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spk00: 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 will receive instructions for participating in the question and answer session. I will now turn the conference over to Stuart McElhinney, 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.
spk10: I will now turn the call over to Jordan. Good morning, everyone. Thank you for joining us. Our revenue during the first quarter is up compared to the first quarter of 2022. but the increase was offset by higher operating costs and interest expense. The slowdown in the leasing pipeline that we mentioned on our last call resulted in a decline in our leased rate, even though we actually signed more leases in the quarter than usual. We continue to have strong demand from tenants under 10,000 square feet who dominate our markets, but because larger tenants have become more conservative in response to recessionary concerns, released less total square footage. Accordingly, we have reduced our assumptions for average office occupancy and same-property cash NOI. The national economy is challenging for all of us, but for some, office CBDs, remote work, oversupply, an overwhelming reliance on large tenants, and concerns about reduced urban appeal seem to pose additional obstacles. As I have said before, our market's supply constraints, smaller tenants, short commutes, and low reliance on public transit supported relatively high leasing volume and utilization during the pandemic. As the pandemic eased, leasing in our markets was very strong until the fourth quarter of 2022 when larger tenants became more concerned about recession. While economic downturns are unpleasant, they are not new to us. We remain confident in the resilience of our portfolio and in our ability to navigate these challenges. We have guided our company through four recessions and always found the silver lining. We repurchased 6 million shares of our common stock in late March and early April, and we are well positioned to take advantage of other opportunities created by the current economy. With that, I will turn the call over to Kevin.
spk08: Thanks, Jordan, and good morning, everyone. Our balance sheet and cash flow after dividends are strong. We have no outstanding debt maturing until December 2024, and almost half of our office portfolio remains unencumbered. We developed our debt strategy to protect our company during times like these. Our debt is all non-recourse, secured by first trust deed mortgages at the property level. We have no corporate-level debt and no corporate covenants. We have a perfect 30-year debt repayment record and are confident we will maintain it during this downturn. Our cash flow after dividends remains one of the best in our industry, and we use less than half of our AFFO for dividends, leaving us with substantial liquidity. Our multifamily projects continue to perform well and lease up at a good pace. At Bishop Place in Honolulu, our office to residential conversion project, we just delivered another floor of apartment units and expect to deliver three more floors by year end. Only two unconverted floors will remain, which are currently leased by office users for several years. At the Landmark LA in Brentwood, we have now leased over 70% of the 376 new units that we began delivering in April last year. With that, I'll turn the call over to Stuart.
spk02: Thanks, Kevin. Good morning, everyone. Smaller tenants continue to drive our leasing in Q1. We signed 235 office leases, covering 625,000 square feet, consisting of 168,000 square feet of new leases and 457,000 square feet of renewal leases. Our leasing spreads during the first quarter were positive 6% for straight line, and negative 6.7% for cash. While this is somewhat better than recent quarters, we don't expect to achieve meaningful gains in office rental rates until our leased rate begins to recover. Our leasing costs this quarter were $5.37 per square foot per year, which is a bit lower than recent quarters and well below average for other REITs in our benchmark group. Turning to multifamily, our portfolio was 99.3% leased at quarter end and rents continue to roll up across our portfolio. With that, I'll turn the call over to Peter to discuss our results.
spk04: Thanks, Stuart. Good morning, everyone. Turning to our results, compared to the first quarter of 2022, revenue increased by 5.7 percent, reflecting the addition of new units to our multifamily portfolio, which has increased by 617 units, and higher in-place office and multifamily rental rates. FFO decreased by 5% to 47 cents per share, primarily as a result of higher interest expense on our floating rate debt. AFFO decreased 13.5% to $81.4 million. Although our leasing costs per square foot remain low, we paid the tenant improvement costs this quarter to move in a large number of tenants with whom we executed leases last year. Same property cash NOI decreased by 1.5%, with higher rental revenue and parking revenue offset by continued inflationary pressure on utilities and wages. Our GNA remains very low relative to our benchmark group at only 4.3% of revenue. During late March and early April, we repurchased 6 million shares of our common stock at an average cost of $12.32 per share. Turning to guidance, as Jordan said, we are adjusting our assumption for average office occupancy which we now expect to be between 81 and 83 percent for the year. We adjusted our expected range of same-property cash NOI growth to be between negative 1.5 percent and negative 0.5 percent, and for straight-line revenue to be between one and three million dollars. These adjustments are offset by the benefit of our stock buyback, so our guidance range for full-year FFO remains between $1.87 and $1.93 per share. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does 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.
spk00: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. And again, in consideration of other participants, please limit your queries to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And the first question will be from Alexander Goldfarb from Piper Sandler. Please go ahead.
spk11: Hey, morning out there. Hey, how are you, Jordan? So two questions. First, on the stock buybacks, I believe you have floating rate debt where the swaps burned off this year. So what are your thoughts on instead of the buybacks using that cash to pay down those floating rate loans to try and reduce the impact of rising rates?
spk10: Well, I mean, I actually think the floating rate debt is at a good margin, and it's pretty good debt. The question is just when do we want to re-swap it. I think there is going to come an opportunity to re-swap it if you look a little longer out, not including this year. I think it swaps back to a reasonable rate almost already. So I'm not anxious to use cash for that. I think there's better uses for it, and that's very good debt with a lot of time left on it. I'd like to mention something. In the lead-in to our call, Stuart's section, it said that Mona is our CFO, which actually Peter's our CFO. So just some behind the scenes is that Stuart doesn't like to re-record his opening over and over again. So he says, use my last one. He didn't mean... used my last one from the dark ages. He actually just used my last one from like the last year. So they obviously pulled one from four years ago. But anyways, maybe nobody caught that except for us. Now, what was your second question?
spk11: Second question. So the second question is, when we were out in Hawaii at the investor event, you were talking a lot about how downtown LA tenants are moving to the west side, not enough space for all these tenants that are coming. And yet you're also talking about the large tenants being the weak spot in your portfolio. So small tenants, very active, large tenants, not active. And I'm just curious how we rationalize that if downtown LA tenants are moving to the West side, those, you know, I would think are larger tenants. So why wouldn't we see some increase in large tenant activity in your portfolio as well?
spk10: So most of that increase has been reflected in Century City. They're actually a bit larger than even we can accommodate. So now Century City, I think almost all the full floors and the towers and some of those other buildings are gone. We don't have a lot of blocks of space. To us, large tenant is 10 to 40,000 feet. And when you get over 20, that's a full floor already, right? And so 10 to 20 is more, I mean, we have full floor tenants, plenty of them, but nothing close to the way Century City operates. Now, they moved in, a ton of them moved to Century. I think Century City is very full right now. And we're hoping that some will move in like Beverly Hills and Westwood or the other places where those people tend to head. And maybe there's a little bit of activity there, but in those markets, we have not had the blocks of space that would have accommodated someone that's looking for 50,000 feet when we just haven't had it.
spk11: Okay, but you would expect some spillover eventually.
spk10: Yeah, well, what I think is that there's definitely tenants moving. I mean, you can look at CB's report or some other reports. Tenants are moving from downtown to the west side. And I don't know of a small one. Smaller ones have a great reason to be there. They probably live over in Pasadena or in that area, and so it's a big deal for them to make the hop all the way across. Now, they might probably, like these larger ones, are having trouble getting people to come into the office downtown, so they're saying, we're moving. I mean, the anecdotal stories that I've heard is law firms that have called everyone back in, and they're saying, we'll come back in, but we don't want to be downtown. They're literally abandoning leases or still paying on them, and they're leasing space in Century City, and they're saying, okay, now everybody back in. So that, I mean, I don't know that, you know, I think there will be some spillover, think, hope, whatever. But, I mean, they're definitely moving our way.
spk11: Okay.
spk10: Thank you. Thanks, Alex.
spk00: And the next question is from Camille Bonnell from Bank of America. Please go ahead.
spk05: Hi, good morning. Can we focus a bit more on what you're seeing in the Olympic corridor and Brentwood submarkets? What have the reasons tenants been saying to your leasing teams when they move out?
spk02: Hey, Camille. Yeah, I mean, our tenants, as you know, we've got almost 3,000 tenants, and the list of reasons they move out is a long list. They're growing, they're shrinking, their partner's retiring, or they're breaking off into two different firms. It's a huge list of reasons. It's kind of that same list of reasons that we've always seen, so no noticeable shift or trends to point to there. Some sub-markets, you mentioned some specific sub-markets. I know we've had some movement around in some of the submarkets. But our submarkets are so small that they're sensitive to small changes. So we really internally think it's more useful to focus on kind of our major regions, the West LA Valley and Hawaii, because individual submarkets really can bounce around pretty easily with small changes.
spk05: Okay. And I guess that's my follow-up question. The small tenants seem to be very active in your markets. Are you tracking enough demand to keep up this level of leasing momentum through 2023? And if you have any comments on your tenant watch list, if there's been any changes following the recent events with SPV, that'd be much appreciated.
spk10: Okay, so as we foreshadowed, Last quarter, we saw the pipeline slowing down, and it did slow down, and you're seeing it. If you're asking me if it's going to slow down more than this, no, we are not seeing that. We're seeing this amount of activity, which is still a good amount of activity. I mean, over 600,000 feet, but not anything to what we're used to, which we want to be around 800,000 feet, and we did four quarters of a million feet. you know, it is substantially off, but I don't consider it, we don't view it as being able to go off a lot more. What was your second question?
spk05: If there's been any changes to your credit tenant watch list.
spk10: Oh, you know, so tenants are, I guess there's two versions of that. So tenants are still chipping away and chipping away and paying less that are kind of the hangover group from COVID, and that number is down, down, down. I think the last time I saw that number, it was 17 million. And if you're asking if more tenants are going on our watch list, yeah, a little here and there, but not much. Not noteworthy amounts, no. And the credit of the tenants... The credit attempts is very good. And I don't know if you would recall, but even in COVID when, you know, 10% of our tenants weren't paying because the state said, you don't have to pay. We kept saying that these people can all pay. That's not going to be where we end up. I think where we are actually going to end up over the, you know, whatever the two or three years of COVID is maybe like 20 basis points, forget about 10%. I mean, it's going to be almost a nothing number. And the reason for that is, As we've said, it's smaller tenants. They have very good credit. And by the way, they signed on the lease personally. So that, you know, not a lot of default in our portfolio over the long haul, and I wouldn't expect a lot right now.
spk05: Thank you for taking my question.
spk00: All righty. And the next question is from Blaine Heck from Wells Fargo. Please go ahead.
spk03: Great, thanks. Jordan, several of your office REIT peers have expressed optimism this quarter around the return to office mandates that some of the tech companies that were, you know, really quick to go fully remote during the pandemic have now implemented. You know, I know you guys don't have much exposure to tech, but can you talk about whether you think this could be beneficial to the LA market in general, and your portfolio in particular, maybe not from those tenants exactly, but other supporting kind of smaller tenants?
spk10: Yeah. So I love seeing people come back to work. And I love seeing those tenants bringing people back in. And I think it's going to be, it's very good for the economy and the L.A. economy and all economies where large tenants have people stay home, whether it be San Francisco or New York or anywhere. If you want to more specifically talk about our portfolio, I would love to say it's going to be like a big deal and blah, blah, blah, but we've been over 80% for a long time. Maybe we're going to go to 100% or 95%. I don't think it's been getting in the way of leasing. I don't think it's been getting in the way of anything, quite frankly. Even our parking, I know Ken sent me a little analysis, a visitor, blah, blah, blah. And we're able to, like, more spot track it. It's fast. And I noticed that on the last one Ken sent me, our visitor is back to full, like back to the 100% level of that it was pre-pandemic. So I'd like to say that would be a good benefit to us, but I actually think the entire issue that we're facing is – I don't know if they want to call it a recession or whatever, the real estate recession that we're having or the conservative way that people are approaching expecting a real estate recession that's caused a slowdown on leasing. I don't think there's anything else. I think it's not dissimilar from the last four recessions that we've been in since we've been running this, Ken and I have been running this company. And And we have to work our way through the recession. And as we come out of it, I'm sure we'll come out extremely well.
spk03: Okay, that's really helpful, Collar. Switching gears real quickly to the investment front, can you talk about any recent conversations you've had with your capital partners, whether they're willing and interested in acquiring office or multi-family assets, and maybe what sort of return requirements or return targets that they have in this kind of environment?
spk08: Sure. Hey, Blaine, it's Kevin. We've been having those conversations and having meetings with our capital partners because, as we've said on previous calls, we are super anxious to deploy some capital in this market. And there are not a lot of people that feel the same way, although there are some, so it's going to be lower competition. And Office and Multifamily in West LA are both okay with our partners. You know, we've all adjusted our return expectations in accordance with interest rates, and so it's not going to be as it was, but we're looking forward to some opportunities coming out and deploying capital.
spk03: Great. Thank you, guys. Thanks.
spk00: And the next question is from Michael Griffin from Citi. Please go ahead.
spk12: Great. Thanks. Um, maybe to piggyback on Blaine's question there on, on capital allocation, you know, you've talked about being kind of, you know, ready to look at opportunities. I think we've seen some stuff that's mainly been in like orange County. So not exactly your, your wheelhouse sort of traded discounted valuations, anything you're seeing from the transaction market or, you know, talking with your contacts out there, you know, I know you've got prop you in west LA, so that kind of helps the supply front. And then Kevin just on, you know, you talked about office and multi being okay with your partners. Does one of these screen better as the other for a potential investment opportunity? Thank you.
spk08: Sure. So, well, I think that there's more certainty around the demand for multifamily in the near term, and people are trying to figure out the demand for the office from a tenant perspective and an underwriting perspective. So, you know, I would expect that multifamily is going to trade at a tighter price range than office. You know, so far, we haven't seen anything that really fits the profile of asset that we're looking for. And what we look for specifically are assets with a smaller tenant base, maybe a problem in the rent roll or something that needs to be repositioned where we can deploy our operating platform into the asset to maximize its potential. And we just haven't really seen that come out yet, although, you know, I'm optimistic that towards the latter half of this year, we're going to see some opportunities.
spk10: I really feel like I will be surprised to see opportunities in residential. Let me just say it that way. I think still trading pretty tight. I think we have a better chance of making some good deals in office if you just, you know, because we have a lot of conviction around it, and that's where you see the weakest conviction from, like, the broader capital markets, which means that I know it's not fun to go against the tide, but that's where we excel.
spk07: Thanks. This is Nick Joseph here with Michael. Just a question on occupancy. I think the guide is 82% average occupancy for the full year. Can you just talk through how you get there, just because number one queue ended?
spk10: Well, you want to talk about it or you want me? So what happens is This quarter, we look at what happened this quarter in terms of leasing, and we can start projecting out pretty good because occupancy is a function of leasing. And so we go, well, we didn't hit goals for leasing, and therefore our average occupancy is going to be lower. I mean, it's actually just kind of calculating math out.
spk03: Great, thanks.
spk00: And the next question is from Steve Sokwa from Evercore ISI. Please go ahead.
spk01: Great. Jordan, thanks for clarifying about Peter. I thought I missed an announcement this morning about his resignation.
spk10: By the way, Mona still works here, too. I mean, so maybe she was also surprised to hear that, because she actually asked to do this.
spk01: What?
spk10: But anyway, yeah, that was weird.
spk01: Yeah, thank you. So coming back to leasing, Jordan, I know you did a lot of renewal leasing, but clearly the linchpin in getting occupancy and lease rate up is the new volume. And based on your comments, it sounds like it's less of an RTO problem and more of an economic outlook problem. And to the extent that that doesn't really clear up this year, does that sort of suggest that the leasing volume you did in this quarter on the new side is kind of the new run rate, if you will, until the economy is really on firmer footing?
spk10: So probably what you said, I hope not, but you certainly understand the situation. Let me say it that way. I hope that's not true. I know we just keep accelerating our push on the new deal and the leasing, and we're constantly adding and doing things. I actually think that It was oddly low this quarter, and that we probably for the next three quarters, I'm hopeful that we'll do a little better. Usually when we have a very low quarter like this, we get some recovery. I think this number is lower than a run rate that I would expect, and it was lower. Obviously, I just said a second ago, it caused us to adjust our occupancy. So I'm not expecting... Well, basically what we're expecting we gave in our adjustment to the assumptions, which would probably not be this run rate of this quarter all for the rest of it. But you certainly understand it. But I think we'll get some recovery over the next four quarters, three quarters.
spk01: Okay, great. And then on the capital deployment side, I'm sort of just wrestling with the The share buyback, I sort of understand at the, you know, at the implied cap rate where you trade is probably high single digits, maybe on certain days pushing low double digits. And, you know, how that would stack up against the new deal. And I agree with you, apartments probably won't come cheaply, so you'd have to be looking at office. And I guess you already know what you own. So, I mean, can you envision finding deals that are as good as what you already own? to make them even more creative than buying back stock?
spk10: Well, I can envision it. I can envision a lot of things. Now, I know some deals where the people in the building are anxious to have us come in and take over. Okay? So I think there might be some deals out there where people are saying, you know... maybe i'm not getting top dollar for this but i'm not going to sell 100 of it and i'll sell a big chunk to you but we just don't want to run this anymore and that is that there might be opportunities there that are very good opportunities for us very very good and that's frankly a lot of what kevin's focusing on and he's traveling and doing the whole deal around um so you know You're right to say we own a lot, and a lot of what we own is the best of whatever market happens to be in. But there's still deals out there, deals we'd like to do, and I think there's a few groups out there that kind of have an attitude that I just described, and that's really the opportunity around office that I was talking about.
spk01: Great. Thanks for the time.
spk00: And the next question will be from Dylan Brzezinski from Green Street. Please go ahead.
spk06: Hi, guys. Most of the questions have been asked already, but I guess just curious, given the news coming out of Hollywood and the strike scene there, do you guys expect that to have any impact on your guys' portfolio?
spk04: Dylan, it's Peter here. probably shouldn't have much impact. We don't tend to have a lot that's affected. We get a little bit of temporary production space when a show's up and running, and that might go away, but it's pretty ancillary to our overall business.
spk06: And then, do you guys have any update on sort of the discussions that you're having with Warner Bros., given their expiration? in the latter half of next year?
spk10: I don't think we have much of an update. I mean, I said our expectation is that they move out, although they haven't said they're doing that. And I think they're going through a lot right now. And so it's, you know, maybe they're not, you know, their plans are changing fast. Now, on the other side of the coin, I also said we're marketing the buildings. That's kind of going to be it until they come to us and they're not under any pressure to say we're moving out because they don't have any. So they're, they're, you know, they're going to play the end and see where they end up. I know they're, you know, at this moment, the reason we expect them to move out is because they they're same announcements that you guys are able to read about how hard they're working to cut costs. If a company just continuously cuts costs, then they go away. At some point, they're going to change their view and say, now we're rebuilding this or that. We don't know where that's going to end up. Do you have a sense of their utilization of the space today? I think the utilization is extremely low, like barely any. I think that's their utilization of like every office space that they have. I mean, if people start, you know, the studios have been very slow to bring people back into office space. I would just say it that way.
spk06: Great. Thanks, guys.
spk00: And the next question will come from Tayo Okusanya from Credit Suisse. Please go ahead.
spk09: Yes. Good morning out there. Just a quick question in regards to the swaps that are going to be dropping off. I think the mindset before was you were just going to let the underlying variable rate debt float. Is that still kind of the idea, given, again, some of the latest news from the Fed around rate policy?
spk10: Hey, did the Fed do their announcement yet? Did they go out of order? Yeah, they did. They raised $2,500. Okay. Well, that's new news to me. I just heard it just now, so I have to think about it. I actually think there might be some opportunities considering we have some very good debt in terms of the margins to kind of let this year play out, but forward swap maybe starting earlier next year. That number's down in the three range, you know, put our swaps more in the low fours, which is fine, and we could swap out and start fixing some of this and start layering it back in. I mean, our intention is not to just put the whole company to floating, of course. But I also, as I've said in the past, I don't like, you know, nobody flies a kite during a storm, you know, even though you need wind to fly a kite. So I like to spend a little time, see how things settle a bit before we do something.
spk00: Sounds good. Thank you. Again, if you have a question, please press star then one. The next question is a follow-up from Michael Griffin from Citi. Please go ahead.
spk12: Hey, great. Thanks. I think you touched on the Warner Brothers lease a couple questions ago. I'm curious. I know you have the conversion in Hawaii. I think you're doing some stuff. You said a landmark. Is this a candidate for conversion? I mean, apartments might be pretty hard because of the floor plates, but, like, Could it be converted to a movie studio? Like don't they film, like didn't they film Larry King around there or in that general area? Just a thought. Thanks.
spk10: Well, that, I mean, the floor plates actually, that building could be converted to an apartment building, but I can't imagine a scenario in which we do that. I mean, that Burbank Media District, while during this recession and what's going on, It seems to be showing some weakness, and maybe because of the new construction that happened there, it's even showing more weakness. But I'm going to tell you that for like 25 years, it's been the strongest office market in all L.A. County. I mean, it's been a very strong office market, maybe downtown Santa Monica and maybe some Beverly Hills. But it's a really solid office market, so I can't imagine – Unless you have a building down there that's really almost dysfunctional, I don't see the spread between office rents and apartment rents being a wide enough gap to encourage anybody to do a conversion. Frankly, I think out there, office rents are probably higher than apartment rents. Just because we have a tenant moving out and we're going to have some vacancy, that's a miles from the idea of saying, is this a market where we do better long-term with the conversion, especially in the mediator shirt.
spk12: But maybe to that point, like if it's a big single tenant user of that building and they've got like 430,000 square feet or whatever, how hard is it to cut up the building into like the smaller tenants, you know, the amit bread and butter, so to speak?
spk10: The floor plates are very good for being broken up. The building can be broken up quite easily. There's larger tenants there, though. I mean, we can do a few floors of smaller tenants. My guess is you're still dealing with tenants that are 50,000 to 200,000 feet. That would be perfect. I mean, to do three or four tenants is more what I'd like to go to. I mean, the reality is there really are only large tenants. We have one other that's large-ish that's WME, but they're right in the middle of Beverly Hills, which is like the heartland of small tenants. They just happen to have grown big in one of our buildings. That's it. That's where the list ends.
spk12: All right. That's it for me. Appreciate the follow-up.
spk00: Thanks. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
spk10: Well, thank you all for joining us, and we look forward to speaking with you again in a quarter.
spk00: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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