. And still we did a lot of deals. And I understand that it was 3,100 feet, and our typical is 5,600 feet. But that gives you a very good feel for how the market feels about wanting to come back, and it supports the fact that we've said our core strategy and our expectation was that the small tenants were going to lead the recovery, and they are. Was that too much, or did I answer all your questions? No, yeah, you did. Thank you.
spk14: All righty. And our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
spk17: Hey, uh, good morning out there. Uh, and sorry, I just popped off another call. So apologies if you, if you answered, but Jordan, I think in your opening comments, you said that you have addressed 50% of the uncollected rents. And I recall you guys mentioning that there's about 6 million a month from people basically, uh, opting to voluntarily not pay you. Uh, So is the 50% addressed, is that around the 6 million, the people who are voluntarily not paying you, or is the 50%? Alex, it's 15, 15, not 50.
spk04: Okay, that's why I asked. Okay, so you guys are convincing. Okay, when I was practicing reading the script, I think that, Stuart or someone or Peter actually said, they're going to think you said 50. I'm like, no way. I'm such a good orator. I mean, there's no way that'll happen.
spk17: Apparently it happened. Okay. Well, I hope whoever took the over on that, you settle up with them. But basically the 15% then of that 6 million monthly, that's not, that's not paying that you've addressed. Do you, How did those discussions go? And do you anticipate that increasing? Or was that 15% those with the tenants who are going to settle up and the rest are only going to do it when the eviction moratoriums end?
spk04: You know, I think that process is going to continue. I think it will be much more rapid once the moratoriums are over. But I think people are trying to get back to work and are trying to settle up on all their impacts from the pandemic, and that's why we're able to start making deals now. And, you know, basically, if you look at what we're showing you outstanding, it was kind of all the rent that was due to us. We made deals on 15% of those deals. But what I thought was noteworthy about it is we didn't really have to give up any rent. It was really immaterial amounts, like tiny amounts. And so... So that tells you that, as we had expected, that these people have the ability to pay, and they're getting to the point now where they're like, well, I need to make a deal now because when the moratorium's up, they're going to just tell us I have to pay the whole thing. So they'll do it now while the moratorium's there and say, well, I'll make a deal, and I'll get some trajectory to pay because they'll kind of see it come to an end, right? Vaccines are out. The level of hospitalizations is dropping very fast in our area. So with that visibility offset against the vaccines, I think people figure, you know, it's time to reengage, and they want to get back in their space.
spk17: Okay. And then the second question is, Stuart, appreciate the comments on the increase in leasing activity of the smaller tenants, but on your rent spreads, you know, they – you know, sort of eroding from where they were in the third quarter. You know, as you guys mentioned the drop in anticipated occupancy, just residual, how should we think about this sort of trajectory of rents going forward? So the market returns to normal, leasing resumes and, you know, gets more active. How do you think about where the rents will ultimately go? And sort of at the prospective view that when we see your upcoming earnings releases over the next few quarters, sort of what we should anticipate as far as rent trajectories.
spk04: I can tell you this. Number one, you need to see, you know, absorption, positive absorption. I think once you start seeing positive absorption, you need a couple quarters of positive absorption and you'll see rent take off again. I think the markets are still relatively full. They're in pretty good shape. as long as people's view going forward is a positive view, once we get beyond all the lockdowns and the moratoriums, I think you'll see rent pick up again. And I think you already see that level of attitude from the number of small tenants that came in and made deals. They want space. They want to keep their space. The reason our renewal rates are high is that Tenants are coming in and saying, I don't want to lose my space. It may be easy for a small guy to say, I haven't been in my space in months. I'll just leave space in the future. But they're not doing that. They want to hold on to their space. So first step is we need to see some positive absorption quarters. But then I feel confident that rents will return to start their trajectory to return to the levels they were at before. Okay. Thank you, Jordan.
spk14: And our next question will come from Frank Lee with BMO. Please go ahead.
spk00: Hi, morning, everyone. Just a follow-up on your comments on occupancy expecting to decline through the first half of 21. Are you guys seeing any green shoots in any markets where occupancy has perhaps bottomed a bit, or is the expectation that occupancy could continue to slip across each of the submarkets?
spk04: I like green shoots. Okay. That reminds me of a decade. I had these conversations in the last recession. To me, the biggest green shoots are, I love the number of deals that were done. And, you know, I said it and I've been very focused on that because in terms of telling me that the market's still healthy and its ability to recover strong, that was the most important thing. I mean, and it actually told me a second thing too, which was that we've retooled our leasing operation. That backbone is so much stronger now with the way it works online. And to think that in a quarter where we were the most shut down, we did the most new deals is just absolutely incredible. So that's applause to that group. When you say it's one market impacted differently than another market, the impact is coming at a city level, right? So you would say, L.A., Beverly Hills, Santa Monica, and Honolulu. Okay, Honolulu doing obviously better than those other markets. Santa Monica, I know you guys see some negative numbers in Santa Monica, but we're in downtown Santa Monica, and the numbers that you're seeing are east Santa Monica. So downtown Santa Monica is still pretty strong. Santa Monica has also backed off quite a bit on the moratoriums, doesn't really apply to office. But then when you move to the city of L.A., the city of Beverly Hills, which covers a lot of markets. I mean, I know Beverly Hills is one market, but that would cover Westwood, Century City, et cetera. They're all impacted by the same thing. And so it's going to be hard to see a reverse in occupancy or positive absorption until the city lightens up on us.
spk00: Okay, thanks. And then any initial thoughts on the bill that's being floated around in Hawaii regarding the eviction moratoriums and commercial leases? You know, it seems to be even more tenant-friendly versus the ordinances in California. I'm just curious, what do you think the likelihood that this passes and thoughts on the impact it could have on the office market there?
spk04: You know, we're just, you know... at the beginning of the fun political season. And there's a lot of stuff that floats around. I can't, we got to get more into it. I can't comment on all that stuff yet. I feel like I just finished the last round. So I don't have much for you on that stuff yet.
spk01: Sorry. Okay. Thank you.
spk14: And our next question will come from Steve Sacqua with Evercore ISI. Please go ahead.
spk10: Yeah, thanks. Good morning. Jordan, you mentioned parking, but one line item that's also been negatively impacted has been tenant reimbursements. I assume that's largely a function of occupancy going down, but you had a pretty big drop between 19 and 20. How do we think about the recovery of tenant reimbursements? Is that solely a function of occupancy, or is there something else going on?
spk04: Yeah, well... Frankly, that's an extremely complicated line item, but I think the primary thing going on there is that our costs of running the buildings have really gone down a lot relative to last year, previous years, maybe even people's base years. So it's hard. If you say what's going to happen to the bottom line part, you know, that's a different issue. I think we're just looking at things and saying we're just have less costs and then they keep kind of relooking at where CAMs are going to come in. And it's more a function of that than anything. It's not that there's lower, you know, there is lower occupancy, so that has a very small impact. But I think the bigger impact of why you see When you see smaller expenses, which our expenses are way down, then I would say you better see smaller camps, right? And we are.
spk10: Okay. Well, I mean, it's just the percentage. If you look at reimbursements as a percentage of expenses, it went down about 600, 700 basis points. So I realize expenses may be coming down, but it just seemed like the percentage dropped quite a bit. So I can follow up with Peter offline. Okay. maybe just switching to the fire insurance proceeds and kind of business interruption. I know that's a very lumpy sort of figure that you guys get. How do we sort of think about the timing of getting the units that were damaged back online? And, you know, what's the kind of the timetable? Is that going to be ended by 21? Or is that, you know, sort of an indefinite time period there?
spk04: Yeah. I'll tell you, what's going on is we're working with the city to make some very substantial changes to the fire life safety across all three towers that are in that project. When you say work with the city, there's a lot of it. There's the fire department, there's the Department of Building and Safety, there's the Department of Housing because this is subject to rent stabilization. And yes, if you've said typical Douglas Summit is getting those units back online, moving slower than we would like, yes. But I would say I like the progress we're making with the city. Every department I named said, we're going to find a way to get there to get you to be able to do a lot of the activities in those buildings, the fire life safety stuff, modifications that you want to do. I actually feel good about where that's headed, but just like many things, you know, you don't always get what you want, you get what you need. And I think we will get what we need in the end of the day. But, you know, what we're not getting is speed out of the city. But I think we will end up with something that was worth waiting for.
spk10: Got it. Thank you.
spk14: And our next question will come from Emmanuel Korchman with Citi. Please go ahead.
spk07: Hey, everyone. Good afternoon. Jordan, or maybe Stuart, can we dig into those small tenant leases that you discussed earlier, the larger volume? Just give us some flavor as to maybe the types of tenants they are and where they're coming from. And were these tenants maybe that broke leases earlier and now just coming back as the moratorium starts to wear off? Do you know that answer?
spk02: I think what we've seen is, you know, it's our typical diverse set of industries. We're seeing demand from tenants across the board, which is typical. It's not, you know, it's not concentrated in one area or one type of tenant. So that was good. What was the second part of your question, Manny?
spk04: Was it industry? Was there an industry concentrate?
spk02: No.
spk04: I think this is Bill and me. Is this Manny or Bill and me? This is Manny. Sorry, am I starting to sound like Bill and me now?
spk05: Okay.
spk04: Yeah, you've been working with him for too long, I guess.
spk05: You want me to rephrase the question for him? He was really trying to get into all the leasing of where it's coming from. Is there any differences from what you've been doing before? Any green shoots of the types of people that are leasing? Just trying to get more details around it.
spk04: Yeah. The only thing I checked was it wasn't because I think I saw something. Was it industry specific and it wasn't? It was the same kind of spread on industries. I did get that info. It's a lot of deals. And I don't think it's any one market that got like a lion's share of the deals. Beyond that, I don't have a lot. I mean, to me, the green shoot is I'm really happy we did 200 deals. That's a lot of deals. I mean, if this is non-pandemic time, and I know it's only 3,100 feet average instead of normal 5,600 feet, you would normally say, wow, that was a lot of deal flow for new deals to do 200 deals.
spk07: Right. And then if we can turn back to operating expenses for a minute, I guess you guys have cut those as much as you could in the buildings. How much of that is sustainable, whether or not, you know, occupancies come up or is it going to be a lockstep with, with people coming back to the buildings that their expenses increase?
spk04: Yeah, I mean, if you say looking at our goals for next year, I think there are energy savings that we will continue to get over the next few years, and we will get this year. I think there are, you know, not necessarily huge payroll-style savings. Those just come back as people come back. You know, we're... we've cut the costs around the buildings dramatically as when the buildings are full again, we will keep a little bit, but not a ton. And of course, uh, you know, insurance is up. So we'll be living with higher insurance and, um, you know, thankfully property taxes will only move at the pace that they are prescribed to move under prop 13. So, you know, you know what that increase will be. Um, Yeah, I don't know. I think every year we've done a good job of controlling and keeping the growth of expenses down. I don't know that something happened this year that caused us to say, wow, expenses compared to a full building before and a full building today will be down in some dramatic way beyond the gains that we've made on energy conservation. Thanks, Jordan.
spk14: And our next question will come from Jamie Feldman with Bank of America. Please go ahead.
spk09: Great. Thank you. Can you remind us just the timing on some of the moratoriums that are impacting you and your thoughts on leasing? And I guess as we think about when they do start to burn off, you know, as we think about the fact that, you know, occupancy was down 100 basis points this quarter, do you think the declines start to moderate from here, you know, until the time the moratoriums burn off? Or how should we be thinking about that?
spk04: You know, first of all, I don't have that answer. Let me just start. I don't have that answer. And, you know, the only, the two things that I think about when you ask that question is, first, I hate to keep coming back to this, but we did a lot of new deals, okay? So that means that a guy that's not paying us and a guy moved in next door to him that just leased a space, okay, that's giving a different feel to our community. The second thing is, Fifteen percent of money that was owed to us, they showed up on our door and said, we want to make deals. We know we're going to have to pay you, and we want to make deals, and blah, blah, blah. Okay, I go, that's a very good sign. This is all about attitude. If they can see that, you know, while these cities have kept doing moratoriums, say the moratorium will end on such and such a date, and then they go in on that date, and they get political pressure, and they go, okay, now extend it another month. Now extend it to three months. Now extend it. Okay. I think the community is now thinking, wow, these extensions are coming to an end. And therefore, they're making their own decision about those moratoriums, and they're coming in and wanting to make deals, lease space, whatever the case may be. So that makes me very hopeful for next year. And I don't know whether that will play out in a logarithmic way or just at a 45-degree angle or what will happen. But it's obviously starting to happen.
spk09: Okay. But do you have the latest dates for these moratoriums? Or you're saying it doesn't even matter because they can always get extended?
spk04: I don't want to be such a negative guy, but you're probably right to what you just said. I've gone and testified in front of city councils and done all kinds of stuff, and they – You know, you get a lot of, they're nodding their head and they're going, you're right, we need to, you know, pull office out because I don't know why it applies. But then they just don't seem to be able to do it. Maybe the issue's too complicated to them. I mean, you got a lot of people on the city council. The city council's never thought they were going to ever be doing this type of thing. Many of them have never seen a commercial lease. So, you know, I'm not sure how it, you know, how it, wound and I'm not sure how it's going to unwind.
spk09: Okay. All right. We'll watch closely. And then you made the comment about short commute times to your buildings. I'm just curious, have you guys run data that shows the commute time by the different submarkets that you guys are in or different buildings you're in? I'm just curious how it ranges across the different assets you own.
spk04: if you say do we you know we've done a real surveying on what's your commute to work the answer is no if you're saying do we have a feel for the communities that we draw from for the what buildings are in that answer is yes and we put that together and it's in a chart that we have um
spk02: It's on our investor overview presentation, Jamie. Basically what we've done is saying the decision maker, the guy that's signing the lease, deciding where the office is, is likely to live in the Palisades or Brentwood or Bel Air or Beverly Hills, right up the street from Wilshire where we're concentrated on the west side, and then in Sherman Oaks or Encino in the valley. And those commutes are 10, 15 minutes down the hill to those major boulevards versus on the west side if you're going from the Palisades to downtown, you're more than an hour, you're in the car for two hours for the day. So we've compared those, and we have a chart in there that illustrates that, and that's what's driving the decision to stay closer to home for those decision makers to have that short commute.
spk04: And we know that because our leasing people look at where the decision maker lives when they're showing them space, And when they're making a decision about whether, you know, they're going to engage in space for showing them or whether they're going to renew or whatever the case may be, that's one of the factors that we look at.
spk02: Right. A guy that lives in Beverly Hills, the 405 acts as a pretty big barrier, right? So a guy that lives in Beverly Hills, he'll want to stay on the east side of the 405. He'll want to be in Westwood or Beverly Hills or Century City. And, you know, same for west of the 405, I'll say Santa Monica, Brentwood. They'll want to stay west of the 405 typically.
spk09: And would you say that the buildings you bought in recent years extend the average commute time for your portfolio or not necessarily?
spk04: No, I don't think it extends the commute. Most of what we bought has been on the west side. Yeah, I think it's short. I think we have a bigger concentration of Beverly Hills, which draws a lot from that kind of that Bel Air, Beverly Hills, and even the East Brentwood market. And then the stuff we bought kind of rolling down towards Santa Monica draws out of Palisades, Santa Monica, and these areas.
spk09: Okay. All right. Thank you.
spk14: And our next question will come from Rich Anderson with SMBC. Please go ahead.
spk11: Hey, good morning, folks. So you talked about this 15% of the non, you know, maybe 50%, moratorium manipulators or whatever you want to call them, starting to make deals. Assuming you weren't booking that revenue last year, how will this impact your earnings profile this year? Will you have sort of a recapture number in some of your quarterly results that could make it kind of lumpy just in terms of the revenue stream?
spk04: Well, I think most of these deals... kind of goal you know during this year and they pay monthly and they pay what they owe so um as more and more deals are made lumpy might not be exactly the right word but it is additive to the uh to the rental income each year the rental revenue each quarter right so you weren't you were not because they don't we didn't include it last year right right so you're kind of getting double double you know doubling up on the number even though maybe it's small impact but That's the right way. Yeah, I don't know if I'd say doubling up since we didn't get it last year, but you're right. It will be a boost to this year since we didn't get it last year.
spk11: The other question I have is you mentioned the leasing, you know, smaller average users. I think you said that the gap rents are up 10%, but the starting rent is down 5.8%, and you attributed that to big bumps. over the course of lease. Can you, can you give some color on that? How much bigger are these rent escalators and how are you able to negotiate?
spk02: I think what we're saying, Rich, is that if you have a, if you have a five-year, you know, our typical five-year lease of 4% bump, that ending rent is 17% higher than the starting rent was. So that's a, you know, that's a big gap to overcome on the ending, the starting number, which is the down 5%, but the overall economics are still 10% better for the new lease. We're just pointing out that our, our average contractual increases are probably higher than a lot of other markets that you look at. So that was the point there.
spk11: What are typical rent escalators then relative to, say, other areas of the country?
spk02: Yeah, typically we're getting three and a half. Three to five. Yeah, three to five. Up until recently, a lot of our deals, three and a half and four is on the majority of our deals in the recent years. Okay. Good stuff. Thanks. That's all I got.
spk14: All right. And our next question will come from Blaine Heck with Wells Fargo.
spk12: Please go ahead. Thanks. Good morning out there. Maybe for Kevin and Jordan, can you just talk about what you guys are seeing on the investment sales side of things? It's clearly been pretty subdued recently relative to normal deal flow, but are you seeing any deals start to shake loose? And if so, are you focused more on office or multifamily opportunities or just kind of the best deal that comes across your table?
spk04: Well, the answer is yes. We're always looking for the best deal. Recently we've been underwriting more multifamily than office, but frankly it's been, it's been slim pickings. I mean, if you look nationally, The hot hand is industrial. And so there's a lot of trades in the industrial market because that's a very, very strong market. And on the office side, it's been relatively anemic. We don't have a lot of high leverage players in our market. And so there hasn't been a huge pressure for people to put things on the market. And, you know, we're starting to see the green shoot. So as that happens and people get more bullish about the market, they're going to be more inclined to put their assets out into a market that people are more positive about.
spk12: Okay, that's helpful and kind of dovetails into the next question. You know, given your low leverage profile, your discount to NAV or high implied cap rate, however you want to look at it, and the lack of, you know, the current lack of deals to bid on, And Jordan, I know you've addressed this on prior calls, but just for an update, does it make any sense to get active on share buybacks here? Or do you think you want to keep that dry powder for opportunistic acquisitions that might come about in the future?
spk04: I'm not against share buybacks. The problem is share buybacks for a company are very different decisions than a buyback decision for an investor. And I know you guys know I've been buying the stock myself because I'm an investor, right? But when I look at decisions for the company, I know that if I'm doing share buybacks, it's either because I'm selling assets and getting cash from that, as was pointed out to me last time, or it's just because I'm raising my leverage level and trading debt for equity, which has a double side, sort of a compounding effect. And, you know, I would say that because of those facts, I lean more to the conservative way that we manage a company's balance sheet and capital structure. And because I lean in balance sheet and capital structure, I lean very conservative to cause there to be less times when I'm pounding the drum of share buybacks. for the company, not for investors.
spk01: All right. Makes sense. Thanks.
spk14: And our next question will come from Craig Millman with KeyBank Capital Markets. Please go ahead.
spk15: Hey, guys. Just a question on the leasing front. I did notice your short-term leases and the expiration schedule kind of ticked up about 60,000 square feet. quarter over quarter. Could you just talk about what was going on there? Is that just kind of limited visibility on the tenant side? Do they want shorter term renewals or maybe there's something else going on there?
spk02: Yeah, I think you said it right, which is typical for us in a downturn. Tenants feel less secure about the future. They tend to go a little shorter on their lease term. So that's what we'd expect and that's what we saw. You know, with all the uncertainty, we did see some tenants that wanted, you know, elected to sign shorter-term extensions, which is, you know, a great sign that they're not giving up their, you know, they don't want to give up their space. They don't want to just go home and work. They want to keep their space, but they want to sign shorter-term during this period. And then when they feel, you know, more certain about their business going forward, you know, they tend to sign a little longer. So it's very typical for what we've seen through the cycles.
spk04: I have to say that what I've noticed over a long time, one of the strengths of the company is, and everybody does this, but when the market's off and rents are off, people sign shorter deals. And then when the market's up and rents are high, they sign longer deals, which would be obviously the opposite of what you would normally want to do. But it is coordinated with their business. you know, two types of fear, right? Fear of their company, so then they sign shorter deals when there's a bad economy. And then fear of keeping their space, they sign longer deals when the rate's higher. And that's been very good for us, obviously, because, you know, it's allowed us to have a very good kind of accelerated growth path in terms of our income, our FFO, FFO, all those numbers.
spk15: Okay, that's helpful then. I know with what's been going on, you guys clearly turned off kind of the redevelopment program here, but it sounds like you're encouraged by the number of leases you've been signing and the platform that you guys have there. I mean, at what point, what do you need to see for you guys to feel confident to restart some of those plans that you had pre-pandemic? Yeah.
spk04: Uh, I would, I can answer that two ways. If you say, what do we need to see to start planning some of those projects? We've already seen it. We've already started planning them again. If you say to actually start them, I need more visibility on this economy opening up again, but we know it's coming and therefore we are starting to plan again, uh, for, for some of that stuff.
spk15: Does the math change at all? I know, you know, on a gap basis, you guys are seeing, uh, you know, still upticks, but at least on the cash side of things, there's been some roll downs. Does the, are your underwriting rents kind of getting impacted at all with what's going on in your markets or are those still generally in a place that it pencils from an economic perspective?
spk04: Most of the repositionings and work we were doing was, it'd be hard not to be worth doing. other than, you know, right now the market's in such turmoil because you can't, frankly, it's very hard to tell where rents are at the moment. But I still feel, let me say it differently, we feel very good about where these markets are going to end up after this is over, and therefore we're still wanting to do the planning. To do the hard analysis that we always do about if we spend this much money, what's the return going to be, I mean, we're certainly not using what's happening today to figure that out because we're seeing negative absorption, right? But we feel confident enough that we think that as things turn this year that we will see something that will cause us to really start spending money.
spk01: Great. Thanks.
spk14: And our next question will come from Bill Crow with Raymond James. Please go ahead.
spk13: I appreciate it. Thanks. Jordan, how confused are your tenants about the future use and demand of the space? I mean, you signed a lot of short-term leases. I assume it didn't have expansion space for de-densification. Can you just kind of take us inside the mind of the tenants and maybe if there's a difference between smaller tenants and larger tenants that you're seeing?
spk04: That's a tall ask. Let me give you some steps. I know this. More expansions than contractions. on renewals. So it is actually a lot of expansion. I have not talked to any, you know, my friends that are tenants, both in our portfolio and other portfolios, I'm not talking to anybody that's saying, oh, yeah, you know, we're sending tons of people home and we think we're going to stay that way. I know some people are making adjustments to their space Or just figure they're just coming back to their space and they were already built out at sort of very liberal numbers. You want to add something there?
spk02: Yeah, I would say the way that we were building our, if you think about our typical suite, our small suite, 3,000 feet, the way it was built out pre-pandemic was probably, like Jordan said, 225 a square foot per person, window line offices, a couple of workstations, a conference room, a kitchen. That's a very typical build out for us. that doesn't really need to change. We haven't seen a massive change in the way people are planning their space going forward because they were already distanced in a way that they feel comfortable. And that's why I think you've seen our attendance be a lot higher than some of the other markets you're looking at.
spk13: What has happened with that attendance rate if you go back six months ago to today?
spk04: Well, at the very beginning, I'd say they were definitely confused, and so were we. So that would be in second quarter. And the augmentation rates were very low. Now, I think the last time I saw some type of real look at this, we figured our buildings were about 30% to 40% occupied. I can tell you that everyone, all four of us on this call for sure, would tell you that The traffic in the morning and the evenings is up. I'm talking about just driving your car, trying to leave work, come to work, whatever the case may be. So, you know, I get my best read on the building I'm sitting in, and I know that parking garage is more full now because I just see it. And I know there's more traffic. You know, I don't know everybody else's buildings or what's going on, but there's way more traffic on the road. in the going to work time and the going home time than there was even like four to six weeks ago.
spk13: Great. Thanks for the color.
spk14: And our next question will come from Daniel Ismail with Green Street Advisors. Go ahead. Great. Thank you.
spk16: Maybe just sticking with the mind of the tenants, how are you perceiving tenants looking to upgrade your space? Are you noticing any slight from Class B to Class A tenants look to trade up, or how are they looking at the quality of their space as they're out in the market?
spk04: That's a good question. I remember when we came out of – we were coming out of the last recession – We had a ton of rebalancing. Now, that recession was long, and it gave a lot of people opportunities that still had businesses they were confident in to move into a much nicer space than, let's say, they typically would be in. And then as we came out of the recession, we started literally letting them out of leases and releasing that space and moving them back to, let's say, where they more properly would be. I don't know that this has been around long enough for that kind of shift to happen, and I haven't heard anyone say that there's a shift in that way. So I think this will be, in terms of us kind of returning to some sort of normalcy, I don't think we'll see that big kind of shift back and forth that we saw in the recession that happened in 2008, 2009, 2010, where I remember like 2011, 2012, You guys were asking us questions, and we're like, yeah, we're literally letting people out of leases in our most expensive markets and letting them sign leases in cheaper markets because we have tenants for that space right now. But I don't think we've seen that shift. There hasn't even been time for people to do that shift, so I doubt that will happen this time.
spk16: And then the last quarter, you mentioned rents sitting, I believe, portfolio-wide about 6% above markets. Is that still a decent line to use, or is this most recent quarter's cash-releasing spread more indicative of where rents sit relative to market?
spk02: Yes, that's still a good estimate for where things are.
spk16: Okay, great. Go ahead.
spk14: Thanks.
spk16: All right.
spk14: And this will conclude the question and answer session. I'd like to turn the conference back over to Jordan Kaplan for any closing remarks.
spk04: Well, thank you all for joining us, and I look forward to speaking with you next quarter.
spk14: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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