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 a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. I’ll now turn the conference over to 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 Crummy, 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 hope you are staying safe and healthy. I know we are all focused on the current situation. Before addressing that, I want to briefly report on our first quarter results. We had another excellent quarter. We grew our FFO by 8.5%, our AFFO by 16.4% and our same-property cash NOI by 7.7%. The straight-line value of our office leases signed during the quarter was 23% greater than the prior leases for the same space and we made good progress on our two multifamily development projects. Of course that was the first quarter. As is true everywhere our tenants are now struggling with the impacts of the pandemic on their business. In addition, the cities in which we operate have passed unusually punitive ordinances, prohibiting evictions and allowing rent deferral for residential, retail and office tenants, regardless of financial distress. By eliminating any fees or interest and providing long payback periods, tenants essentially have the option of a free loan. Given the current uncertainties in our earnings package we provided you with our April rent collections data in lieu of guidance. To date those collections represent 87% of aggregate rent billed with residential at 95%, office at 90% and our small retail component at 22%. We don't know whether April will prove to be a good predictor of the next few months or the remainder of the year. While we also do not know how long the pandemic will last over numerous cycles during the last 30 years, we have designed our operating platform, capital structure, and investment strategy to weather downturns. We entered this downturn with strong cash flow and a very healthy balance sheet. At the end of Q1, we had $175 million of cash on hand, an undrawn $400 million line of credit, no debt maturities before 2023, no financial covenants that could force us to issue equity at the wrong time, and 41% of our office portfolio is unencumbered. In the end, we own many of the highest quality properties in the strongest, most desirable submarkets of Los Angeles. Our diverse tenant base represents our nation's most competitive industries and limits our vulnerability to any single tenant or industry. Our markets have no meaningful new supply, so we face no overhang from new construction as we recover from this crisis. Now I will turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone. On the operational front, our buildings remain open, safe, and available for our tenants. We're focused on providing excellent service while instituting stringent cleaning protocols, safe distancing, face coverings in common areas, and reduced elevator density. As you might expect, we're seeing low attendance at our office properties, which will likely continue at least until the lifting of the stay-at-home orders. During this time, we expect some savings from variable expenses to help offset expected declines in parking revenue. As Jordan mentioned, the cities where we primarily operate, Los Angeles, Beverly Hills, and Santa Monica, have all enacted enforcement moratoriums to cover our residential, retail, and office tenants. The ordinances have some carve-outs for large tenants and generally prohibit landlords not only from evicting tenants but also from imposing any late fees or interest. Under the ordinances, tenants are required to pay back the deferred rent within three to 12 months after the end of the emergency. On the capital front, construction is continuing on our two large multifamily development projects, although it may take a little longer under current conditions. In Honolulu, where we are developing 500 apartment units at our office conversion project, we have already pre-leased a number of units and expect to deliver them over the next few months. For our Brentwood apartment tower, we currently expect delivery of the first units to be pushed into 2022. For the moment, we have suspended work on new office repositioning projects, and acquisitions in our market seem to be on hold as buyers and sellers evaluate the new conditions. With that said, we are well-positioned to take advantage of any opportunities that emerge. I will now turn the call over to Stuart.

Thanks, Kevin. Good morning everyone. In Q1, we signed 174 office leases covering 702,000 square feet including 184,000 square feet of new leases. Leasing spreads for the first quarter were 22.6% for straight-line rent roll up, 9.3% for cash roll up. As we discussed last quarter, we had a high number of expirations impact Q1 and anticipated an early dip in occupancy this year. The decline in occupancy for our total office portfolio to 90.8% was in line with our pre-COVID-19 expectations. By late March, the pace of new leasing in our office portfolio slowed to a trickle, but we are starting to see some signs of life as tenants and brokers adjust to the new normal. We have often talked about how we make the leasing experience in our small tenant office portfolio mirror the ease and speed of that at our apartments. As a result, we were early adopters of virtual touring technology and we are well-equipped to complete the entire leasing process remotely from tour to space planning to electronic document execution. This experience should serve us well in the current environment and going forward. On the multifamily side, our portfolio remained essentially fully leased at 98%. Residential new leasing activity also slowed somewhat in late March, but not to the same extent as office. I'll now turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning everyone. We are pleased with our Q1 results. Compared to a year ago in the first quarter of 2020, we increased revenues by 12.1%. We increased FFO 8.5% to $112 million or $0.55 per share. We increased AFFO 16.4% to $99 million. We increased our same-property cash NOI by 7.7% and at only 4.1% of revenues, our G&A for the first quarter remains well below that of our benchmark group. As Jordan said, we don't know what will happen in May or in subsequent months. Many things could change even before the stay-in-place orders begin to be lifted. Many of our small tenants have applied for federal assistance which can be forgiven if they pay their rent by June. The local governments that have authorized rent deferrals are considering excluding office tenants, which would reduce or eliminate that headwind. Leasing could start to recover as tenants come closer to the end of their existing leases. On the other hand, we could see more tenants stop paying rent if the impact on their business grows. These uncertainties are compounded by many other critical variables on which we have little information: how long the current stay-in-place orders remain, how they are phased out, how businesses react after they are phased out, and whether there is a second pandemic wave in the fall. While in past recessions, our tenants have shown low default rates, we can't be sure what will happen this time. As a result, we have withdrawn our guidance for all of 2020. I will now turn the call over to the operator so we can take your questions.

Thank you. Our first question comes from Jason Green at Evercore.

Thank you. Just a question on the tenants who have not paid rent, do you have any insight as to how many of those tenants are experiencing real financial distress versus how many are just opportunistically seeking rent relief?

Considering this is Jordan. I'm sorry our voices sound different since we have five people in a 46-person conference room spread out for social distancing, and we probably need to keep the microphone six feet away. Anyway, regarding our office tenants and the office markets we operate in, along with our credit underwriting, we feel fairly confident in our tenants' ability to pay. It's challenging to assess everything, as everyone is affected by this situation. For our retail tenants, we have some large ones that likely have the capacity to pay, but the reasons for not doing so are understandable. As you can see, our residential occupancy is around 95%.

Got it. I guess just one more on capital allocation. You guys announced the approval of a share repurchase program in the quarter, but didn't repurchase any shares when the stock hit the mid- to low $20 level. I guess just what was the thinking behind not repurchasing shares when it got down to that level?

Well, we set up that program to make sure we had that flexibility. But at the same time, I don't know then or even now whether we have the right kind of visibility to know what we're facing whether it's months, years, whatever to know exactly what we want to do. So the first stage of what we've been doing has been kind of organizing the company to keep it protected and running right, to run our buildings properly and keep our people employed, do all that stuff right. And then the second stage is to look for opportunities. And I think we've done a good job of the first step and we're starting to evaluate the second step.

The next question comes from Craig Mailman at KeyBanc Capital Markets.

Hey, good afternoon guys. I know it's a little bit early in May here, but just curious what the early trends you guys are seeing if you're on the same pace you were in April or if more people are maybe taking advantage of the moratoriums that are in place?

Right now, we're tracking about the same as April. Although, in terms of business days, it's early to know where we're really going to end up in May. I think that we are seeing some tenants are starting to get the PPP, and I think we've also been pressuring some tenants saying you know what you're doing is not right. And frankly, we've been talking to some of the cities and saying to them you've put together programs that are more punitive than any of the other gateway markets in the United States. It's almost asking the tenants to not pay with the way you're providing a sort of free 12-month loan. So with all of those things swirling around juxtaposed with the fact that, now it's our second month of COVID and stay-in-place it's hard to know how we'll really end up.

Okay. That's helpful. And then the big themes of work-from-home and easing of densification are kind of topics in the office space. I'm just curious you guys tend to skew smaller just your thoughts on kind of how dense your tenants got versus maybe some of the larger tech firms? And whether this work-from-home could just cause some of your smaller tenants to just say you know what I'll just do my work out of the house if it's kind of a small company. Just kind of curious, as you guys have looked through that kind of thoughts here?

The first part of your question is quite challenging. Honestly, we don't have much more information than you do. However, regarding our market, I don’t believe it has reached the same density as other gateway markets from the outset. We are still in the process of developing most of our space. For example, much of our space is designed for 200 feet or more. When it comes to very small tenants, those figures can be even higher. It’s unclear how many of these small tenants we've assessed in relation to our space. We have areas that still require improvement, but I think they are relatively well-positioned to recover even without modifications to their space. The trend of densification that has unfolded over the last decade in places like New York, Boston, and the tech hubs in San Francisco raises questions about how to ease that situation. Just this shift alone could potentially benefit those markets, but I'm uncertain if it means they will simply retain their current space while relocating another group or what the outcome will be. The second part of your question concerns whether our smaller tenants might choose to work from home instead. Most of our tenants have always had that option, and they appreciate having their offices. Our strategy highlights the short commute from their homes to our locations. For years, I have suggested that they should transition from their homes to their office spaces, as the cost-per-square-foot of office space is significantly more economical. I believe they value having a designated place to work and are unlikely to decide to work from home permanently. Conversations with people indicate that many are eager to return to an office environment. While they may have concerns about health and safety due to the virus, it is human nature to desire a change of scenery. I have felt for almost two decades that technology has allowed people to work from home, broadening the workforce by enabling those who couldn’t otherwise work in an office to contribute. However, I don’t think this will change the dynamics for the segment of the workforce that prefers the office environment and collaborates with colleagues there.

Great. Thanks.

The next question comes from Jamie Feldman, Bank of America.

Thank you. I would like to discuss your liquidity position, particularly in light of your decision to reduce spending this year. Could you outline your spending needs for this year? Additionally, if there are dislocations in the market, how do you plan to approach potential investment opportunities? Or do you believe you're not prepared for that at the moment?

I’m not sure how extensive the list of investment opportunities is right now. We’re not seeing many emerge, and by that, I mean nearly none. Currently, on the capital market side, we have three groups of opportunities. First, we're focused on refinancing because as rates decrease, we actively pursue those options. Second, we initiated a stock buyback program, but I don't believe we're prepared to move forward with that just yet. Lastly, regarding third-party construction, we’ve decided to proceed with our two large projects. However, we have reduced our spending on about $100 million worth of additional building repositionings and lobby renovations this year to ensure our cash position remains strong.

So I guess how do you think about like sources and uses this year with kind of your revised capital plan?

Well I think our income will be sufficient to fund our uses. If you're asking me the simple question do I think we're sort of trapped in something where we're forced to be a net borrower I don't think we are. And I don't project that even with the fact that I think we ended up 12% off in April or something like that continuing I think we're in plenty good shape.

Okay. And I guess similar with the distribution at the current level? Cover everything?

Well, if you're asking me does the distribution cover our income, I think we're in fine shape. I think the dividend you're talking about the public company dividend right?

Yes.

Yes, I think we're in plenty good shape.

Okay. Can you talk about what the co-working companies are doing in your markets right now? Are they paying rent? Are you hearing that they are struggling? Any insights would be helpful.

It's case by case. In discussions with my peers in the marketplace, some of the larger co-working companies are paying rent, while others are requesting a bit of rent relief currently since offices aren't being utilized. However, we don't have significant exposure in West L.A., so this is based on anecdotal observations across the market. I've noticed that we have been paying some landlords and not others, similar to what is happening nationwide.

Okay. All right. Thanks guys.

The next question is from Emmanuel Korchman at Citi.

Hi everyone. If we think about the 90% collections in the office portfolio, is there any commonality whether it be by industry or by size or by some other characteristic of the 10% that haven't paid other than the fact that the municipalities have given them the right not to?

I have been discussing this with various city councils, and I've noticed a concerning relationship between nonpayment and the rules surrounding the moratorium in different cities. Some cities have very lenient policies with no costs and long payback periods, and in those locations, we are seeing significantly worse collection rates compared to cities with stricter regulations, where fees can still be charged and the payback periods are much shorter. The advantage of having a disgruntled landlord isn't as pronounced as it is in places with better payment rates. This is a key observation that stands out from the latest data.

Thanks. And then in terms of your new leasing it looks like the leasing costs were elevated. I don't know if that had to do with mix and the base rents in that pool were higher or if it just had to do with spaces but could you give us some color as to why those new leasing costs specifically seen higher than recent trends?

Yes. I mean look I think – this is Peter. There's the overall rate ends up much lower, right? So we had a much lower on the renewal side. And then the new leasing we did a small number of deals and a couple of them were at slightly higher cost but it doesn't look like it's indicative of any kind of trend. And as a percentage of rent, the rent that we're giving is the combined blended rent. So when you take that – when you take new leasing just over the new leasing rents, it's pretty much in line with what we've seen in the past.

Thanks.

Our next question comes from Alexander Goldfarb of Piper Sandler.

Hey guys, good morning. Good morning out there. Hey, you guys are pretty brave to all be in the same room together so...

It's such a huge conference room it's almost absurd.

Now everyone is realizing that their homes are not big enough. Two questions. First, can you just talk a little bit about Hawaii, It sounds like the state overall has been fine COVID-wise and that – hopefully, it can start to reopen. But clearly it's going to be a while before tourism returns. So your product out there, the apartments, the office, what are you guys seeing? And is your view that tourism absolutely has to return before you can see benefits in your properties? Or do you think the local economy is sufficient enough for you guys to continue the building conversions and pushing rents and all that good stuff?

Well, I'll tell you. First of all, I think the group that I think has worked hard and done a good job what I've seen happen in Hawaii has been really impressive. They did well with COVID. I thought the city-state, county leaders, whatever that group is they're all kind of mashed together did a really nice job. They have four local banks there we got because we – for the stuff we do in Hawaii we use local banks we got conversations with them. They were really aggressive. Literally midnight, the first round of PPP, they made sure they got all the local companies covered and got a good chunk of money out to all of them. You saw really good engagement out of the mayor and others in terms of walking the line to what's open, not open construction. So in terms of management, I really – maybe it's because they're all like a big family there they all know each other. But I give them a really high grade. So I'm hoping that – and they're super focused on recovery and protecting their economy. Now they for sure have the problem of being a very tourist-dependent economy they have construction. They have a huge chunk of military in there. They have other stuff but tourism is a big deal. Now I know that they are working as hard as any hotel company or any airline to go how do we solve this and how do we make people feel comfortable coming back when the time is right? On the other side of the coin, when you talk about Douglas Emmett and our residential projects are going – our construction is going there and our occupancy is fine, and our pay rate is fine, all good. On our office projects, they're – interestingly we went into Hawaii originally, now it was two decades ago with the thought that a run-up in tourism and facing Asia would be very good for that economy and then now would flow through to the office product. And that was what we do, office and residential so that's what we did. Hawaii is where we learned that tourism for sure to the plus side, as tourism kept running up we did not see it roll through the office product. So we saw tourism – when we went into Hawaii, I think the tourism was like $4 million to $5 million. And last year probably $9 million $10 million, right. So you would have said "Wow you called it right" but that did not drive much in terms of the office product. I'm not sure that that decline will drive much in the way of the office product. But overall, having a strong economy is going to be important. And I think more than any of the other places where we operate, they are just collectively growing as a team to make sure that Hawaii that doesn't suffer too much. So we've been very happy about that.

Okay, Jordan. When you speak with local California politicians about eviction moratoriums, I'm sure they also implemented a real estate tax moratorium to prevent landlords from being stuck in a difficult situation. When you bring this issue up to the politicians, do they grasp that concept? I know Gavin was discussing payment issues a few weeks ago, but do they comprehend the implications of your ability to withhold taxes if payments are not made due to government mandates?

I didn't use as much sarcasm as you did since I'm trying to get them to help me, but I did point out that the impact of these moratoriums has essentially shifted the borrowing responsibility to us instead of to tenants, which doesn't seem fair. To be fair to their perspective, they are primarily concerned with residential issues. Most of these ordinances were created by individuals without real estate knowledge who were focused solely on residential concerns. When you speak with them, they mention their desire to preserve local retailers, as they are an integral part of the community, and they want to avoid having empty storefronts. When we discuss protecting housing and preventing evictions, they are generally open to changing things for the commercial sector as well. The challenge is that they are overwhelmed with various problems, and their budgets have been severely impacted. Although we've managed to get their attention and engage with city attorneys to revise these emergency ordinances, it is a time-consuming process. They haven't been particularly resistant; when we explain our position, they begin to understand that they are trying to support businesses that generate sales tax rather than covering hedge funds or office spaces. This distinction is the first time they’ve started to separate retail from office, as many of the ordinances just mention commercial without specifying further. They seem willing to make the necessary adjustments, but it has taken a while—these provisions were put in place at the beginning of April, and now a month later, we have had meetings with top officials, including the mayor and council members, who are addressing these issues. That has been a positive development.

Right. But they understand that you can't act as a middleman or a lender of last resort. If there are failures at the top, you shouldn't be expected to pay out at the bottom. They get that, right?

They haven't realized that we're still paying all our city business taxes and fees. However, I'm not presenting it to them in that way because we are focused on achieving our goal of getting the commercial release. All right.

The next question is from John Kim at BMO.

Hi. This is Frank Lee on with John. First question I have is do you have a sense of what percentage of your multifamily rents are currently delinquent? And can you walk us through your plans on addressing any of this?

Well, yes. Unfortunately, the 5% that did pay might just be due to ramp-up, but I believe it's slightly more significant than that. It appears to be largely concentrated among tenants who choose to rent some of the most desirable spaces in our beachfront properties with high rents. These tenants, who likely have considerable net worth, want to enjoy the beach view and access to the sand. When I examined that listing and ranked it by rent, it became clear that if we focused on collecting from those who paid over $4,000, we could recover a substantial amount. If someone is paying $4,000 for their apartment, they probably have the means to pay. However, the regulations are stringent, and those tenants have been informed that they are not required to make payments. I’ve informed the cities, although they seem disinterested in this aspect concerning apartments, that it appears the tenants who consider themselves financially savvy are the ones taking advantage of these ordinances. In contrast, the average tenant does not want to let their rent accumulate, as they need to live there, and they tend to pay their rent. It seems that those who feel they can manage the additional costs are the ones responsible for a significant portion of the unpaid rent. This situation will evolve over time.

And then, what's your expectation to recoup that 5%-ish of kind of lost rent from those tenants?

It's challenging to make predictions at this point. We're focused on increasing the collection rate each month, and then we can reassess. Our underwriting is strong when leasing space. During the last recession, we did not experience defaults. You’re referring to defaults that arise not from the city allowing non-payment but from actual failures to pay. I believe our defaults were typically below 2%, possibly peaking at 3%, but unlikely exceeding 2%. In a recession, we may see increased vacancy and a potential decline in rents, but we manage defaults effectively. Therefore, I would anticipate that our default rates will remain low, although the collection timeframe appears to be extending.

Okay. And then second question I have is if I look at your top tenant list did all the tenants pay April rent? I'm just curious particularly on the lease with Equinox?

We prefer not to discuss individual tenants, so we won’t be doing that today.

The next question comes from Dave Rodgers at Baird.

Yes, hey guys. Just I guess with your smaller tenants and much faster roll the shorter lease term that you generally have versus office I mean what are those discussions like today for the next kind of three to five months? I mean typically, I think larger deals would be done but I think you guys do it a little bit more just-in-times. So, can you give us a little bit of color on how those discussions are going and what you'd expect here in the near-term on some of those near-term roles?

Yes, I can share what little I know, and perhaps Stuart has more insights. Smaller tenants usually face significant pressure to finalize their decisions about five months before their lease expires. As for having current information on renewals, being a month into this, I can't say we have a lot of data since most tenants don’t wait until the last possible moment to renew. Therefore, there's limited information on how leasing is progressing. We are signing new leases, and Stuart can elaborate on this.

Yes, I think that's fair. Many people are currently postponing their decisions, but we are still achieving a reasonable amount of leasing activity. It has definitely slowed down, but we are starting to see an uptick. We are noticing an increase in volume and inquiries, which are coming back after having almost completely halted for a period. As I mentioned earlier, we are well-equipped with virtual tours and are working on getting both the broker community and tenants accustomed to this new environment. Brokers are eager to close deals because they do not earn when they aren't closing deals, so we are seeing activity begin to return. As Jordan mentioned, while many of our tenants are delaying their decisions temporarily, our average tenant typically makes renewal decisions about six months before their lease ends.

And then I guess maybe just on the rate side Jordan it wasn't long ago we were talking about pushing rate and having tenants really pushing back and complaining and personal phone calls to you et cetera. As you kind of think about this next phase in terms of where rents are on leases and where you feel comfortable pushing those or pulling those how are those discussions going? And what's the expectation near-term that you think about?

No, we haven't engaged in any discussions about rates. I personally have not had any conversations about them. I don't believe we have raised or lowered rates, and I think we're continuing to make deals. There is a certain level of social sensitivity involved here. I would be hesitant to increase rates, even if the market remains very tight; I would likely take a pause for a bit. There is a lot of tension in the world right now, so it’s important not to do anything that could be perceived as aggressive or exploitative. I believe we need to remain vigilant and aware. While L.A. is a large community, in the various markets we operate in, it’s beneficial to have more allies rather than isolating ourselves.

Yes, it's Peter. I mean we're probably at this point but it's hard to say how it's going to go. We're probably getting about half the parking income that we normally have. But as I said that's on a very short time period and really hard to see where it's headed in the next couple of months. And especially as things start to reopen just don't know which way it's going to go.

I believe that when things reopen, people will prefer to drive rather than take a bus. They will want their parking spaces back. I think parking will only be a temporary issue while people are told to stay at home.

Yes, I think that makes sense. All right. Thank you.

The next question comes from Rick Anderson at SMBC.

Hey, I'll take that question even further. I think there should be a parking REIT in the aftermath of all this because everyone is going to be driving all around the country in my opinion.

That's might be right.

It hasn't come up yet, but not to pile on the regulatory silliness of California, but Prop 13 do you agree with Victor and Hudson that's on the back burner for now for at least a while?

I don't think back burner is the right term. It's going to be on the ballot. We are doing a lot of work to fight it because it’s a bad idea and it’s polling quite poorly. For me, it’s not just about defeating it; we want to beat it decisively so that we don't have to face it again. It often comes from groups that aren't really stakeholders in our markets, frankly looking to raise money for their own purposes. You don’t see the state or anyone else endorsing it, so we want to be clear about not just beating it, but beating it well enough so that no one would want to waste their money or ours in the future dealing with it. I still feel confident we will beat it, especially since it’s polling so poorly. Californians in general have conveyed that they are fed up with taxes, and that’s unfortunate because we've implemented some taxes for unusual and specific purposes during the boom times based on persuasion from certain groups. Now, they will really need that money for the general state budget. I think there will be some shifting there, but we'll see what happens.

Given that you typically work with small tenants regarding lease size, are there any additional vulnerabilities for your business associated with these smaller companies, especially considering their potentially limited financial stability in the current environment? Is there a concern about them possibly having to close down? Or is that not something being discussed at this time?

I don't believe that the size of the companies plays a significant role in how the economy impacts them, their capitalization, or their potential for closing down. From what I've seen, it seems to be the larger companies that are shutting down rather than the smaller ones within our portfolio. Smaller companies generally have a better ability to manage their expenses and, when you compare the capital they have to their rent obligations and overall costs, they appear to have more capital backing compared to many larger firms that have been operating at a loss and borrowing to sustain that. The current economic situation doesn't resemble past recessions, like the financial crisis, which was tough for many because banks stopped lending and supporting those businesses. This recession feels different, and I don't anticipate small tenants being as adversely affected. Looking at the industries they belong to—like tech, entertainment, and medical research—there's potential for increased investment in those sectors. I'm not particularly concerned about small tenants. Even during the financial recession from 2007 to 2010, we saw a default rate of only about 2%. Our performance was likely better than many others, and since we entered these situations without an excess supply issue, we haven't experienced the same decline in rents. Our records show that during the last recession, our lowest rent levels were still 10% higher than the previous peak, something not seen in other major markets except Washington D.C., which did feel some impact.

Fair. Great. Thanks very much.

All right.

The next question is from Peter Abramowitz at Jefferies.

Thank you. I just want to ask you about the multifamily portfolio specifically. You've had two straight quarters of negative same-store revenue growth. So just in comparison, I guess to some of the apartment peers that are in the 2% to 3% top-line growth range, anything specific that's going on to your portfolio that might be a drag there?

It's Peter. I don't think there's any specific trend. We've been maintaining a very high occupancy rate, well over 99%, for several consecutive quarters. The numbers in the same-store category are quite small, so a mere 1% fluctuation translates to approximately 19 or 20 units. A slight change can significantly affect that figure. However, at 97.5% leased, it remains an exceptionally high lease rate. It's too early to determine the long-term effects of the pandemic, but we did not observe any specific trends as we approached the end of the quarter.

Got you. Is the lease rate going down, say, a couple of hundred basis points in the quarter? Was that at all pandemic related in March the beginning? Because I think the building with the fire was excluded from that if I read correctly.

We're not seeing any of that. We're not seeing that as a driving force.

The next question comes from Daniel Ismail at Green Street Advisers.

Great, thank you. Just following up on a previous question about parking revenue. I don't think I heard a percentage of revenues that comes from parking. Are you able to provide that?

We don't break that out separately. I did say that we've probably collected about half what we normally do.

Okay. But is that like low single digits, like sub-5% or somewhere higher than that?

Yeah, we don't break that out. And parking and other is a line item on our income statement. So take that line item and cut it about in half.

All right. So the majority of that is in parking and not other sources of ancillary income.

Yes. The majority of parking and other is parking.

Okay. Jordan, considering the restrictions on evictions, are you able to use security deposits and letters of credit to cover some of the shortfall from nonpayment?

We really haven't been doing that. I think we can address that last group if I get these changes in the cities. Ultimately, we have not forgiven any rent for anyone, so all of these collections are not based on any rent forgiveness. I hope that when everything is finalized, and I’m not saying we will never forgive any rent, but if we do, it will be in exchange for some other terms or improvements in a lease. I don’t think pulling security deposits and starting to unwind a lease is the right approach right now. We just aren’t there. If we can resolve these moratoriums to be less punitive, I believe many of these people will decide to pay now, similar to how not many people paid their 2019 taxes in April when they didn't have to pay until July. It’s not that they are good or bad; they were presented with a situation and they reacted accordingly. We are not prevented from taking the steps you mentioned, but I don’t think we are actually doing it.

All right. Make sense. Thanks, Jordan.

The next question comes from Tayo Okusanya at Mizuho.

Yes. Good afternoon, everyone. A couple of questions from me. The first one, the Barrington Plaza, the apartment complex, could you tell us what the latest is with that in regards to refurbishing the apartments that unfortunately did burn down and kind of what the status is with some of these pending class-action lawsuits?

Let's see. In terms of the litigation, we won't be discussing it, but as we mentioned, we are insured. Unfortunately, in our current environment, some individuals attempt to exploit disasters. Putting that aside, regarding the building, we are making significant progress in refurbishing the floors, securing plan approvals, and collaborating effectively with the city. The city does not currently have an ordinance that aligns properly with the fair housing department’s requirements for retrofitting high-rise residential buildings with sprinklers. We have communicated our intentions to them, and they have been supportive in finding a way for us to install the sprinklers, even though it isn't codified at this time. I'm optimistic that we will not only complete the floor renovations but also achieve collaboration with the city to facilitate the installation of sprinklers in these buildings, so we feel positive about that.

Got you, that's helpful. And then I just wanted to go back to Frank's question around tenants. He did ask about Equinox. But I'm curious what you're hearing from Morgan Stanley, given some of the vocal comments the CEO did make, on their earnings call about needing less office space going forward, because more of the employees will be working from home?

Okay. What was the comment made that I'm referring to?

The CEO of Morgan Stanley.

Okay. And he thinks more people are going to be working from home?

That's what he said on their earnings call that they would be looking at and taking less office space going forward, because of that.

I don't know what those large investment banks will ultimately decide. They have already been the main group working diligently to reduce their office space to 150 square feet per person, or even 140 square feet. When we visited New York and went to those large trading floors, it was definitely busier than we've seen before. I doubt that there will be so many people working from home that they'll be able to maintain social distancing and effectively reduce their space to create an appropriate environment. However, maybe they have found a way to manage it; I really can’t say. I believe that for those in that situation, they will have to continue allowing employees to work from home for much longer than other companies. Practically speaking, I’m not sure how they could bring everyone back — even with every other seat occupied, maintaining six feet of distance seems challenging. Therefore, for them, this will likely be a long-term issue. Regarding human nature, I’ve observed that when technology came into play, people initially claimed that no one would want to be in the office. In reality, office spaces became more filled because individuals were more productive working with computers in those environments. Then, at some point, organizations thought to expand their workforce allowing many to work from home, including tech companies, which later realized they preferred having teams together. This shift led to a significant move back towards in-office work, as they wanted casual interactions that ignited creative conversations and collaboration. Now, amidst our current situation, people are reconsidering the work-from-home model. I think, ultimately, they will discover that when working in the office, employees prefer not to feel compelled to engage in collaborative discussions constantly; they want their own space. Additionally, they will find that that space should exceed 20 square feet. While many people can work from home in a way that enhances productivity, I have always believed that it wouldn't become a long-term trend, and I still hold that opinion.

That's helpful. One more if you could indulge me, just around the office parking other income line item in 1Q, just kind of given some of the discussions you talked about your parking trend. That line item was actually up $3 million in 1Q 2020 versus 4Q 2019. Could you talk a little bit about that delta? And what caused that big increase?

I don't know that answer. I see Peter, starting to try to look around at his papers...

I believe there were some adjustments from previous quarters. There is typically some variability from quarter to quarter. However, there is nothing...

Nothing stands out. We didn't prepare for the question.

So, that's just some accounting true-ups in 1Q 2020 on that that's kind of it?

Yes. Additionally, we consolidated one of our joint ventures partway through the fourth quarter, which will contribute to this.

Yeah. Got it. Right. Thank you. Have a good weekend.

You too.

At this time, we show no further questions. Would you like to make any closing remarks?

Yes. Thank you all for joining us. And we hope that, very soon in the future we're able to meet you again in person.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.