Pardon me, ladies and gentlemen, sorry for the delay. Thank you for standing by. 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 one question and one follow-up. I will now turn the call over to Jordan.

Good morning, and thank you for joining us. During the first quarter, we leased 1.2 million square feet of office space, which includes renewing a 250,000 square foot lease with WME through 2037. Even excluding that lease, we still did 950,000 square feet of leasing. New leasing was just over 200,000 square feet, still not quite enough to drive positive absorption. As we said in February, we are not assuming a significant increase in new leasing demand this year. However, our strong renewal rate tells us that our existing tenants, especially the smaller tenants, on which we have built our portfolio, are not reducing their space needs. Despite challenges in new large tenant demand, our office leasing economics continue to perform well and leasing concessions remain low. We are still signing leases that are more valuable than the prior lease for the same space, with a straight-line roll-up this quarter over 23%. While that number benefited from the WME lease, even excluding that lease, we achieved a straight-line roll-up of over 11%. As we mentioned before, our average leasing cost since the pandemic has actually been lower than our prior long-term average and remains below that of other office REITs. We are well positioned to navigate this downturn and emerge stronger in the next growth cycle. I am confident in the long-term performance of our portfolio as our markets have excellent supply constraints and diversified demand from high-growth industries. With that, I'll turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone. Now that we have stabilized our Landmark L.A. residential development and are waiting for the expiration of office leases to finish the final two floors at our office to residential conversion in Honolulu, we have shifted our focus to the fire and life safety upgrades at Barrington Plaza. Office sale transactions remained slow in our markets. However, we are starting to see some sales in surrounding markets and hope that similar opportunities will soon come available in our markets. We remain ready to pursue acquisitions that fit into our strategy. With that, I will turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. During the first quarter, we signed 214 office leases, covering 1.2 million square feet, including 202,000 square feet of new leases and 987,000 square feet of renewal leases. This was the second highest quarter of renewal activity in our history. As Jordan mentioned, office rental rates remained strong despite the challenges in new large tenant demand. This quarter, we achieved a 23.8% increase in the value of signed leases. Our in-place office rent per square foot is now the highest in our history. Our high fixed annual rent increases mathematically lower our cash leasing spreads, though the WME lease signed this quarter lifted our average cash spread to a positive 1.9%. Even excluding the impact of the WME lease, straight-line spreads this quarter were positive 11.6%. Our total leasing costs during the first quarter averaged $6.11 per square foot per year, slightly above our recent average due to some larger renewals. Leasing costs on new leases were only $5.64 per square foot per year, below even our recent trend and well below the average of other office REITs. Our residential portfolio remains essentially fully leased at 98.9% and is generating healthy rent roll-ups. 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 first quarter of 2023, revenue decreased by 2.9% as increased revenue from new residential units, higher in-place office rents and increased parking revenue were more than offset by lower office occupancy, lower tenant recoveries, and the removal of Barrington Plaza apartments from the rental market. FFO decreased by 8.7% to $0.45 per share, primarily as a result of higher interest expense and lower revenues, partially offset by lower operating expenses. AFFO decreased 8.2% to $74.7 million. And same-property cash NOI increased by 0.7%, reflecting lower expenses, including some property tax refunds. Our G&A remains very low relative to our benchmark group at only 4.7% of revenue. Turning to guidance. First quarter FFO per share was above expectations due to lower operating expenses, and we expect straight-line revenue to be higher during the balance of the year. Nevertheless, we have left FFO guidance for the year unchanged because we expect the operating expense savings and higher straight-line revenue to be offset by higher interest expense. As a result, guidance for full year FFO remains between $1.64 and $1.70 per share. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future acquisitions, dispositions, or financings. I will now turn the call over to the operator so we can take your questions.

Our first question comes from Steve Sakwa with Evercore.

Yes. I guess, good morning out there still. Jordan, I know given the small nature of the tenancy, it's hard to really discuss much of a pipeline because it's a little bit more like apartment leasing, it happens pretty quickly. But can you maybe just talk about kind of what you're seeing in the marketplace? And what are some of the upcoming plans and tours looking like for re-tenanting the Warner Bros.' known vacancy up in the third quarter?

Okay. Sorry about the delay, we had trouble getting on the website. In terms of Studio Plaza, they will be moving out in two quarters. We are likely going to make some improvements to the building, and we are currently conducting showings and working on leasing it. My hope is to lease it to several tenants rather than just one, so that it is no longer a burden on us. It is a great building, and I am confident we will fill it. Regarding the leasing pipeline, it's a challenging situation because the small tenant leasing pipeline is doing exceptionally well. We recently executed a large lease of 950,000 square feet, which is a significant achievement. However, our momentum is mainly coming from smaller tenants who are renewing and signing new leases. Unfortunately, with some larger tenants vacating, we are not achieving the one-third of new leases needed for overall growth. Large tenants appear to be very cautious, whether due to concerns about a recession or the high cost of capital. They are primarily focused on reducing expenses to improve earnings rather than seeking new business or revenue opportunities.

Okay. And then maybe a follow-up question, I don't know, Stuart or Peter. If you think about kind of where guidance is and you look at what you did in the first quarter, it kind of implies something like a $0.41 plus or minus quarterly run rate moving forward. And I realize there's a little bit of seasonality in expenses. But as you think about the cadence of FFO over the next couple of quarters and really the exit rate, how do you think about sort of where we'll be at the fourth quarter moving into '25?

Yes, it's Peter, Steve. You're asking for quarterly guidance, but we don't typically provide that. There are several factors that will impact us towards the end of the year. The Studio Plaza, for instance, is relinquishing space, which will have a negative impact in the last quarter. Additionally, Barrington Plaza is another factor to consider. We've also adjusted our interest expense guidance upwards, indicating our expectations for higher interest rates for the remainder of the year. This should give you an idea of our direction.

Your next question comes from Anthony Paolone with JPMorgan.

I know this maybe sounds like quarterly guidance, but just thinking about your occupancy, because you kept the range the same for the year, but you also talked about just the retention coming in stronger. So any thoughts on like when that troughs, or if there's a part of that range that you feel a bit more comfortable with at this point? Or has anything changed there?

I feel comfortable with the midpoint of our range, which is why we provided one. While I hesitate to speculate since we're halfway through the year, I've always believed this would be the year we would reach the lowest point. I am somewhat surprised that inflation has returned, but I was not shocked by the recent lower-than-expected hiring figures. It's likely that you have more information at your disposal than we do, as I genuinely believe we're influenced by broader national economic trends. The factors affecting us are primarily that we're not facing issues like work-from-home impacts or an oversupply of buildings; therefore, it will take time to absorb new and existing spaces. The main situation we're encountering is that large tenants are reducing their scale and are hesitant to sign leases. I believe this can't continue indefinitely as these businesses need to operate and generate revenue. We're just waiting for overall economic confidence to return, which would positively impact new capital investments. Once that happens, I think we’ll recognize that we've reached the bottom and are on our way up. In terms of the company's operations, we're diligently controlling expenses and actively engaging in leasing. Our market is not performing poorly; in fact, much of it is quite strong. Office utilization is nearly full, aside from perhaps a lighter Friday. Overall, the key factor seems to be how national economic conditions will encourage large investments again, contrasting with the current goals of the Federal Reserve.

And then just my other question is, can you comment on just any sort of capital markets activity you're seeing, or investment sales in your market, and maybe where values may be? And also just your own desire to put any capital out right now?

Anthony, it's Kevin. Right now, Downtown is grabbing all the attention. There is some activity, as I mentioned earlier, in the surrounding markets. However, we haven't observed much movement in our markets with properties that align with our investment goals. Still, we are keen on investing some capital in this market because we believe there will be excellent buying opportunities as many people are avoiding office spaces. We are very confident that, based on the fundamental supply and demand, the office market here will perform well in the long run, and we aim to acquire as many office buildings as possible at favorable prices.

The next question comes from Alexander Goldfarb with Piper Sandler.

Jordan, returning to Steve Sakwa's question about the tenants, especially the larger ones, you mentioned that L.A. and particularly the West side aren't oversupplied, nor are they affected by work-from-home trends. Is it the case that these larger tenants are opting to expand in other markets? As these companies are rehiring and adjusting, are they prioritizing different office markets over their locations in L.A.? I'm trying to gain a clearer understanding. As you mentioned, your tenants aren't typically those massive 500,000 square foot companies that involve significant investments in the tens or hundreds of millions. The investments remain relatively small. So I'm looking for more insight into the mindset of these larger tenants, especially since they are smaller compared to your larger competitors in the central business district.

That's a good question, actually. I've been asked that. I do not think our problem is one of tenants choosing to relocate not only out of West L.A. or out of L.A., but out of state, which I guess is kind of at the gist of what you're saying. And I'll admit, I'm not happy about some of the population statistics for California and movement that's happened. But I don't think that's actually happening in our markets. And we are not seeing tenants say, 'Great knowing you, now we're leaving.' We're just seeing them say, 'We're doing layoffs and we don't need this space now.' And I don't think they're going to never hire people again or never need the space again. I just don't think they need it right now. And a lot of that, you see that coming from tech companies, which you're hearing. I mean the people that drive a lot of that large tenant space, even larger than what we use, are tech companies, entertainment companies, like the research guys are still taking large amounts of space. And I don't think they're saying we're abandoning California or we're abandoning L.A. I think they're just literally laying people off and saying we're taking less space and cutting our costs.

Okay. For my second question, as you assess your landlord peers, are you noticing clear indications that there are financially stressed landlords, possibly even institutional ones, looking to exit the business? Given your strong capital position, it seems you could capitalize on this by investing in the assets and covering costs like commission and tenant improvements. Are there concrete signs of this happening, or not really? I would think this situation could benefit you, but perhaps it's reflected in the 70 basis points down in negative absorption, rather than being more significant. I'm trying to understand how your capital situation plays into this.

Yes, I believe that some landlords facing vacancies may not simply be concerned about upcoming loan payments or being over-leveraged. Their decision to retain a building could also involve the significant effort and capital expense required to lease it up. They may be thinking that they no longer have the necessary personnel to handle this process. This is a challenge we prefer to avoid right now, as it requires dedication and expertise. This situation will likely create many of the opportunities we observe. While there might be a few over-leveraged situations, most will stem from landlords being exhausted and unwilling to manage the operational demands of leasing a property that has suffered due to neglect or distraction.

And the next question comes from Michael Griffin with Citi.

I wanted to go back to the commentary on the large space takers and being hesitant to kind of commit to leases. Should we interpret that as meaning there is going to be continued negative net absorption later this year? And is it possible that you would look to cut up that space for some of your smaller guys? Or would you rather wait for large tenants to come back so maybe you could charge higher rents?

Our guidance already takes into account the absorption trends we expect this year. When it comes to dividing up space, we can do it quickly, especially since we lease to smaller tenants quite efficiently. However, quickly cutting up space is different from quickly transitioning to a larger project, like preparing for a marathon instead of a 10K. We don’t hesitate; when we get a floor back and don’t see potential tenants for it, we resize it and lease it out. Our ability to do this efficiently relies on our significant expertise and the resources we have, including our construction company. This speed in adapting spaces has been a major strength for us. Even as we've lost some one- and two-floor tenants, we've effectively managed to fill those spaces again. This has meant only minor losses rather than significant ones. This relates to the previous question; some others face challenges when large tenants vacate, as they think they need to engage architects, space planners, and contractors to convert spaces for multiple tenants. This hesitance may create opportunities for us, and I'm confident we are the most adept in this market at this process.

And Jordan, how many of those large leases do you need to do in a quarter to really move the needle? And then how many are you doing actually on a quarterly basis?

We need to do three or four, and we're doing one. And by the way, large is like over 10,000 feet. It doesn't have to be that big. 10,000 to 30,000 foot leases. And we used to do like four every quarter. So we just need to get a couple more back.

Got you. And then I was curious if you could give a little more color on the WME lease. Anything on concessions? Why offer the early termination right? And then, Stuart, I think you gave the GAAP rent spreads ex the William Morris lease, but can you give us the cash rent spreads ex the lease?

You want to answer on all questions, Stuart?

Yes. Regarding the lease concessions, they were quite reasonable, especially given the size of the tenant. They were larger than our typical concessions for smaller tenants, as expected. The tenant received reasonable tenant improvements as part of the deal. Importantly, they renewed all of their space and did not return any. They extended the lease for another 10 years, until 2037. The straight-line rent increase, without considering them, was 11.6%. I mentioned that earlier. I don't have the cash rent increase number available at the moment, excluding William Morris; it was slightly negative but better than the previous quarter, though I don't recall the exact figure.

The next question comes from Rich Anderson with Wedbush.

So back to Warner Bros. Jordan, you said, gee, I hope it's not a single tenant again. But why even let that into the process? Why not sort of driving on this break up the building as you just described you're good at, and take out that bulky situation out of the future for yourselves? So why are you even entertaining a full building release there? Or maybe you're not. I just didn't understand that.

You should understand that we're in the real estate business, which defines our approach. When a full tenant comes along, I question whether we have that kind of commitment, which is why I hope for options instead of insisting on them. It seems to be second nature for us to pursue deals we believe we can complete, and when we have that confidence, we'll go through with it. However, I believe we operate faster than others who would seek a major tenant before making moves. Instead, we start leasing portions of the building gradually. I think that's the most effective way to manage such an outstanding property. The building is excellently situated with fantastic signage and ample amenity space, meeting what people desire. I'm very optimistic about the building's success, and it's likely to attract multiple tenants, which I prefer over the risk of relying on a single tenant. My hope is for several tenants to fill the space, reducing the potential risks we might face.

Okay. Second question, just looking at the same-store stats on Slide 9. And multifamily revenues were exactly the same in both periods, $35.672 million. First of all, make sure that's not a typo. Second, what flattened out revenue? Was it Barrington's impact? Was there something else? Just curious if there's anything one-time-ish in the multifamily performance this quarter.

Yes. I mean they're looking at it. I mean I think multifamily revenue is going up and Barrington is going down, and all you're saying is that's kind of insane that those are the exact same numbers.

So Barrington is not in there.

That's good. Okay.

Look, we're always going to have some variability quarter-to-quarter on revenues and...

Not in this case.

There's nothing. No, I know. There's nothing.

I think if there's a significant increase or decrease, it can be linked to some cost factors. However, if there are many fluctuations and they end up resulting in the same number, that’s more difficult to account for. I understand we don’t have a clear explanation for you at this moment.

The next question comes from Peter Abramowitz with Jefferies.

Just wondering if you could kind of comment on the pockets of demand you're seeing within the different submarkets. I think Boston Properties mentioned on their call Century City looking a lot stronger than Santa Monica and other parts of West L.A. So just curious if you could provide some context and your own thoughts on that.

Yes, I believe that aligns with what we observed during the quarter. We experienced some growth in Century City, which has notably benefited from tenants leaving downtown Los Angeles. These tenants are typically very large, and the demand from these large tenants has positively impacted the Century City market, with our buildings performing well there. However, as Jordan mentioned, we are still not seeing enough new leasing in our other markets to achieve positive growth.

Got it. That's helpful. I have a follow-up on that. If there’s any spillover from Century City, where is it going? Where are those tenants looking if they can't find what they need in Century City?

The natural alternatives are Beverly Hills, and that Wilshire Westwood corridor is where I would expect they go. But I can't give you an exact answer.

The next question comes from Dylan Burzinski with Green Street.

Just going back to the property taxes, I mean is it your sense that you can continue to see relief on this front as you get through the remainder of the year and maybe 2025? And then I know several quarters ago you guys flagged higher insurance costs as being a potential headwind. Just curious sort of if you guys have worked your way through that or if you guys sort of envision that potentially coming up and being a risk to expense growth in the near future?

In terms of property taxes, the straightforward answer to your question is that I believe we will likely be able to file appeals and receive adjustments. However, the impact will take years to materialize. When you file these appeals, it can take a long time to get a refund, even if they don’t significantly challenge it, because you have to continue paying based on the previous valuation. Therefore, the refunds we receive are often disconnected from when the original appeal was submitted. It also seems that the assessors currently undervalue many properties, although they might be struggling to accurately assess building values just like everyone else. That addressed your first question; what was your second question?

Just if you can flag insurance, yes.

Yes. So we had some dramatic increases in insurance. I still think there are increases in insurance. They're probably not as bad as they were the last couple of years. But the insurance industry is going through a lot right now, on many fronts, not just in terms of insurance property claims, but liability claims and all the rest of it. And it's causing us to really have to work hard to keep those costs in line. Although I'd say, in general, I think we're able to do it, including making adjustments to policies, taking some of the early risks and stuff like that, because we're pretty good at controlling our costs and claims. We're very good at it actually. But because of things that are happening all around the world, we're caught up in just increases. And so I don't think it's as bad as it was the last couple of years.

That's helpful. And then maybe just a quick one on parking. You guys are still below pre-COVID levels. Is this sort of the run rate that we should expect until you guys are able to drive further occupancy in office? Or is there some other potential upside to parking income even absent additional occupancy gains?

I believe parking income has increased in relation to occupancy, and the next step is to boost occupancy further in order to enhance parking income. More precisely, I think that's the remaining way to reach or surpass previous levels. Given our current occupancy, our rates have likely already risen.

And sorry, you kind of cut out, you said rates are up on parking?

For our current level of occupancy, rates have actually increased. The next step is to lease more space. If we look at the gross numbers from before, our focus should be on leasing more space and attracting more people to the building. While we could continue to achieve rate gains as a strategy, the most straightforward approach is to boost our leasing efforts.

The next question comes from Upal Rana with KeyBanc Capital Markets.

You have three swaps expiring this year totaling around $1 billion. Are you still planning to let those loans float, or has your stance changed? Additionally, can you share how many rate cuts you had initially anticipated compared to your current outlook?

How many rate cuts?

Assumptions changed from our first guidance to now.

Oh. Rate increases. How many times have we increased what we expect the rates to be...

When we provide our interest guidance, we recognize that there are various opinions on what will happen for the remainder of the year. We rely on the SOFR curve and the forward curve at the time we prepare our guidance, which is essentially what we based our decisions on. The current curve indicates that rates are expected to remain elevated for an extended period.

The next question comes from Alexander Goldfarb with Piper Sandler.

I'm still Alex Goldfarb. But Alex Garfaf wants to ask a follow-up question. Stuart, maybe you addressed this in the responses. You mentioned insurance and real estate taxes, but what were the specific items that fell below your expectations in OpEx during the first quarter? Were those the two items, or were there other trends at play? I'm trying to clarify. Additionally, why do you believe that the savings from the first quarter will not persist?

Yes. I mean it's Peter, Alex. And my name hasn't changed. Yes. No. So I mean we talked about the tax refunds. That was a portion of the up in this quarter. The other savings, I mean, they were in a bunch of different categories, and some of it was really the timing and may come back later in the year. Hard to say. I mean we're controlling expenses pretty closely. But you factor in that there are some things that are just a timing difference, and that's in our guidance for the year.

Yes. But Peter, on that front, your renewal leasing activity is pretty healthy. It's the new that's the issue. So it doesn't sound like the hesitancy to change guidance is based on the leasing, because that market sort of is what it is. But it sounds like you guys have some potential operating savings that maybe you're hesitant to really commit to at this point, it almost sounds that way. Is that a fair way? It sounds like there could be further?

The biggest factor is the increase in interest expense, right? And that outweighs all the good things that we talked about. So yes, we increased our straight-line guidance, and yes, we saw some expense savings. But we're also anticipating pretty steep increases in the interest expense, as you see in the change in our assumptions.

Right. But let me ask you this, Peter. Yes. We certainly know what interest rates will be if they remain flat. So my question is, if you achieve the same level of operating savings in the first quarter for the rest of the year, would that put you at the high end of guidance or exceed it? All else equal.

It depends on where the savings are. Not all of the expense savings are straightforward due to the consolidation of several joint ventures, which adds complexity. However, if we can maintain savings for the remainder of the year, we would likely adjust our guidance range accordingly.

There are savings from property taxes, some timing savings, and some permanent savings. However, the interest costs exceeded these savings. Therefore, if you are suggesting that without any interest costs we would have savings, that is correct.

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

Okay. Well, thank you for joining us. And sorry about the delay at the beginning. And I'm sure we'll be speaking to most of you individually later. Take care.

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