Earnings Call
Douglas Emmett Inc (DEI)
Earnings Call Transcript - DEI Q4 2020
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to the Douglas Emmett’s Quarterly Earnings Call. Today’s call is being recorded. And 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 would now like to turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.
Stuart McElhinney, Vice President of Investor Relations
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.
Jordan Kaplan, President and CEO
Good morning, everyone. Thank you for joining us. I'm pleased to report that our rent collection and leasing activity improved during the fourth quarter despite continued headwinds from the pandemic and tenant-oriented lease enforcement moratoriums. In recent months, we have started to see movement on tenant payment plans for rent deferred under the pandemic. To date, we have reached agreements with tenants who wrote about 15% of the outstanding balances. These deals are exempt from the moratorium protections, and we have already begun collecting deferred rent under them. Except for immaterial amounts, we have not forgiven rent, and we still expect to collect a large majority of all past due amounts. In prior downturns, the impact of personal guarantees and small business owners’ commitment to their companies have kept our default rate extremely low. Our cash collections have also improved. As of today, we have collected 92.7% of our rent from the three quarters affected by the pandemic, including 96% of our residential rent, 95% of our office rent, and 45% of our retail rent. We saw stronger leasing demand last quarter driven primarily by small tenants. We signed an impressive 197 leases and retention was also above average. We see the economy beginning to recover with tenants increasingly confident about their future. As more tenants engage, we should shift back to positive absorption. Of course, predicting the pace of recovery remains challenging at this early stage. And because occupancy is a lagging indicator, we expect to see some further decline during the first half of this year. Overall, we remain confident over the longer term. As I've said throughout the pandemic, I believe that companies will return to the office. Our tenants generally have short commutes and they don't face significant mass transit, parking, or vertical transportation barriers to re-occupancy. In the meantime, the Brentwood segment remains well-capitalized with no debt maturities before 2023. We own a dominant share of the best buildings and the best markets in L.A., and there is no threat of material new office supply in the near future. Our integrated operating platform is built to withstand recessions, and our team continues working to get better every day. With that, I will turn the call over to Kevin.
Kevin Crummy, CIO
Thanks, Jordan. And good morning, everyone. Our two multifamily development projects continue to make impressive headway. The demand for new units at 1132 Bishop, our office to residential conversion project in downtown Honolulu, remains robust. As I previously mentioned, we have fully leased the first phase of 98 units, and by year-end, had already leased 29 out of the 76 units in the second phase. Construction at our Brentwood high-rise apartment has nearly topped off and delivery of the first units remains on schedule for early 2022. In December, one of our joint ventures sold an 80,000 square foot Honolulu office property for $21 million. Our decision to close the health club as a result of the pandemic triggered interest from a number of owner-users targeting that type of space. The buyer will use the club for space for youth vocational training and after-school programs. Property transactions in our markets remain slow as many potential sellers are in a watch-and-wait mode given current uncertainties. I will now turn the call over to Stuart.
Stuart McElhinney, Vice President of Investor Relations
Thanks, Kevin. Good morning, everyone. In Q4, we signed 197 office leases, covering 612,000 square feet, including 202,000 square feet of new leases and 410,000 square feet of renewal leases. As Jordan said, the recovery in demand from our tenants last quarter was led by our smaller tenants. As a result, the average size of the leases we signed last quarter was 3,100 square feet, compared to our overall portfolio average of 5,600 square feet. This resulted in our office lease percentage declining to 88.6%. The leases we signed during the fourth quarter will provide almost 10% more rent than the expiring leases for the same space, although the initial cash rents were 5.8% lower as a result of large annual rent bumps over the term of the prior leases. On the multifamily side, our lease rate improved to 98.2% from 97.5% with gains in both West LA and Hawaii. I'll now turn the call over to Peter to discuss our results.
Peter Seymour, CFO
Thanks, Stuart. Good morning, everyone. The fourth quarter reflected the continuing impacts from the pandemic. FFO was $0.46 per share, down 15% from Q4 2019. AFFO declined 16% to $76 million, and same-property cash NOI declined by 20%. Compared to the third quarter, FFO increased by $0.06 from fire insurance proceeds and $0.02 from better collections and lower expenses. Those increases were partly offset by $0.02 of issue advocacy expenses for the November election. As a result, FFO increased by a net $0.06 per share compared to Q3. At only 4.6% of revenues, our G&A for the fourth quarter remains well below that of our benchmark group. Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance. However, I do want to share some general observations based on what we currently see. We expect further improvements in collections and parking revenue as the economy opens up and local moratoriums are loosened. These will be gradual at first but prior history suggests that we will collect a large majority of past due amounts in the end. We expect that leasing will recover over the course of the year. Because it is a lagging indicator, we expect occupancy to decline at least through the first half of the year. We expect straight line rent to be minimal in 2021 largely as a result of tenants who were put on a cash basis in 2020. We expect revenue from above and below market leases to resume its normal decline. As usual, these observations do not assume the impact of future acquisitions, dispositions, or financings. I will now turn the call over to the operators so we can take your questions.
Operator, Operator
We will now begin the question-and-answer session. Our first question today will come from Nick Yulico with Scotiabank. Please go ahead.
Josh Baron, Analyst
Hey there. This is Josh Baron with Nick. So, I was hoping you could dig into kind of what drove the decision not to provide 2021 guidance? And then maybe you could provide some of your assumptions a little deeper on office occupancy such as retention rates and upcoming lease expirations and then new leasing volumes versus pre-COVID levels?
Jordan Kaplan, President and CEO
There are a lot of questions, but I'll get them all. We didn't provide guidance because we don't have confidence in the way the pandemic is going to kind of withdraw and the economy is going to recover. That just plays a huge role in it, more so even in our markets because when all the stay-at-home orders and the moratoriums are off, we think we're going to see a big change. You saw, and we stated in our prepared remarks that we're happy with what we're seeing on the leasing. Because as you look at the last three quarters or the impacted quarters, you saw 125 new deals in the second quarter, 150 in the third; now 250 new deals in the fourth quarter. That's a very good trajectory, and it gives us confidence that when the market loosens up, when the stay-at-home orders are off, when people are feeling more confident about going out, we're going to do a lot of leasing. We know we have a strong market here. But the question of when that happens plays such a huge role in the way we lease, in what our numbers end up being that we don't feel confident that we can give you good information and guidance or the way the year is going to roll out. So, that's why we didn't give guidance. In terms of the leasing, it depends on that same set of issues. Well, what was your last question?
Josh Baron, Analyst
What are your thoughts on retention rates and what level of new leasing do we need for occupancy to improve?
Jordan Kaplan, President and CEO
I would say that retention typically ranges from the high 60s to 70%. When you exceed 70%, it indicates strong retention. Regarding the type of leasing needed to turn things around, our historical range has been between 750,000 and 1 million square feet. At those levels and higher, we saw an increase in our lease rate, and even when we were above 93%, we continued to see upward movement. However, when we operate in the 600,000 to 700,000 square feet range, we start to slide backward despite having good retention. We need to get back to that range to reverse the trend. I'm feeling positive about the situation, even though last quarter was extremely challenging due to the pandemic. Many of our potential clients were forced to retreat. Despite this, we still closed a significant number of deals. While the total was 3,100 square feet, our usual is around 5,600 square feet. This indicates a strong interest in returning to the market. This supports our core strategy, which was to anticipate that small tenants would lead the recovery, and they are indeed doing so. Did I address all your questions?
Operator, Operator
And our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.
Alexander Goldfarb, Analyst
Hey. Good morning out there. I'm sorry I just hopped off another call, so apologies if you answered. But, Jordan, I think in your opening comments, you said that you have addressed 50% of the uncollected rents. And I recall you guys mentioning that there's about $6 million a month from people basically opting to voluntarily not pay you. So is the 50% addressed, is that around the $6 million of the people who are voluntarily not paying you, or is the...
Jordan Kaplan, President and CEO
Alex, it's 15%. 15, not 50.
Alexander Goldfarb, Analyst
Okay. So…
Jordan Kaplan, President and CEO
The funny thing is…
Alexander Goldfarb, Analyst
It's okay. You guys are convincing.
Jordan Kaplan, President and CEO
Okay. When I was practicing reading the script, I think that Stuart, or someone, or Peter actually said they might think you said 50. No way. I'm a great speaker, so that won't happen. Apparently, it happened.
Alexander Goldfarb, Analyst
Okay. Well, I hope whoever took the over on that, you settle up with them. But basically, the 15% then of that $6 million monthly that's not paying that you've addressed. How did those discussions go, and do you anticipate that increasing, or was that 15% those are the tenants who are going to settle up and the rest are only going to do it when the eviction moratoriums end?
Jordan Kaplan, President and CEO
I think that process will continue and likely accelerate once the moratoriums are lifted. People are eager to return to work and resolve the issues stemming from the pandemic, which is why we're starting to finalize deals now. If you look at the outstanding rent due, we've reached agreements on 50% of those amounts. What stands out is that we didn’t have to concede any significant rent; the amounts we gave up were minimal. This suggests, as we anticipated, that these tenants have the capacity to pay. They are realizing that they should negotiate now because once the moratorium ends, they’ll be expected to pay the full amounts. So, they are proactively making deals while they can. With the vaccines being distributed and hospitalization rates declining rapidly in our area, people seem ready to re-engage and return to their spaces.
Alexander Goldfarb, Analyst
Okay. And then the second question is, Stuart, appreciate the comments on the increase in leasing activity to smaller tenants. But on your rent spreads they are sort of eroding from where they were in the third quarter. As you guys mentioned, the drop in anticipated occupancy is just residual, how should we think about the sort of trajectory of rents going forward? So, the market returns to normal, leasing resumes and gets more active, how do you think about where the rents will ultimately go and sort of it’s a prospective view that when we see your upcoming earnings releases over the next three quarters, what we should anticipate as far as rent trajectory?
Jordan Kaplan, President and CEO
I’ll let you explain it.
Kevin Crummy, CIO
I can tell you this. Number one, you need to see positive absorption. I think once you start seeing positive absorption, you need a couple of quarters of positive absorption, and you'll see rent take off again. I think the markets are still relatively full. They're in pretty good shape. As long as people's view going forward is a positive view, once we get beyond all the lockdowns and moratoriums, I think you'll see rent pick up again. And I think you already see that level of attitude from the number of small tenants that came in and made deals. They want space, they want to keep their space. The reason our renewal rates are high is that tenants are coming in and saying I don't want to lose my space. It may be easy for a small guy to say I've been in my space in months, I'll just leave space in the future. But they're not doing that. They want to hold on to their space. So, the first step is we need to see some positive absorption quarters, but then I feel confident that rents will return to start their trajectory and return to the levels they were at before.
Alexander Goldfarb, Analyst
Okay. Thank you, Jordan.
Operator, Operator
Our next question will come from Frank Lee with BMO. Please go ahead.
Frank Lee, Analyst
Hi. Good morning, everyone. Just to follow up on your comments on occupancy expecting to decline through the first half of 2021. Are you guys seeing any green shoots in any submarkets where occupancy has pressed bottom a bit? Or is the expectation that occupancy could continue to slip across each of the submarkets?
Jordan Kaplan, President and CEO
Well, I like green shoots. Okay. That reminds me right, that we had these conversations in the last recession. All right. To me, the biggest green shoots are I love the number of deals that were done. And I said it, and I've been very focused on that because in terms of telling me that the market is still healthy and its ability to recover is strong, that was the most important thing. It actually told me a second thing, too, which was that we've retooled our leasing operation. That backbone is so much stronger now with the way it works online. And to think that in a quarter where we were the most shut down, we did the most new deals is just absolutely incredible. So that's a plus to that group. When you say it's one market impacted differently than another market, the impact is coming at a city level, right? So you would say LA, Beverly Hills, Santa Monica, and Honolulu. Okay, Honolulu is doing obviously better than those other markets. Santa Monica, I know you guys see some negative numbers in Santa Monica, but we're in downtown Santa Monica. The numbers that you're seeing are East Santa Monica. So downtown Santa Monica is still pretty strong. Santa Monica has also backed off quite a bit on the moratorium. It doesn’t definitely apply to office. But then when you move to the City of LA, the City of Beverly Hills which covers a lot of markets. I mean, I know Beverly Hills is one market but that would cover Westfield Century City, etcetera. They're all impacted by the same thing. And so it's going to be hard to see a reverse in occupancy or positive absorption until the city lightens up on us.
Frank Lee, Analyst
Okay. Thanks. And then any initial thoughts on the bill that's being floated around in Hawaii regarding the leasing moratoriums and commercial leases? It seems to be even more tenant-friendly versus the ordinances in California. I'm just curious what do you think the likelihood that this passes and thoughts on the impact it could have on the office market there.
Jordan Kaplan, President and CEO
We're just at the beginning of the political season and there's a lot of information circulating. I can't provide specific details as I just completed the last round, so I don't have much to share on that topic yet. Sorry.
Operator, Operator
And our next question will come from Steve Sakwa with Evercore ISI. Please go ahead.
Steve Sakwa, Analyst
Yeah. Thanks. Good morning. Jordan, you mentioned parking. But one line item that's also been negatively impacted has been tenant reimbursement. So I assume that's largely a function of occupancy going down, but you had a pretty big drop between 2019 and 2020. How do we think about the recovery of tenant reimbursement? Is that solely a function of occupancy or is there something else going on?
Jordan Kaplan, President and CEO
The tenant situation is quite complicated, but the main point is that our costs for operating the buildings have decreased significantly compared to last year and previous years. Predicting the impact on the bottom line is challenging. We're just evaluating our situation and recognizing that our costs are lower, and we are reassessing what to expect from comparisons. It's more about this cost reduction than anything else. While occupancy has decreased slightly and has a minor effect, the larger reason for the decline in expenses is evident. Therefore, it would make sense to expect lower comparisons as a result, and that's what we are witnessing.
Steve Sakwa, Analyst
Okay. If you look at reimbursements as a percentage of expenses, it decreased by about 600 to 700 basis points. I understand expenses may be declining, but the percentage dropped significantly. I can follow up with Peter about this later. Regarding the fire insurance proceeds and business interruption, I know that's a variable figure. How should we consider the timing of bringing the damaged units back online? Will this be completed by 2021, or is it more of an indefinite timeline?
Jordan Kaplan, President and CEO
We are collaborating with the city to implement significant changes to fire safety across all three towers involved in the project. Working with the city entails engaging with various departments, including the fire department, the Department of Building and Safety, and the Department of Housing, due to rent stabilization regulations. While it's true that Douglas Emmett is getting those units back online at a slower pace than we would prefer, I am encouraged by the progress we're making with the city. Each department I mentioned is committed to finding a solution that allows us to carry out the necessary fire and life safety modifications. Overall, I feel positive about the direction we're headed. However, as with many situations, we may not receive everything we want, but we will get what we need in the end. Although the process with the city is taking longer than anticipated, I believe the outcome will be worthwhile.
Operator, Operator
And our next question will come from Emmanuel Korchman with Citi. Please go ahead.
Emmanuel Korchman, Analyst
Hi, everyone. Good afternoon. Jordan or maybe Stuart, can we dig into those small tenant leases that you discussed earlier, the larger volume. Just give us some flavor as to maybe the types of tenants they are and where they're coming from, and where these tenants maybe that broke leases earlier are now just coming back as the moratorium starts to wear off?
Jordan Kaplan, President and CEO
Do you know what's the answer?
Kevin Crummy, CIO
I think what we've seen is it's our typical diverse set of industries. We're seeing demand from tenants across the board, which is typical. It's not concentrated in one area or one type of tenant. So that was good. What was the second part of your question?
Emmanuel Korchman, Analyst
Was there a concern within the industry? This is Manny. Am I starting to sound like Bilerman now?
Jordan Kaplan, President and CEO
Yeah. You've been working with him for too long, I guess.
Kevin Crummy, CIO
You want me to rephrase? You want me to rephrase the question for him?
Emmanuel Korchman, Analyst
I was just trying to get into all the leasing, of where it's coming from, is there any differences from what you'd been doing before any green shoots, the types of people that are leasing. I guess I'm just trying to get more details around it.
Jordan Kaplan, President and CEO
The only thing I checked was whether it was industry-specific, but it wasn't. The spread was the same across the board. If I had that information, it indicates a lot of deals, and I don't think any single market captured most of these deals. Overall, I don't have much else to add. To me, the positive sign is the 200 deals; that's quite a significant number. Even considering we're looking at an average of 3,100 square feet instead of the usual 5,600, one would typically view that as a substantial flow of new deals. Looking ahead to our goals for next year, I believe the energy savings we will continue to achieve over the next few years, as well as this year, are significant. However, these savings are not large-scale payroll savings, as those will return when employees are back. We have significantly reduced costs related to our buildings, and when they are fully occupied again, we will maintain some cost savings but not a large amount. Additionally, insurance costs have increased. We will have to manage with higher insurance rates, but property tax increases will remain in line with what is mandated under Prop 13, so we know what to expect. Over the years, we have effectively controlled and minimized expense growth, and I do not see anything this year that would dramatically alter our expenses compared to a fully occupied building, aside from the energy conservation gains we have achieved.
Emmanuel Korchman, Analyst
Thanks, Jordan.
Operator, Operator
And our next question will come from Jamie Feldman with Bank of America. Please go ahead.
Jamie Feldman, Analyst
Great. Thank you. Can you remind us just the timing on some of the moratoriums that are impacting you and your thoughts on leasing? And, I guess, as we think about when they do start to burn off, as we think about the fact that occupancy was down 100 basis points this quarter, do you think the declines start to moderate from here until the time the moratoriums burn off, or how should we be thinking about that?
Jordan Kaplan, President and CEO
First of all, I don’t have that answer. When you ask that question, I think about two things. First, I hate to keep coming back to this, but we did a lot of new deals. That means that one tenant who isn't paying us has been replaced by someone who just leased the space, which gives a different feel to our community. The second thing is that 15% of the money owed to us showed up at our door, and they said that if we want to make deals, we need to settle our payments. They want to make deals, which is a very good sign. This is all about attitude. If they can see what these cities have been doing with moratoriums, stating that they will end on a certain date, and then extend them due to political pressure, the community is starting to think that these extensions are coming to an end. As a result, they are making their own decisions about those moratoriums and expressing interest in making deals and leasing space. This makes me very hopeful for next year. I don't know how this will play out, whether it will be exponential or steady, but it's clear that change is beginning to occur.
Jamie Feldman, Analyst
Okay. But do you have the latest dates for these moratoriums? You're saying it doesn't even matter because they can always get extended.
Jordan Kaplan, President and CEO
I don't want to sound overly negative, but you might be right. I've talked in front of city councils and been involved in various efforts, and while they often agree with me, acknowledging that action is needed, they struggle to implement changes. It could be that the complexities are overwhelming for them. Many members of the city council have never anticipated dealing with these issues and may not even have experience with commercial leases. So, it’s unclear how the situation developed and how it will resolve. So, if you ask whether we have conducted a real survey about people's commutes to work, the answer is no. However, if you're inquiring whether we understand the communities we draw from regarding the buildings we occupy, the answer is yes. We have compiled that information into a chart.
Kevin Crummy, CIO
It's included in our investor overview presentation, Jamie. Essentially, we've been analyzing the locations where decision-makers are signing leases, whether it's in the Palisades, Brentwood, Bel Air, or Beverly Hills, all in proximity to major areas like Wilshire and the concentration on the west side, including Sherman Oaks in the Valley. These locations allow for a short commute of about 10 to 15 minutes to major boulevards, whereas traveling from the Palisades to downtown can take over an hour, resulting in a two-hour round trip daily. We compared these commutes and have a chart that illustrates this. This is influencing decision-makers to remain closer to home.
Jordan Kaplan, President and CEO
And we know that because our leasing people look at where the decision-makers live when they're showing them space and when they're making a decision about whether they're going to engage in space for showing them or whether they're going to renew or whatever the case may be. That's one of the factors that we look at. No, I don't think it extends the commute. Most of what we've bought on the west side…
Kevin Crummy, CIO
Is shorter the commute. Yeah.
Jordan Kaplan, President and CEO
Yeah. I think it's short. I think we have a concentration, a bear concentration in Beverly Hills which draws a lot from that kind of Bel Air, Beverly Hills, and even the East Brentwood market. And then the stuff we bought kind of rolling down towards Santa Monica draws out of Palisades, Santa Monica in these areas.
Jamie Feldman, Analyst
Okay. All right. Thank you.
Operator, Operator
And our next question will come from Rich Anderson with SMB. Please go ahead.
Rich Anderson, Analyst
Hey. Good morning, folks. So you talked about this 15% of the non, maybe, moratorium manipulators or whatever would I call them starting to make deals. Assuming you weren't booking that revenue last year, how will this impact your earnings profile this year? Will you have like sort of a recapture number in some of your quarterly results that could make it kind of lumpy just in terms of the revenue stream?
Jordan Kaplan, President and CEO
Well, I think most of these deals kind of go during this year, and they pay monthly and they pay what they owe. So, as more and more deals are made, monthly might not be exactly the right word but it is additive to the rental income each year, the rental revenue each quarter.
Rich Anderson, Analyst
Right. So you were not…
Jordan Kaplan, President and CEO
Yeah. I don't know if I'd say doubling up since we didn't get it last year but…
Rich Anderson, Analyst
Well, that’s right.
Jordan Kaplan, President and CEO
You're right. It will be a boost to this year since we didn't get it last year.
Rich Anderson, Analyst
The other question I have is you’ve mentioned the leasing, small or average users. I think you said that the GAAP rents are up 10% but the starting rent is down 5.8% and you attributed that to big bumps over the course of the lease. Can you give us some color on that, how much bigger are these rent escalators and how are you able to negotiate it?
Jordan Kaplan, President and CEO
I think what we're saying is that with a typical five-year lease, the ending rent is 17% higher than the starting rent, which poses a significant challenge given that the starting rent is down 5%. However, the overall economics for the new lease are still 10% better. It's worth noting that our average contractual increases are likely higher than many other markets you might consider. That was the point I wanted to make.
Rich Anderson, Analyst
What are typical rent escalators then relative to, say, other areas of the country?
Jordan Kaplan, President and CEO
We typically we're getting 3.5%. I mean, up until…
Peter Seymour, CFO
3% to 5%.
Jordan Kaplan, President and CEO
Yeah, 3% to 5%. Up until recently a lot of our deals, 3.5% to 4% is on the majority of our deals in the recent years.
Rich Anderson, Analyst
Okay. Good stuff. Thanks. That’s all I got.
Operator, Operator
And our next question will come from Blaine Heck with Wells Fargo. Please go ahead.
Blaine Heck, Analyst
Thanks. Good morning out there. Maybe for Kevin or Jordan, can you just talk about what you guys are seeing on the investment sales side of things? It's clearly been pretty subdued recently relative to normal deal flow. But are you seeing any deals start to shake loose? And if so, are you focused more on office or on multifamily opportunities, or just kind of the best deal that comes across your table?
Jordan Kaplan, President and CEO
Well, the answer is yes. We're always looking for the best deal. Recently, we've been underwriting more multifamily than office. But, frankly, it's been slim pickings. I mean if you look nationally, the hot hand is industrial. And so, there's a lot of trades in the industrial market because that's a very, very strong market. And on the office side, it's been relatively anemic. We don't have a lot of high-leverage players in our market. And so, there hasn't been that huge pressure for people to put things on the market. And we're starting to see the green shoots. So, as that happens and people get more bullish about the market, they're going to be more inclined to put their assets out into a market that people are more positive about.
Blaine Heck, Analyst
That’s helpful and relates to the next question. Given your low leverage profile, your discount to NAV or high implied cap rate, and the current lack of deals to bid on, Jordan, I know you have addressed this in the past, but could you provide an update? Does it make sense to consider share buybacks now, or do you prefer to retain that capital for potential acquisitions in the future?
Jordan Kaplan, President and CEO
I don't oppose share buybacks. However, the decision for a company to buy back shares differs significantly from an investor's buyback decision. As you know, I have been purchasing the stock myself because I'm an investor. Yet, when considering decisions for the company, I understand that if share buybacks are taking place, it's either due to selling assets for cash or it involves increasing leverage by exchanging debt for equity, which has a compounding effect. Because of these factors, I tend to be more conservative in how we manage our company’s balance sheet and capital structure. This conservative approach has led to fewer instances of advocating for share buybacks for the company, as opposed to for investors.
Blaine Heck, Analyst
All right. It makes sense. Thanks.
Operator, Operator
And our next question will come from Craig Mailman with KeyBanc Capital Markets. Go ahead.
Craig Mailman, Analyst
Hey, guys. Just a question on the leasing front, I did notice your short-term leases and the expiration schedule kind of ticked up about 16,000 square feet quarter-over-quarter. Could you just talk about what was going on there? Is that just kind of limited visibility on the tenant side that they want shorter-term renewals or maybe there's something else going on there.
Jordan Kaplan, President and CEO
I think you made a good point, which is typical for us during a downturn. Tenants often feel uncertain about the future and tend to opt for shorter lease terms. That aligns with our observations. Given the prevailing uncertainty, we noticed some tenants chose to sign shorter-term extensions, indicating they are not ready to give up their spaces. They prefer to retain their locations rather than transition to remote work. However, they are opting for shorter terms at this time. When they gain more confidence in their business outlook, they usually sign longer leases. This behavior is very consistent with what we have experienced throughout this cycle.
Kevin Crummy, CIO
I have to say that what I've noticed over a long time what the strengths of the company is and everybody does this but when the market is off and rents are off, people sign shorter deals. And then when the market is up and rents are high, they sign longer deals, which would be obviously the opposite of what you would normally want to do. But it is coordinated with their two types of fear, right? Fear for their company so that they sign shorter deals when there's a bad economy; and then fear of keeping their space, they sign longer deals when the rate is higher. And that's been very good for us obviously because it's allowed us to have a very good kind of accelerated growth path in terms of our income, our FFO, AFFO, all those numbers.
Craig Mailman, Analyst
That's helpful to know. With everything that's been happening, I see that you have paused the redevelopment program. However, it seems like you are optimistic about the number of leases you've signed and the platform you have. What indicators would give you the confidence to resume the plans you had before the pandemic?
Jordan Kaplan, President and CEO
I can answer that in two ways. If you say what do we need to see to start planning some of those projects, we've already seen it and we've already seen that. We've already started planning them again. If you say to actually start them, I need more visibility on this economy opening up again. But we know it's coming, and therefore, we are starting to plan again for some of that stuff.
Craig Mailman, Analyst
Does the math change at all? I know on a GAAP basis you're still seeing increases, but on the cash side, there have been some roll downs. Are your underwriting rents being affected by what's happening in your markets? Are those still generally in line from an economic perspective?
Jordan Kaplan, President and CEO
Most of the repositionings and work we were doing would be hard to justify right now, as the market is in turmoil and it's very difficult to determine current rents. However, we feel confident about the long-term prospects of these markets once this situation stabilizes. Therefore, we will continue our planning and conduct thorough analysis regarding expenditures and expected returns. We are not letting today's circumstances dictate our decisions, as we are currently observing negative absorption. Nevertheless, we are optimistic that changes this year will encourage us to start investing.
Operator, Operator
And our next question will come from Bill Crow with Raymond James. Please go ahead.
Bill Crow, Analyst
Thanks, Jordan. How confused are your tenants regarding the future use and demand for the space? You've signed many short-term leases, which I assume do not include options for expansion due to de-densification. Can you provide some insight into the thoughts of the tenants, and if there’s a difference in perspective between smaller and larger tenants?
Jordan Kaplan, President and CEO
That's a significant request. I can share some insights. We're seeing more expansions and contractions with renewals, indicating quite a bit of growth. I haven't spoken to anyone among my friends who are tenants, both in our portfolio and elsewhere, who are saying they’re sending a lot of people home or believe that trend will continue. Some tenants are making adjustments to their spaces or deciding to return to our spaces, but they have very minimal changes. Would you like to add anything?
Kevin Crummy, CIO
I would say that our typical small suite, around 3,000 square feet, was originally designed pre-pandemic with around 225 square feet per person, featuring windowed offices, a few workstations, a conference room, and a kitchen. This layout is quite standard for us and doesn't really require any changes. We haven't observed a significant shift in how people are planning their spaces moving forward, as they have already maintained a level of distancing that makes them feel comfortable. This is likely why our attendance has been much higher compared to some other markets.
Jordan Kaplan, President and CEO
What has happened to that tenants rate if you go back six months ago to today? At the beginning, there was definitely some confusion, and we were in the same boat. This confusion was notable in the second quarter. The occupancy levels we observed were quite low. The last time we assessed the situation, we estimated that our buildings were around 30% to 40% occupied. However, I can say that all of us on this call have noticed increased traffic during morning and evening commutes. I'm referring to the experience of driving to work. From my perspective, the building I’m in seems busier, as I can see that the parking garage has more cars, and the overall traffic has increased. While I can't speak for the situation in other buildings, it’s clear there are more people on the road during peak commuting times than there were four to six weeks ago.
Operator, Operator
And our next question will come from Daniel Ismael with Green Street Advisors. Go ahead.
Daniel Ismael, Analyst
Great. Thank you. Maybe just sticking with the mind of the tenants, how are you perceiving tenants looking to upgrade their space? Are you noticing any flight from Class B to Class tenants look to trade up or how are they looking at the quality of their spaces, their out market?
Jordan Kaplan, President and CEO
That's a good question. I remember when we were emerging from the last recession. There was a lot of rebalancing during that time. That recession was lengthy, providing many businesses the chance to move into better spaces than they would typically occupy. As we came out of that recession, we started allowing tenants to exit their leases and re-leasing those spaces, so they moved to where they more appropriately belonged. However, I don't think the current situation has been established long enough for such a shift to occur, and I haven’t heard anyone mention that kind of movement. Therefore, in terms of returning to some level of normalcy, I don’t expect to see the significant back-and-forth shift that was evident in the recession of 2008-2010. I recall that in 2011 and 2012, you were asking us about this, and we were letting tenants out of leases in our highest-demand markets to sign leases in supermarkets because we had tenants for that space. However, I don’t think we’re experiencing that shift this time, as there hasn't been enough time for people to make those changes, so I doubt it will happen.
Daniel Ismael, Analyst
And then last quarter you mentioned about sitting I believe portfolio-wide about 6% above the markets. Is that still a decent line to use or is these most recent quarters cash leasing spread more indicative of where res sit relative to market?
Jordan Kaplan, President and CEO
Yeah, that's still a good estimate for where things are.
Operator, Operator
And this will conclude the question-and-answer session. I'd like to turn the conference back over to Jordan Kaplan for any closing remarks.
Jordan Kaplan, President and CEO
Well, thank you all for joining us and I look forward to speaking with you next quarter.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.