Douglas Emmett Inc (DEI) Q3 2026 Earnings Call Transcript

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 McElhenney, Vice President of Investor Relations for Douglas Emmett.

Thank you. Joining us today on the call are Jordan Kaplan, our Chairman and CEO, Kevin Crummey, our CIO, and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During 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. Thank you. I will now turn the call over to Jordan.

Good morning, and thank you for joining us. We've now had our fourth consecutive quarter of positive absorption. With almost 1 million square feet of office leasing, our strong leasing this year is now translating into increased office occupancy. During the quarter, we grew occupancy by more than a full point, our largest quarterly gain since 2012. And we still have a high occupancy backlog as our lease-to-occupied spread is almost double our historic average. Our apartments continue to be a growth engine. Our portfolio remains fully leased with same property cash NOI over 4% higher than last year. Despite a challenging loan market, we have successfully refinanced $1.2 billion of loans over the last nine months. During our entire 40-year history, we have never had a debt default or short pay. This track record has been key to our continuing ability to access debt and equity capital on better terms than are typically available to the broader market. We're optimistic, even though the macroeconomic climate remains murky. Office occupancy has begun to recover, our leasing pipeline is quite healthy, and our NOI has essentially recovered to its 2019 level. Credit for that goes to our very strong operating team. Our biggest challenge is interest rates. With our average cost of debt increasing from 3% to 5%, we now spend over $135 million more on interest than we did in 2019. This alone equates to nearly all of our FFO decline since our 2019 FFO high-water mark, despite lower office occupancy. Even if interest rates don't eventually moderate, we believe that rising occupancy and our residential developments under construction can drive our FFO back to its 2019 level and beyond. And that estimate does not include the accretive impact of our entitled residential land bank or accretive acquisitions using our private equity platform. During multiple downturns over the last 40 years, we have made generational acquisitions by having dry powder at times when other buyers and owners were capital starved. We have already made two great acquisitions in the current market and believe additional similar opportunities will surface soon. As they do, we will be ready. With that, I will turn the call over to Kevin to discuss our refinancing and redevelopment activities.

Thanks, Jordan, and good morning. In August, we refinanced a $366 million office loan. The new non-recourse loan has a four-year term with interest effectively fixed at 6.24% until September 2029. This brings the total debt we have successfully refinanced so far this year to over $1.2 billion. Our apartment redevelopment projects remain on track to add over 1,000 units over the next few years, including 712 units of the landmark residences in Brentwood, and up to 323 units at 10900 Wilshire and Westwood. We also continue to evaluate other development opportunities within our existing portfolio. As Jordan said, and it is worth repeating, as more owners are forced to navigate this challenging capital-constrained environment, we expect to see more of these typically rare opportunities to buy high-quality buildings at very attractive values. With that, I will turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. Our strong leasing again produced positive absorption, increasing our leased rate to 80.4%, including Studio Plaza. During the third quarter, we signed 224 office leases totaling almost 1 million square feet, including 142 renewal leases totaling over 724,000 square feet and 82 new leases totaling almost 272,000 square feet. Reflecting our leasing over the past year, our occupancy improved by more than a full percentage point during the quarter to 76.7%. As Jordan mentioned, our occupancy backlog remains unusually strong, with a 370 basis point spread between our leased and occupied rates at quarter end. The straight-line value of leases we executed in the quarter increased by 1.8% compared to the prior leases for the same space. With our typical 3% to 5% annual fixed rent bumps more than offsetting the impact of lower beginning cash rents. Our lease transaction costs average $5.26 per square foot per year, well below the benchmark for other office rates. Our residential portfolio continues to perform exceptionally well, with cash same property NOI up 4.4% and the portfolio over 99% leased, reflecting strong demand across our markets. With that, I'll turn the call over to Peter to discuss our financial results.

Thanks, Stuart. Good morning, everyone. Compared to the third quarter of 2025, revenue increased from $251 million to $261 million. FFO increased from $68.5 million to $69.6 million. AFFO decreased from $52 million to $47 million. And same property cash NOI decreased 3.1%. At approximately 4.6% of revenue, our G&A remains the lowest among our benchmark group. Turning to guidance, we still expect our 2026 net income per common share diluted to be between negative 20 and negative 16 cents. And our fully diluted FFO per share to be between $1.39 and $1.43. 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 property acquisitions or dispositions, common stock sales or repurchases, financings, property damage insurance recoveries, impairment charges, or other possible capital markets activities. I will now turn the call over to the operator so we can take your questions.

Again, in consideration of other participants, please limit your queries to one question and one follow-up. Thank you. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning out there. Jordan, can you just talk about, you guys obviously have done a very good job growing the occupancy from second quarter to now and, you know, a million square feet for the past four quarters, but can you give us a sense of how much signed but not yet commenced office leasing that you have, just trying to get a sense for what the earnings ramp would be, how much leasing you've done that hasn't yet taken effect?

Well, I mean, the spread between leased and occupied is, what, 370 basis points. 370 basis points. So that is kind of high for us. I think Stuart said that in his section. I mean, we're, like, normal, normal, maybe 100, 150. Low is below 100, which is a drag, right, because it means Either you're totally full, which is fine, or you're not doing a lot of new leasing, right? $350 is a very good sign. Like, you should always be happy with the big spread there because it means we're leasing kind of faster than where we're occupied and faster than with new deals. It represents new stuff. So there's a good run on that. I think even more interesting is that our pipeline is still, like, it's still very good. I mean, we feel very good about it, and we feel very good going forward, and, you know. That's the best news. I mean, because we've been very direct with you guys as the pipeline has moved, because, you know, obviously we're a month or so into the quarter, and it still looks very good. And when it's been bad, we've been saying it looks bad, but it looks very good.

And then just following up on that, as we think about, you know, the cadence and how this leasing comes online, I mean, you guys are small tenants, so it's probably pretty quick within, you know, maybe two quarters or so, two, three quarters. But is there some pace, Stuart, that you would give us so that as we think about this strong leasing that you've been doing, what the ramp is? Because obviously there's normal portfolio churn. Just trying to get a sense for how quickly this will come in as we gauge earnings into next year.

Yeah, I think, you know, we're happy with that widespread. I don't think we want to give kind of timing on what that means for how quickly it comes in. You're right to say that most of the leases are pretty small. So of the leases that we've signed that are not commenced, I think basically all of them will commence over the next four quarters. So that'll give you a good sense. There's not too much that's much longer out than that. And I think the next one or two quarters is the majority of it.

Thank you.

The next question comes from Steve Sacqua with Evercore ISI. Please go ahead.

Yeah, thanks. Maybe to follow up on Alex's line of questioning on leasing, you know, the new leases is really kind of key to, you know, kind of building the occupancy at the company. I know it's kind of lumpy, but it has come down a bit, Jordan, from the first quarter to the second quarter to the third quarter. I know it can be a function of maybe a few. Larger-sized deals may be slipping, but can you maybe just talk about the dynamics of some of the larger deals, and are you seeing more of them, and, you know, what would your outlook be kind of moving forward on those larger deals?

Well, we're definitely seeing more of them. Some of it's a function of the fact that Studio Plaza just gets larger deals, but throughout the whole portfolio, we're getting larger deals. And larger deals have, you know, some good impacts and some not as good, right? The good ones are you get big chunks of space leased, but on the other side, they're going to negotiate higher TIs, and they're also a little slower to move in. But I feel, I can't tell you, we had one quarter with an enormous amount of new leasing. I don't think what you're kind of alluding to of a downhill trend in terms of new leasing, I don't think we're feeling that. I think we're feeling a little bit of like too much quarter to quarter. I think we'll end the year with a very good average across the four quarters of new leasing and You know, least rate gain, I'll call it. Maybe I should just answer your question and stop there. I was going to keep answering with something else. Go ahead.

Okay. And then maybe you mentioned, like, the apartments. You know, you're obviously very full. You've got, you know, a couple of projects underway, the conversion as well as Barrington. You know, how do you think about new apartment starts and, you know, where would your return hurdle be or have you changed your return hurdle to, say, start a new apartment, you know, development project today?

I think our return hurdles were always high enough that they were beyond anything that, like, most people were doing, and they're still not far up from what, if someone could get it, they would do today. We've told you we're doing a lot of this stuff at ACAPs and better. And we are. Now, of course, we own the land. And, you know, buying the land and especially for kind of developers are trying to build and sell. You have, you know, the punitive transfer taxes and a bunch of other things that we're not really subject to. Right. We already own the land. And they've made the entitlement side cheaper. So we're in a position to still, other than the cost of debt, other than the cost of debt, to still be able to be... Do very accretive new development. And we've told you that and said we continue to look at new projects. Although I mentioned in my portion of the script that I think with what we have going on now, we can recover our FFO. Even with these high interest rates, we can recover our FFO back to and beyond where we were in 2019. And that doesn't even include taking on new resi development projects, which are very creative, which you're about to see, for instance, with respect to Barrington and the partnership deal that we're in on Murdoch. And, of course, that also doesn't include new deals that we do with our equity partners that are of the ilk of, like, the Bedford deal. We just think we can get there. Simply out of completing the two projects we have going now that are very accretive, or two or three, I guess, Barrington, 10-900, and then finishing leasing up Studio Plaza. Remember, Studio Plaza and Barrington were a huge reduction in our FFO when both of them went offline. So, you know, When you ask about new development, I mean, I put the stuff we're doing now to be super important and our first priority to get our FFO back to where we want it, but we still have that stuff, too, and I actually think even at this time, that stuff could still make sense for us. Too much of an answer, or did I answer your questions to you?

No, I mean, it sounds like you can make the deals pencil, I guess. Are you more inclined to want to start another residential project right now, or do you feel like you have a lot on your plate getting Barrington to the finish line?

Oh, well, I mean. I feel like I'm not more inclined to start another residential project right now, but we are in full construction and the rest of it, but we are doing some preparatory work on two sites, just kind of planning style work and architectural work, but we're not going to start anything until we get a lot of this stuff that we're working on now completed. Great.

That's it. Thank you.

All right.

The next question comes from Nicholas Ulico with Scotiabank. Please go ahead.

Thanks. Good morning. I guess the first question is just on the balance sheet and thinking about, you know, I guess the maturity you have next year, the JV loan. You also have a swap maturity early next year. So, you know, plans for both of those and how we should think about kind of all in rates versus what you just did that 360 million at six and a quarter percent. Thanks.

Well, in terms of all-in rate, I mean, you guys have, you literally have the same amount of information we do. We have a great schedule that shows you all the loans and when swaps burn off and all the rest of it, and you guys can make determinations about where you think we'll end up. You know we've been refinancing its spreads between 170 and two and a quarter over and swapping out, you know, three to four years. So... You know, that I'll leave you, and we'll obviously give guidance on it next quarter. In terms of the loan that's coming up, as we've been able to do with all our debt, and it's kind of one of the last ones of this whole, like, roll-up, we're, you know, we'll refinance it, and obviously the rate will move up. There's no sort of... Debt jeopardy there. It'll just get refied, and we're already in those discussions, and we'll get it done, and we're actually kind of working on some things to even move a little farther out to buy out some years, but we're super comfortable about being able to refi the rest, you know, anything that's coming up, and we're super unhappy about where our interest rates are.

Okay, yeah, got it, Jordan. I guess second question is just on Landmark and 10900 Wilshire, the development portfolio there. How much is left to fund on those two projects, and are you still, you know, thinking that you could get some level of proceeds back from the insurance litigation? Thanks.

So, we're right on target, or a little better, so I think we put the balance of the construction loan, that's at the end of the last quarter in our schedule, but we'll use the construction loan, and it will fund, like, finishing the buildings, okay? So, we're in good shape there on funding. What was the second part of your question?

That the insurance, potential insurance, litigation, proceeds?

Yeah. I mean, of course I do. I wouldn't be continuing to pursue the litigation. But, you know, the number of times I've been wrong where I thought this was a slam dunk in front of the courts, you need more than one hand to count on. So, yeah, I don't understand how we lose that, but, you know, whatever, that's going.

The next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Great, thanks. Jordan, might be a little early to ask, but I'm going to anyways. And I guess in light of yesterday's elections, can you talk about whether anything changes materially for your business in L.A., particularly around residential conversion approvals or ground-up development or even rent regulation? And, you know, whether there are any specific outcomes that could move projects forward in your pipeline or even change the level of political spending that we should expect in G&A next year.

Uh... There might be some political spending in G&A next year because we still have transfer taxes to deal with statewide. We got very close, and I think we can win that one. I think there's a deal there to be made. The rest of the stuff with the state, at least in conversations I've had with now Governor Becerra, I think are probably going in an okay direction for us. And, you know, I don't know what's going to happen locally, although locally depends a lot more on council and some other things. But that's in terms of that stuff. Federally, I think that people are feeling now that some of the more The inflationary things that the federal government's been pursuing are going to be forced into moderation. And that's super big for us. I mean, I said in my notes, it's all about the cost of debt and interest rates and how much they've moved up on us. And I think I'm kind of optimistic now. I thought we'd have to wait two years before someone really did something to get control over all that. And I think now we're going to see something happen in the next couple of years that we'll start a process that will be probably pretty good for the economy and get us. We're going to get into a less inflationary and less of an up arrow on interest rates. And I'm very optimistic for that. And we'll see if we can, if, you know, if the House and the Senate are able to kind of push some stuff through or make deals that get that happening. That makes me, it's the biggest thing for us. That's the biggest thing.

Great. That's helpful. We noticed the amount of space expiring in 2027 came down pretty significantly this quarter. I guess, can you just talk about how much of that early renewal activity was driven by tenants coming to you versus an intentional push by you guys to address those a little bit early and how you think the economics of those early renewals compare with what you might have been able to achieve if you waited, you know, closer to the natural aspiration?

Well, we start. I mean, to say we start a year early trying to renew people probably understates it. So, I mean, a lot of what happens at the buildings is the day the guy moves in, we're thinking about the renewal and we're trying to give his level of service that makes him want to renew. And by the way, it's reflected, right? We're like 70% renewal, you know, year in and year out. So, I mean, have we done more than that? I don't know that we've done more than that. In terms of the economics, Going forward, I don't think we spent a lot of time trying to determine If we wait or whatever, what the future economics would be on a lease. We want to be full. We want our buildings full. So we'll make deals today that keep our buildings full, even if we're extremely confident that rents are going to be up next year. I mean, we want to lease up the portfolio. So that is such an overwhelmingly dominant goal that I don't think anyone would even consider if a tenant was ready to go to say, let's stall it and hope that rates rise. Thanks, Jeremy.

The next question comes from Rich Anderson with Cantor Fitzgerald. Please go ahead.

Hey, thanks. Good morning. So, Jordan, you just mentioned sort of a nice lead-in to my question, my first question, 70 percent tenant retention. How do you move that number up? And what's – besides price, obviously, like why are people leaving and – What can you do to turn that 70 into 80, or is it just frictional stuff that's unavoidable, and that's just the way the cookie crumbles in your world?

You know I run the company with a partner, Ken Panzer. The two of us run the company. And you are on Ken's favorite subject. Ken wants to find a way to increase the renewal rate. It is enormously difficult because it's already at a high level. I'm not going to bet against him. But he really has thought about that and is thinking of ways to do that and is always trying things out. So we want to increase that. But more important, the way we're moving up our lease rate is real aggression on large and small tenants and going after them, just going after them. And I'm seeing it. I mean, I see Ken is doing leases again. I mean, he oversees a huge amount. He is down calling on leases right now. He wants leasing. And I see it happening. And he's got that whole team. I mean, you go, I mean, on Halloween, they had one team that did a song, and kind of the repeating phrase was, leasing, leasing, leasing, which he's saying in every meeting. So we're super focused on it right now and getting the lease rate up. I mean, that's the best I can tell you in terms of those two things.

Okay. All right. And then second question. I got a couple, but I only have one more. Oh, so if Barrington or whatever, what's it called now, Landmark?

Yeah, Landmark Residences.

Yeah, yeah. If that's a kind of two or three-year process, how far inside that will Studio Plaza be done, do you think, in terms of it being fully leased up?

Well, I'm so bad at making those predictions, but I think we'll be... In a very good position, certainly within the next four quarters and maybe within the next two. But then, you know, these are big leases. They have to move in and do the rest of it. So for the income to roll in might even take a little bit longer. Okay.

Fair enough. Thanks.

The next question comes from Jana Gallin with Bank of America. Please go ahead.

Hi. Thank you for taking my questions. Following up on the interest rate environment potentially causing investment opportunities, could you provide some parameters on what you're looking for? Would it be stabilized buildings, redevelopment opportunities, any new submarkets?

Yeah. We're looking for a super class A office at discounts we haven't seen in decades, but super class A. So we'll pay for them. I mean, we'll be paying for them, but we'll be paying a lot less than we would have over the last 10 or 15 years or even more. And I think that's just an incredible opportunity. We know the list of buildings we want. We're talking to them. We're chasing very large deals. Very large, super class A deals. Office, office. Yeah, go ahead.

I'm going to ask any apartments, but thank you for clarifying.

No, no, no, no, we will not buy apartments. Apartments are still trading at, you know, higher cap rates than historically, but still not very high cap rates. Call it a five, maybe even high fours. And we just think we can build at much better. Much more creative costs than that.

Thank you. And then maybe just kind of in terms of the capital that's looking to potentially partner with you, curious, you know, what that looks like in terms of, you know, capital raising.

Uh, they, I mean, that environment is out, is excellent. I mean, we owe them more deals. That's where that's at. I mean, they know the stuff we're chasing, and they're more than ready. I mean, they're like, want to come in and tour it. They're more than ready. We got to make the deals, though.

The next question comes from Seth Burgey with Citi. Please go ahead.

Hey, thanks for doing my question. I guess just to kind of follow on that similar line of questioning, kind of how are your IRR expectations or kind of how do you think about, you know, what returns you're trying to solve for when you look at those kind of Class A office opportunities that are out there.

We're obviously going in with much higher yields than historically we would have been able to, and in terms of long-term IRR, that has a lot to do about your optimism about office and office rates and what's going to happen in these markets, but I think we're looking at some pretty good all-cash and leveraged IRRs, and as you guys know, we don't use very high leverage, and leverage. At these rates, you've got to be at a very good all-cash IRR for leverage to help it, so I think we're feeling that those numbers also in that world are historically high.

Great. And then maybe just going back to kind of the leasing activity you've done and that 370 basis points, just given a lot of your deal sizes are smaller, you know, how kind of quickly do you kind of anticipate that pipeline converting into occupancy?

Seth, yeah, I think of the leasing that's not yet occupied, most of it should move in over the next three quarters.

Great. Thank you.

The next question comes from John Kim with BMO Capital Markets. Please go ahead.

Thank you. On the acquisitions, should we assume you're going to be funding that with a JV partner? And how do you look at the earnings accretion versus shareholder purchases?

Yeah, we've historically done things, especially larger transactions with JV partners, and they're the best source of capital out there right now, and I don't know why we would change that.

Yeah, I just want to make sure because you talked about very fact of IRR. Thanks for confirming. Looking at your cash spreads, I guess it's not a big surprise that they're negative given 3% to 5% annual escalators or fixed rent increases. But when do you expect market rents to exceed that 3% to 5% level so that cash spread figure improves?

Yeah, I think at, you know, at 80% leased, as Jordan has been emphasizing, we're very focused on leasing and occupancy at this point in the cycle. So once that lease rate has a strong up arrow on it, and we're moving up in the mid 80s, then, you know, rents will likely follow at that point. And you could see that turnaround. But at this point in the cycle with, you said it right, with our bumps, three to 5% bumps. Ending rent is, you know, 12% to 16% higher than it started. It's very hard to have a positive cash spread with those built-in escalators. So it's not unsurprising that they're still negative. We're very pleased that the overall straight-line values has remained positive, so the leases on average are still more valuable. But we're really focused on occupancy, and rate will follow once we've got a good trajectory there.

Okay. Thank you.

The next question comes from Upul Reyna with KeyBank Capital Markets. Please go ahead.

Great. Thanks for taking my question. Jordan, on the large Class A office assets that you're pursuing, are any of those in new markets, or are you sticking to L.A. for the time being?

It's correct to say we're sticking to L.A., but then within L.A., the market's in L.A., it's generally, even in markets, there's one deal that's in another market I've always wanted to be in, but that's in L.A., you really should count as West Side. But other than that, yes, it's like West Side L.A.

Okay, great. And then maybe on touching on tenant industries, you know, maybe you can give us an update on which ones are, you know, currently driving the most demand and where you're seeing, you know, expansions versus downsizing.

Yeah, pleased to see that we're still seeing expansions easily outpacing contractions, and that's been true for several quarters. Demand remains very strong across our diverse group. That pie chart that we give you is still very instructive. It's legal. It's accounting, finance, entertainment, all very good and very active.

The next question comes from Dylan Berzynski with Green Street. Please go ahead.

Hey, guys, appreciate your comments on sort of the demand backdrop, but I guess just maybe looking at it a little bit deeper, when you guys sort of look at your pipeline and specifically focusing on sort of new leases or vacant space leasing of that demand, would you say most of it or could you break it down by? Is there a percentage on new-to-market tenants, expansionary versus sort of musical shares within a market and you guys taking share? And then I guess if you sort of think about the near-term recovery, is it such that you guys need to see a continuation of just broader market-wide demand growth in order to sort of choose some of your goals on that front?

Well, I mean, if you look at what the, you know, sort of the public... Kind of market lease rates are being published by like the big brokerage firms. I don't, I think the growth, I don't think anyone's stealing from anyone. I think it's like growth. Now, whether it's organic, and people expanding, or whether it's coming from the outside and new leases coming in, I think both those are happening in our portfolio. I mean, we're also taking tenants from other buildings, but it's super hard to figure out. Other than to compare our growth and what's going on in the sub markets that we're in to say, I mean, I don't see, as we move up, they seem to be moving up. So we're probably not robbing Peter to pay Paul. We're probably seeing, you know, a return of market strength. And I think that's also reflected in the fact that And even in, you know, when we have a kind of very big, very, very big flytrap. I mean, almost everything that flies in, we can get a grab on. But we weren't able to get large deals going until large tenants just started doing deals. And. And trust me, we would have been willing to take them out of other buildings. So I think now we're seeing people kind of expand or come back in or whatever the case may be or open a new office because they want everyone in. I don't know what all the list of stuff is, but we're seeing a lot of deals that I don't think we're looking and going. They came out of here to go here, but we are saying they came out of here to go come to us, too. I think they're both happening.

Great. Thanks, Jordan.

All right.

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

Well, all I'll say is thank you all for joining us, and I look forward to speaking with you again in three months. Goodbye.

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