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 will 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 find our earnings package in 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 may 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. Thank you. I will now turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. We had another strong leasing quarter with total leasing exceeding 1 million square feet and new leases at a very healthy 365,000 square feet. Despite this accomplishment, I feel like we've been on a treadmill for the past several quarters, considering our efforts have only produced a modest increase in net absorption and occupancy. Of course, this is partly due to our program of replacing nonpaying tenants with new paying tenants. As I mentioned last quarter, the expiration of commercial eviction moratoriums has finally allowed us to recapture space from nonpaying tenants, while still pursuing their outstanding balance. During the third quarter, we recovered about 50,000 square feet from nonpaying tenants. We expect to address a similar amount of space in the fourth quarter. With respect to occupancy, our leased to occupied spread improved slightly but remains more than twice our historical average. While we expected occupancy growth from a reduction in that spread, it has not happened yet. One reason is that an unusual number of tenants are expanding in our portfolio or simply relocating, which increases occupancy lead times. While we are concerned about a future economic slowdown, we firmly believe in the long-term health of our markets. Our demand comes from numerous industries without any risk of material new supply. Having successfully managed through several prior cycles, our strategy and platform are designed to withstand downturns while staying positioned to act opportunistically.

Thanks, Jordan, and good morning, everyone. Higher interest rates have begun to affect us, even though only 13% of our debt is currently subject to a floating interest rate. To provide us flexibility during challenging debt markets like these, we typically borrow for seven years and swap for five, so that we can delay refinancing for up to two years without any penalty. With current loan spreads historically wide, we do not think this is the best time to refinance. We have no debt maturities until the very end of 2024. We do have additional swaps expiring in 2023. As a result, we expect our interest expense to increase next year. Turning to development. Our residential projects continue to lease up at a very good pace. At Bishop Place in Honolulu, our office-to-residential conversion project, we have now delivered at least about two-thirds of the eventual 493 units, and we will continue to convert more floors to residential as office leases expire. At Landmark LA in Brentwood, we have now leased over 50% of our 376 new units. Rents at both projects have been increasing, while sales transactions have remained very slow in our markets, higher operating expenses and a challenging refinancing market may encourage sellers to bring their properties to market.

Thanks, Kevin. Good morning, everyone. As Jordan said, we had another very successful leasing quarter, signing 199 office leases covering over 1 million square feet, including 365,000 square feet of new leases. Larger tenant demand picked up during the third quarter, increasing our average deal size to over 5,000 square feet. We were also very pleased to see strong expansion activity from our existing tenants with expansions outpacing contractions by over 50,000 square feet. Our office leasing spreads this quarter were positive 7.2% for straight line and negative 8% for cash. This means that new leases have a greater total value, even though the starting rent is less than the ending rent in the prior lease. Turning to multifamily, our portfolio remains full at 99.3% leased, and rent roll-up on new leases was a very healthy 8%. With that, I'll turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the third quarter of 2021, revenues increased by 6.5%, same property cash NOI increased by 0.4% with increases in both office and residential revenue, largely offset by the effects of inflation, particularly in the cost of utilities, insurance, and third-party vendors. FFO increased by 6.7% to $0.51 per share and AFFO increased 3.1% to $90.4 million. Our G&A at only 4.4% of revenues remained very low relative to our benchmark group. Turning to guidance, elevated lease to occupied spreads have restrained occupancy growth. In addition, residential revenue growth will be impacted as Barrington Plaza vacates in preparation for rebuilding. While insurance may cover some of that lost revenue, the collection of any insurance proceeds can be very slow. Finally, we also expect increased operating expenses as a result of higher office utilization and inflation. Taking these factors into account, we now expect our full year FFO to be between $2.03 per share and $2.05 per share. This reflects revised assumptions that average office occupancy will be between 84% and 85% for the year, and that same property cash NOI growth will be between 3.5% and 4.5%. For information on other 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.

Thank you. We will now begin our question-and-answer session. The first question will come from Michael Griffin from Citi.

Just on leasing. I'm curious if you're seeing tenants quicker to make decisions around the real estate and then on the new leases in the quarter, sort of what the industries you've seen that from, is that from one specific one or generally just seeing it from across the board?

Well, to take your second question first. We're still seeing it across all the industries. So we have a big mix of industries we're getting them from every direction. But when you say are they leasing quicker, we've done a lot of leasing in the last few quarters. I would say this quarter, which typically is a slow quarter, even taking that into account, I think things are slowing down a little bit. So I certainly wouldn't say they're speeding up and we're very concerned about what's coming regarding the economy.

And then maybe on the multifamily side of the business, I think we've heard the apartment rents might be kind of slowing down after pretty sizable increases recently. Are there any concerns within your portfolio and maybe some additional color around expectations there would be great.

Certainly, I have no worries. I wouldn't be surprised to see multifamily rents begin to decline. Given the rapid increase we've seen, around 7% and then 8% this quarter, that's an unsustainable rate. Historically, in the markets we operate in, we've typically seen mid-four percent growth over the last 20-plus years, and I would anticipate it to stabilize around a figure like that.

The next question is from Blaine Heck from Wells Fargo.

Can you just talk about the remaining square footage in your portfolio that's occupied by nonpaying tenants? And I think last quarter you talked about working through the remainder of those tenants by year end. Is that timeframe still achievable?

Yes, it's pretty achievable. I mean, we had about 100,000 feet left at the end of the last quarter, last call, and we did about 50,000 feet, and I suspect the rest will be for the most part dealt with. I mean, there might be stragglers in the first quarter, but not that you'll notice.

Second question. Can you just talk about your interest in acquisitions at this point? Are you guys actively pursuing investments, are you seeing better opportunities in office or multifamily? And then it sounded like you're expecting to see distress opportunities, given the increase in rates. Is that happening yet and if not, when do you think those deals start to come into the market?

Buyers and sellers are still kind of adjusting to the new environment and so that has slowed things down a little bit. Although, when the sentiment changes, things should move pretty quickly. We are seeing opportunities that we're underwriting both in multifamily and in office, but a lot of it is not things that we would consider to be a target acquisition. I'm hopeful that there will be some more opportunities coming next year.

And the next question is from Nick Yulico with Scotiabank.

In terms of leasing, I wanted to see if you could give an update on how the fourth quarter is trending so far in terms of lease velocity versus the last quarter. If you’ve seen any slowdown?

Historically, the fourth quarter is our slowest leasing quarter. However, I believe we are experiencing a slowdown that goes beyond what is typical for this time of year. We only have one month of data for this quarter, but it appears that the slowdown is more pronounced than what we would normally expect in the fourth quarter.

And then just the second question is on the upcoming expirations in the next several quarters. I don't know if there's any numbers you're able to share about how much of that square footage may have already been addressed or do you think you have a good chance of re-leasing right now?

So what's in the supplemental, which did show it's been addressed because it says 14%, which is for the year, which is very typical for us if you go backwards for this point in the cycle for what the upcoming year is. And as we've said a lot in the past, we typically have about a 70% renewal rate. That gives you a good feel for what's coming next year. Now presumably, some of it will get done this quarter which will change those numbers. So once we actually enter 2023, that will be a lower number, and we'll be working our way through that.

I guess I just wasn't sure like for your fourth quarter expirations, by way of example, 3.8% of the square footage of the portfolio, if you had any activity on a specific amount of that space to talk about right now.

Well, we have a lot of activity. So every quarter, we have a lot of activity. So when I say things feel like they're slowing down, I'm not saying we don't have a lot of activity; we just don't have as much as I would typically expect in the fourth quarter. So certainly, a lot will get done this quarter.

The next question is from Steve Sakwa with Evercore.

Jordan, I think in the past, you've talked about this $30 million number or so of rent that you're owed. I guess it probably relates to some of that square footage that you're taking back from the nonpaying tenants. Just can you give us any sense for the, I guess, progress you're making on collecting that money in addition. I know it sounds like you're getting these tenants out to replace, but what about the collection of sort of prior period rents?

We continue to make progress against that number. I mean, as we've said, it sort of jumps around a little bit at the beginning of the month, end of the month, but we're down to low 20s, almost $20 million as we work through that. And we'll continue to work through it as the moratoriums officially end, it brings everybody to the table and we are confident we're going to get through it.

And then maybe just on the financing markets. Could you just give us a sense, if you guys were to come to market today to do something new, just where are financing rates for the types of deals that you guys would do?

Currently, it appears that the spreads for residential properties are at the lower end, around 200, while for office spaces, they are at the higher end, near 300. The situation is quite volatile right now, making it a challenging time to try and stabilize the market and assess current conditions, but this is the understanding we have at the moment.

The next question is from Alexander Goldfarb from Piper Sandler.

Just continuing on Steve's question. You guys have a bunch of swaps that are coming due next year. So my question is, some of the other companies of your other peers who have engaged in swaps, we've gotten some insight into swap pricing, obviously, not really something that most elements apartment from you guys. But sounds like swaps are still available, they're whatever five basis points, I have no idea if that's expensive or cheap, you guys are much more insightful on that. But what are your views on the swaps for next year? And is the market attractive that you would reengage or because of where interest rates are overall, you really don't want to lock in these levels? Just trying to get a better sense of how we should think about that for next year.

In the current debt market, there is significant uncertainty and a risk-averse attitude. Therefore, rather than debating whether interest rates are high or low, it is not an ideal time to make long-term commitments. We typically prefer to avoid this level of volatility and wait for conditions to stabilize. It's not a matter of being right or wrong; we’re not predicting the market. However, there is a considerable risk premium reflected in the current spreads, which means that entering into swaps now would require accepting those spreads. We do not engage in speculative swaps. While I can't predict where we will be next year, it may present a better opportunity. For now, it is probably not a wise decision to secure rates for the next five to seven years.

And the second question is, Kevin, on the JV side, you guys obviously do a lot of your acquisitions with especially overseas Gulf money. Are all of your joint venture institutional partners, are they all fully engaged that if you found a deal today, they'd be there signing up or have your traditional institutional partners pulled back the way the public markets are pulling back?

So we've been engaging with all of our partners because they have a lot of questions. And we had talked about the same things that you guys ask us: what's the utilization rate, what's happening with expenses, what are we seeing on the leasing side? LA is a bright spot in our markets relative to a lot of other major markets in the country. And so we've gotten pretty positive feedback from people that if there are opportunities that we think are compelling, then they want to underwrite those with us. And so we're definitely planning on a going forward basis to show any deals that we're excited about to those guys, and hopefully, they'll deal with us.

Next question is from Rich Anderson with SMBC.

Most of my questions have been already asked, I’ve got fortunately two more. On the $20 million remaining to collect, what's the cadence of that? Is it taking like another year, you think, to get that money back rent number, or will be longer or shorter than that based on what you've experienced so far?

Well, our goal is to take to tenants all that money that are in the portfolio and say, let's renew and lengthen it out and we'll spread it out over that. So that would mean that the cadence of actual collection would be stretched out over time. If that isn't followed then I don't remember what they have something like another three or six months left to just pay it off over time and it just gets paid on.

And what if they don't? What if they just give you the Heisman?

Well, if they don't pay you, then they fall in the category that you've been hearing about. So we had about 200,000 feet of it, we did 100,000 in the second quarter and in the third quarter, we just said now we just 50 and we got about 50 of exactly what you're describing, that are going to see the door this quarter.

I was actually referring to the people that are no longer tenants but still owe you back rent. Are we talking about the same thing?

That just goes through a legal process. And I mean, their problem is unless they want to file bankruptcy.

Second question, Stuart, you mentioned this quarter 7.2% up on a GAAP basis on your office leasing and down 8% on a cash basis, and made the observation that leases are more valuable even though your starting cash rent is lower. Are you guys somehow getting bigger escalators, is that the explanation there? How is that gap happening this quarter and is it something that you see as sustainable?

We're focusing on our annual increases, which have been a strategy we've utilized for a long time. I believe our escalators are likely higher than those of any other office company you're comparing us to. During inflationary periods like this, we have been definitely working to increase ramp-ups, as we believe that should serve as an indicator of inflation.

So what are you getting approximately, over and above what may be considered normal?

I believe each deal varies. Some agreements remain at three, but we are observing many at four, and occasionally even reaching 4.5 or possibly a five. This serves as a negotiating tool in our leases, and we are certainly inclined to push for these increases.

And the next question is from Dave Rogers from Baird.

Jordan, you guys are pretty good leasing machine. So this lease to occupied gap, I wanted to dive into that a little bit more, why that's kind of so different today. When you talk about relocations, is that within the portfolio, are you relocating more people from outside in, less business formation? If you could give a little more color on just kind of why that gap is so unique today for you guys, and then when do you anticipate that closing, would be my follow-up to that.

I expected the gap to have narrowed a bit by now, as it's quite significant. The main reason for this gap is the substantial amount of new leasing we are undertaking. When there's a high volume of new leasing, it naturally creates larger gaps. Additionally, while we usually retain tenants well, some may choose to move, and recently many have opted to shift to larger spaces. This means we've had a considerable number of tenants staying within our portfolio but expanding into new spaces. As a result, we end up with leased spaces that are still vacant until the tenants move in, which contributes to the gap. Moreover, the pace of city inspections and permits has slowed down, hampering our ability to expedite new projects. This also affects the gap, as it reflects the difference between signed leases and actual occupancy. The transitions of spaces, both from internal moves and new leases, combined with the city’s delays, have widened this gap significantly. The silver lining is that this situation is somewhat anticipated, and we expect to eventually close the gap. Ideally, this will happen not because we've reduced our new leasing activities, but because the cities improve their processing times. We'll just have to wait and see how it unfolds.

The next question is from John Kim with BMO.

Looking at your top tenant list, it looks like you have about 134,000 square feet expiring in 2023, which isn't a huge amount, but at a higher rent portfolio overall. Are there any known move-outs, or maybe asked a different way, what's your handicap as far as the renewal rates on these leases?

We don’t discuss individual tenants, but our predictions regarding these matters are often quite inaccurate. We have some significant tenants moving, and we struggle to anticipate their decisions. Larger tenants tend to be unpredictable, so we only have clarity once a deal is finalized. Therefore, I can't provide an accurate estimate on that front. However, I can share that we're more adept at forecasting overall trends, as we complete many deals. This gives us an overall renewal rate of about 69% to 70%, which encompasses both large and small tenants among others.

If one of those larger leases had left, is it difficult to cut it up into the smaller leases that you typically sign?

Well, it's always cheaper to renew with the guy in place. But when large tenants move out, I would say one of our expertise is to put in quarters, breakup floors, and quickly lease a building. And actually, we've used that as a strategy when buying buildings. When a large tenant was leaving, our cost of converting that to multi-tenant space has always been much cheaper than everybody else’s, because we have a whole group that's very quick at doing that. So that's well within our comfort zone.

John, it's important to remember that many of our large tenants have multiple leases. As a result, they don't function as large tenants in the traditional sense. Instead, many of these occupy smaller spaces that are distributed throughout our portfolio.

I just want to follow up on the interest rate swap discussion. I know you don't want to lock in higher rates now. But is it cost effective or do you find it attractive to place caps to price those swaps that expire?

Tight, meaningful caps are quite extensive. You can go with caps that are significantly out of the money, but I believe you would be concerned, as meaningful caps tend to be expensive.

And the next question is from Daniel Ismail with Green Street Advisors.

Peter, you mentioned the impact of inflation on OpEx. Can you unpack that a bit more on what line items you're seeing higher increases, and how much of that can be passed on to tenants?

We usually manage to offset it with tenant recoveries in the office space. Specifically, we talked about utilities and insurance, but it's also affecting us with our third-party vendors, security, janitorial, and so on. We expect to recover a significant portion of it, but it is definitely impacting the numbers.

Any specific reason as to why that isn't a direct pass-through, is it just slightly lower occupancy or timing?

No, it is a direct pass through. But in the office space, that base year, so it's all certain portion of the tenant base as base years in any given year. But yes, we generally recover quite a bit of it.

And then maybe just last one for Jordan. You mentioned being on the treadmill and trying to keep up with those shorter duration leases. Does this make you want to have go a bit longer in terms of your average lease length given the amount of volume you're putting out versus your expirations in the upcoming years?

We prefer longer leases, but due to the nature of our markets, our leases are generally secure and mostly guaranteed by the principal. When an individual is guaranteeing their lease, they often prefer not to commit for longer than five years due to personal preservation concerns. This is why we focus on the five-year market, which appears to be the standard duration, even though our average lease length is longer since larger leases typically extend over a greater timeframe. If someone has a business with 2,000 to 7,000 square feet to guarantee, they usually feel comfortable committing for five years but are hesitant to go beyond that.

Next question is a follow-up from Alexander Goldfarb at Piper Sandler.

Peter, on Barrington that you're emptying out. Can you give a timeline for that and then how much NOI, what sort of the FFO impact? Because I don't know if you're going to end up capitalizing that building where there's minimal FFO impact or not. So maybe you just walk through what we should expect for timing, is that fourth quarter, is that next year?

I'll answer because I'm in the middle of it. It's a long process that's starting next year. They have full impacts related to things like collections from insurance and timing of rent payments, which affect the price that goes through FFO, similar to other income sections. This will be a long and complicated process involving three buildings, adding sprinklers, and cutting floors. It will also be challenging to determine how it translates to FFO or AFFO depending on how the insurance company makes payments.

So when you give guidance, are you going to have your guidance number with some element of impact? I mean, I'm just saying, should we be modeling some elements for Barrington or should we leave, or should we not try it?

I anticipate there will be an impact, but the extent will depend on several factors. First, how easily we can access the buildings, as emptying them isn't straightforward. Second, the speed at which we can complete the necessary work. Third, the timing and amount of payments from the insurance companies. If we take a long time to empty the building and the payments are low, the impact may not be noticeable. Conversely, if we clear it quickly and they pay, there might still be no significant impact. However, if we clear it quickly and they delay payments, everyone will certainly see an effect. Additionally, how they distribute their payments adds to the complexity. We will estimate this, and you are right to ask; however, that estimate has not yet been made.

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.

Thank you all for joining us and we will speak to you again next quarter. Bye, bye.

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