Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

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 1 question and 1 follow-up. I will now turn the call over to Jordan.

Good morning, and thank you for joining us. Our office leasing activity during the third quarter continued at a strong pace. We executed 225 office leases covering close to 1 million square feet. Third quarter activity had a much higher percentage of new leases compared to the second quarter. It also included quite a few new tenants over 10,000 square feet, all very good news. As we indicated last quarter, one large tenant in Woodland Hills renewed but downsized, which was the primary cause of our negative absorption. Nationally, the office market faces three challenges. Many commentators have simply focused on the narrative that work from home has permanently weakened office demand, which is wholly inconsistent with our experience and long-term expectations. Once vaccinations became ubiquitous and offices reopened, we saw meaningful jumps in leasing volume, absorption, and building utilization. It was not until the Fed raised rates to control inflation that we saw the slowdown in large tenant leasing that impacted our absorption. Even with that slowdown, our office utilization has returned to very high levels which was likely aided by our market's short average commute times and low reliance on public transportation. We feel that the remaining two challenges have had a more meaningful national impact. One of those challenges is that many gateway markets are suffering from new construction overhang as a result of recent overbuilding. Fortunately, that has not been a problem in our markets, where strong supply constraints have limited new construction. In fact, over the past 15 years, our markets have only added 3% to total office inventory. The third challenge, which has been most impactful for us, is that tenants, particularly large tenants, have become cautious about new investment. This is understandable and likely a reaction to the Fed raising the cost of capital to slow the economy. Our results in recent quarters have been significantly impacted by this last factor, though the Fed's intervention is clearly cyclical. This is our fourth experience managing Douglas Emmett through a recession, which typically comes with a mix of pain and opportunity. We feel well prepared for both and are confident in the long-term health and resilience of our markets.

Thanks, Jordan, and good morning, everyone. Our two recent multifamily development projects continue to progress nicely. Our 376-unit Landmark L.A. property in Brentwood is now almost 90% leased. At our office-to-residential conversion in Honolulu, we have completed 424 of the 493 units and are on track to convert another floor into 22 apartments before year-end. We've been leasing these units as fast as we can convert them. As the remaining few office tenants move out, we will convert the last two floors. This quarter, we closed the new $350 million loan that was mentioned in our last call. The loan is secured by the two development properties, which were built using our free cash flow. The new loan bears interest at SOFR plus 137 and matures in August 2033. At Barrington Plaza, our 712-unit apartment complex in Brentwood, a significant majority of the tenants have already vacated in preparation for the installation of upgraded fire life safety systems. Tenants occupying 170 units have the right to remain until next May, and we expect them to move out at an uneven pace in the intervening period. The transaction market has remained slow, but as acquisition opportunities come to market, we are ready with ample liquidity.

Thanks, Kevin. Good morning, everyone. During the third quarter, we signed 225 office leases, covering 934,000 square feet, consisting of 267,000 square feet of new leases and 667,000 square feet of renewal leases. As Jordan noted, we are pleased to see more demand from new tenants over 10,000 square feet. Reflecting the fixed annual rent growth built into our office leases, average rent on our in-place office leases continues to rise, reaching a record high in the third quarter. However, as leases expire, these higher ending rents put pressure on cash leasing spreads. Still, the overall value of our new leases increased by 3.6%, even though cash spreads were down 9.7%. At an average of only $5.59 per square foot per year, our leasing costs during the third quarter remained well below the average of other office REITs in our benchmark group. Our residential properties continue to perform well during the third quarter, providing 18% of our overall revenues, even with increasing vacancy at Barrington Plaza, which is being emptied in preparation for a major fire life safety upgrade. Our portfolio was 99% leased at quarter end with healthy rent roll-ups across all markets. With that, I'll turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the third quarter of 2022, revenue increased by 0.7%, primarily due to higher tenant recoveries and parking revenue from our office portfolio, and new units delivered in our multifamily portfolio, partly offset by tenants vacating Barrington Plaza. FFO decreased by 15% to $0.45 per share, primarily as a result of higher interest expense on our floating rate debt. AFFO decreased 24% to $68.7 million as we built out more square footage this quarter due to higher leasing volume, and same-property cash NOI increased by 0.4%, driven primarily by our higher revenues. Our G&A remains very low relative to our benchmark group at only 5% of revenue. Turning to guidance. We increased our assumptions for occupancy and same-property NOI growth, but the positive impact from these changes was not enough to increase the FFO guidance outside of the range we provided last quarter. 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.

Our first question will come from Michael Griffin with Citi.

Maybe just on the leasing front. I'm curious if you need to see larger tenant demand pick up more in order to see that net absorption rate turn positive later in the year into 2024. And anything you could comment on that would be helpful.

Yes, Michael, thanks. So happy to see the increase in particularly in new leasing in Q3. That was good to see. We need that ratio of new to renewal leases to be in that 30% range because we know on average, we're going to renew in that high 60s, which is kind of where our historical renewal rate is. So we do need to see that new leasing kind of in that range to see positive absorption. Of course, this quarter, we want to remind you that we had that large move-out in Woodland Hills, which drove most of the negative there. Looking at '24 expirations, we've talked a lot about Warner Bros. We know that's going to be a headwind for absorption next year when they move out at the end of Q3.

Great. And then with the new term loan, you've got ample dry powder with cash on the balance sheet. Can you maybe talk a little bit about opportunities you're seeing out there in the market, be it office or multifamily? How or when can we see you capitalize on potential distress in the market?

Yes, I don't want to wish distress upon anyone, but I can't say we've encountered anyone in significant trouble, even though we are exploring opportunities. I've mentioned before that we prefer to acquire some of the excellent buildings we don't currently own in these markets, and we maintain a positive outlook on the market. However, I believe most assets are privately held, and their internal valuations don't seem to align with how some may be valuing REITs or similar assets.

Our next question will come from Alexander Goldfarb with Piper Sandler.

I guess, Jordan, to that point, obviously, the Blackstone Howard Hughes project has gotten a lot of headlines, but clearly is outside of your core markets. Are there other deals, be it private equity type deals from the last cycle that you guys are looking at? Or are there other deals, like a family that has loans coming up that they don't have the capital to put in? Just trying to get a framework for what kind of distress you're seeing.

Okay. So the Howard Hughes project hasn't been offered for sale. Just to clarify, we are working on assets that have been owned for a very long time by families that might have debt coming up or where the debt is coming up at a much higher rate, or they don’t want to put a lot of capital into rematching those loans at this time. Some of it is that kind of thing. And some of it is what you described, which is institutionally owned real estate that the institution could put the money into, but they're just not.

Okay. And then the second question is on the Barrington. Can you just sort of walk through what is reflected in the third quarter as far as the impact and then the remaining 170 units that you mentioned? I just want to understand the earnings impact on the remaining 170 units.

Well, there are less than 200 tenants in there right now, so it's pretty impacted.

Is 3Q the full impact of all of those move-outs to date? Or that's what I'm trying to get at?

No. No. I mean there are still people moving out. People moved out last week. People are still responding to the situation.

Yes. It's Peter. The individuals who remain are still required to pay rent in order to continue living there. You now have an understanding of how many people are allowed to stay until May, and after that, it’s uncertain how quickly they will vacate. With the holidays approaching, we have time until May. Ultimately, that number will decrease to zero, but the timing of that exit is unpredictable.

No, I understand that, Peter, but I'm trying to get at, in the third quarter, how much of the impact because presumably, the people didn't move out the first day of the third quarter. So how many -

I don't think anyone here knows the number, even if I were willing to share it.

I'll say one other thing. There was a big date which was the beginning of September when a large number had a deadline to move out. So people were moving out in advance of that, but a lot of activity occurred in September. So I don't think you've seen the full picture yet.

Yes, I think the fourth quarter will be a lot less in that building than the third quarter. And I actually think there will be a meaningless rounding error of people like as you get into the second quarter of next year.

And our next question will come from Blaine Heck with Wells Fargo.

So just to clarify on guidance first, clearly, there were some positive revisions with respect to occupancy in same-store, but can you just talk a little more about the decision not to boost FFO guidance and whether there are any factors that might offset those improvements, or is it just conservatism given the overall environment?

Yes. I mean — it's Peter again. We did have some slight positive adjustments to our assumptions, but they weren't enough to take us outside the range. And we just talked about Barrington, which, of course, we can't predict very well.

Okay. That's helpful. And probably sticking with you, Peter. We noticed that the line of credit expired during the quarter and it didn't look like it was renewed. Can you just talk about that decision, whether you have the ability to replace it but just didn't like pricing? And I guess, whether the process to establish a new line in the future is any more difficult than it would have been to keep one in place this quarter?

Number two. We didn't like the pricing. So when you look at the cost — so first of all, it's expensive to borrow for office right now. I don't think there's any secret about that. And then when we're a company that looks for a line, it with the charge being even more and now with really high unused fees. And when you look at it, you kind of end up feeling like, wow, I mean, I'd rather just do a loan and get the interest in the bank, then deal with fees to get into it, and then excessive fees for not even having the money. It was just priced outside of what we thought was reasonable. Now we still like it because it was secured by six buildings. And now those buildings are completely debt-free.

Our next question will come from John Kim with BMO.

Can you just talk about the uplift in your occupancy guidance for the year? It looks like there's still a lot of leasing you need to do and leasing activity was up quite a bit this quarter, but just wanted some additional color on the change in guidance.

Yes. I think we did a little bit better on leasing than we expected. So that was reflected in the range. But you're right, we still got a lot of leasing to do in Q4, and that's certainly what we're focused on. That's been the focus around here as we've been saying for a lot of quarters now is office leasing and getting back to positive absorption is our number one focus. So that remains true.

In my opening remarks, I said this quarter, I was glad to see we did a little better on new, and we did a little better on larger new leases. Those are key because we're doing a good amount of renewal and a good amount of small tenants. One quarter doesn't create a pattern for sure, and it might have just been a good quarter. But that's what you should keep an eye on because that's what we mostly see driving our negative absorption.

And Jordan, those new leases, are those tenants that are downsizing from other spaces? Or are they businesses that have been built up or emerged and are now looking to lease office space?

I think we see a mixed bag of everything. I mean, we've got growing businesses, new business formation, and tenants moving from other buildings. We did 225 deals, so you get a lot of variety of stories behind those deals. That's typical for what we're used to seeing.

Our next question will come from Jay Paskett with Evercore.

I was wondering if you could just provide a breakdown of the leasing pipeline between new and renewal tenants and just some of the main industries that are looking for space now?

Jay, we don't provide a pipeline breakdown like that. That's not something we've ever focused on. We're kind of a flow business with all these small tenants and so many transactions happening. And it's a relatively short pipeline. We're not negotiating leases for the end of 2024. We're still working on 2023 leasing and Q1 '24 leasing in the pipeline that we've got. As far as the industries, you can look at the pie chart in our supplemental materials to see that it hasn't changed significantly.

I think that pie chart barely moves. If you look at it, you can see the same mix of industries and tenants for a very long time, and we have another chart that represents the size of our tenants that has been consistent for a very long time.

That's helpful. And then just a quick question on the renewal percentage in the quarter. I know you had that one larger tenant that renewed but downsized. I was just wondering if there was anything else that helped drive that higher attention in the quarter?

Yes. I know you focused on the remaining expirations we showed you at 630 that we had left to do. You're right that we did renew a slightly higher percentage than before with a quarter to go than we had typically over the prior year. I think that was just due to timing of a couple of tenants waiting a little longer to make their renewal decision.

And our next question will come from Upal Rana with KeyBanc.

I just want to circle back to Barrington Plaza just quickly. Do you fully intend to expect all the tenants to be out by May of 2024, and when do you expect the sprinkler installations to be complete? I'm just trying to get a sense of the timeline going forward.

Yes. I expect the tenants to be out. The fire life safety work and all modifications will take years because we had to vacate all the buildings to do all the work that the city required.

Okay. Great. That's helpful. And then in regards to the space that Warner Bros. has given back next year, how confident are you in potentially leasing that up before they exit the space?

I would not say we're confident that we're leasing it up before they exit. I can tell you this: that market historically in L.A., my 30-year run has been one of the best markets. However, there's a lot of turmoil driven by the fact that the studios have their studios right there and large tenants are pulling back. There's a lot of unease in the entertainment industry, so it's cumbersome right now to find tenants. The long-term prospects of the building are outstanding because it's a fantastic market, but right now, it will be a big job to lease it up.

And our next question will come from Dylan Burzinski with Green Street.

I guess just any update on some of the zoning changes that were made at the state level for multifamily zoning that you guys have?

Well, the state has been our friend in this. AB 2011, which L.A. just gave guidance on, allows us to do a zone change without a public hearing process. This is great for getting more housing done and getting around the opposition in L.A. The state has been very active, some changes are helpful while others are not.

That one was really helpful. Does that change have any immediate impact on projects outside of Barrington, or is this still a longer-term process?

It's shorter than it was before that, much shorter. The value we've been talking about has realized that change happened. It's a really big deal.

And our next question will come from Rich Anderson with Wedbush.

First question, you're thought of as an office REIT, but we talked more and more about multifamily lately for all the different things that you're doing. Do you have any interest, or have you seen any of that come to market and market rate type multifamily product from peer REITs that might become interesting to you?

We're seeing multifamily more than we're seeing the quality office that we want. Some of it's new, and some of it's coming off of a construction loan. Yes, I mean, some institutional owners are looking to exit, but I wouldn't say there's a wholesale abandonment of L.A. due to politics. Those same politics that make it difficult to build also make it great to own.

It's definitely a combination of some institutional owners looking to exit and multifamily in L.A. is still attractive relative to other markets. We've seen some people who bought with floating rate debt getting squeezed right now.

I think Kevin said it accurately. If you want to generate profit in these markets at very low cap rates, those trades are happening. We can build for a much cheaper cap rate than people are selling apartments for right now.

Okay, good enough. And then second question for me is about expanding your geographical horizons. You said you’re not seeing stress, but you’re kind of waiting and looking. What would you say about nearby markets like Orange County or San Diego?

I would love to give you a long and detailed answer, but the short answer is we're sticking to our knitting. Our markets are fantastic with a great mix of drivers, supply constraints, and everyone wants to be in these markets.

Our next question will come from Camille Bonnel with Bank of America.

Bigger picture, I think your leasing teams deserve credit for the activity to date given this challenging market. However, the portfolio's occupancy trends really haven't been enough to offset the declines since 2019. Are you seeing this vacancy being concentrated in one or a few of your assets?

Yes, Camille, we're not seeing vacancy concentrated in any particular assets. Unfortunately, we've seen declines across markets as we face challenges from COVID and the more recent challenges Jordan spoke about. It's not a specific asset issue; it's a demand issue based on uncertainty in the market.

What you said about the leasing group is something we've said in good markets. We’ve built a very sophisticated leasing platform to capture activity. If you look at our leasing volume, we're doing an incredible amount of leasing. We've had two quarters close to 1 million square feet; that's a lot of leasing.

I guess the point is from a liquidity standpoint and granted, yes, you're doing a lot of leasing activity, but there's still occupancy pressures going forward based on your lease expiration schedule. How do you balance that liquidity with declining income versus opportunistic investments?

We've been balancing it for the last three or four years. We have plenty of cash flow to do our leasing. Even after we finished all our leasing and paid all our costs, we still have plenty of cash flow.

And our next question will be a follow-up from John Kim with BMO.

I wanted to get an update on the bad debt that you had during the quarter. A lot of your multifamily peers talked about this quite extensively this quarter? And also, if Barrington has had an impact on bad debt?

We’re seeing good payment and collection trends on the multifamily side. I don’t think there’s a meaningful impact from Barrington on bad debt.

Would you say bad debt has come down in the second quarter?

We’ve handled very little bad debt in multifamily, so yes, it differs.

There’s nothing to come down. I mean, pretty much everyone pays.

Okay. And looking at your top tenant list, I'm just curious, the tenant you mentioned that downsized during the quarter, was it among your top 5 tenants?

No, the tenant that I mentioned, that downsized in Q3 was not on that top list. That list, I think we cut off at 1% of our rents.

That list is a tenant that could have like 20 locations.

Macerich fell off the list because they downsized a little bit last year. However, the other tenant I mentioned was not on that list to begin with.

Our next question will come from Bill Crow with Raymond James.

I guess a question for you. Years ago, we talked about the potential of reducing your equity investment in Hawaii. Given that market has gotten little discussion in the last few quarters, is it more tempting now to downsize your Honolulu exposure?

It would be more tempting if we weren't making so much money there. It has to be structured correctly. We have a lot of construction opportunity there for units, which presents a great opportunity to bring in a partner for capital. It's not a big one on our list right now.

Okay. Follow-up question, different subject, but the step-up in parking revenues, curious whether that's a volume issue or whether that's a rate issue.

It's been a steady increase as utilization continues to be high. I hope it’s both, but I suspect it has a lot more to do with just more people.

Our next question will come from Steve Sakwa with Evercore.

Jordan, I just wondered if you've made any progress with the insurance companies on the payments for the Barrington redevelopment.

We are in heated disagreements because we’ve gotten that far. We're in extreme disagreement with those guys, and we have a lot of wood to chop there. This is going to take years to work out.

Okay. And then circling back on some of the questions around development. It sounds like you're tapping the brakes on being aggressive. What yields need to be on your capital? How much have you raised those yields?

It's a good question. I mean, our yields need to be higher than they were. The last thing you get to is, well, do we want to use our capital to start building apartments or to buy buildings, probably office, or we could use it to guard our building. We have a whole list of uses, and an easy one that you don’t have to do now because it will be there is building these apartments, so that's easy to put on hold.

And this concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.

Well, thank you all for joining us, and we look forward to speaking with you again next quarter. Goodbye.

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