Earnings Call Transcript - DEI Q4 2025

Operator, Operator

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett, Inc.'s Quarterly Earnings Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question and answer session. I will now turn the conference over to Stuart McElhinney, Vice President, Investor Relations of Douglas Emmett, Inc. Please go ahead.

Stuart McElhinney, Vice President, Investor Relations

Thank you. Joining us today on the call are Jordan Kaplan, our Chairman 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 ninety 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; 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.

Jordan Kaplan, Chairman and CEO

Good morning and thank you for joining us. During the fourth quarter, we had good new office demand and very high retention. As a result, we achieved 100,000 square feet of net positive office absorption while maintaining modest concessions and stable market rents. On the multifamily side, our strong demand and increasing rents again led to full occupancy and an increase in same property cash NOI of almost 5% compared to the prior year. You may recall that our Los Angeles residential assets are concentrated in the very high-end West Side. I am also proud of the fact that by aggressively focusing on revenue growth and expense control, we achieved positive same property cash NOI for the year. For the full year of 2025, we also made substantial progress on several key capital market objectives. We acquired 10900 Wilshire and are close to beginning construction to convert it into a high-end mixed-use residential and office building. We strengthened our relationships with our joint venture partners and as a result, we were substantially oversubscribed for our 10900 Wilshire acquisition. We started construction at the Landmark Residences. Our seven twelve-unit redevelopment in Brentwood, in the Burbank Media District, we converted Studio Plaza into a multitenant office building and leasing is progressing nicely. And we successfully executed almost $2 billion in debt transactions at competitive rates both extending our maturity profile and further fortifying our balance sheet. Looking ahead, we have a straightforward strategic plan for 2026. Our primary focus remains office leasing, including retenanting Studio Plaza. Our first quarter always has somewhat higher seasonal move-outs, but our overall lease expirations during 2026 are relatively low. We will continue to refinance and extend maturities at advantageous rates. Construction of our new high-end residential units at the Landmark Residences and 10900 Wilshire will, of course, be a key focus. We have begun planning additional residential development sites on our land in the West Side. And we believe we can make more very high-quality office acquisitions in our markets where current valuations offer significant discounts to long-term values. 2026 will surely present new challenges and opportunities. We feel well-positioned for both. I remain confident in the long-term fundamentals of our markets, the high quality of our portfolio and balance sheet, and our incredibly strong operating team, which has carried us through many other challenging periods. With that, I will turn the call over to Kevin.

Kevin Crummy, CIO

Thanks, Jordan, and good morning. We are making progress with our development portfolio. At 10900 Wilshire and Westwood, we expect to commence construction in 2026 to convert the existing office tower into 200 apartments and to develop an additional 123 units in a new building at the site. Our very successful phased Honolulu conversion project demonstrated that full-floor office tenants and apartments coexist quite well. At Studio Plaza in Burbank, we have completed extensive common area upgrades to transition this asset into a premier multi-tenant property. We are well into lease-up construction fully underway on the new tenant suites. In Brentwood, we have started construction on the transformative redevelopment of the seven twelve-unit landmark residences. After refinancing over $1.66 billion of loans during 2025, we had another productive quarter. In November, one of our consolidated JVs reduced its outstanding debt by $60 million and effectively fixed the interest on the remaining $565 million at 4.79% through November 2027. That loan matures in August 2028. In December, we closed a non-recourse first trust deed construction loan which will provide up to $375 million for the redevelopment of our landmark residences project in Brentwood. As of December 31, we had drawn $49.5 million against this facility. The loan matures in December 2030 with interest at SOFR plus 245 basis points. We entered into accreting swaps that mature in January 2030 to effectively fix the interest rate at 5.8% per annum and 75% of the increasing estimated balance outstanding under this loan. Looking ahead, we are well-positioned to address our remaining 2026 loan maturities and capitalize on attractive acquisitions during this stage of the cycle. With that, I will turn the call over to Stuart.

Stuart McElhinney, Vice President, Investor Relations

Thanks, Kevin. Good morning, everyone. For all of 2025, we signed 896 office leases totaling 3.4 million square feet. During the fourth quarter, we signed 224 office leases, covering 906,000 square feet, including 274,000 square feet of new leases and 632,000 square feet of renewal leases. Office tenant demand continues to be spread across the multiple diversified tenant industries in our markets. During the fourth quarter, financial services, legal, health services, education, and real estate led the way. But no one segment provided more than 20% of tenant demand. As Jordan said, with the combination of good new demand and high retention, we achieved 104,000 square feet of positive net absorption for the quarter. We continue to sign higher value new leases, increasing the straight-line value over the life of leases executed in the quarter by 2%. As our 3% to 5% annual fixed rent bumps more than offset the impact of beginning cash rent that was 10% lower than the prior lease's ending cash rent. At an average of only $5.76 per square foot per year, our office leasing costs during the fourth quarter remained well below the average of other office REITs in our benchmark group. Our residential portfolio, with cash same property NOI up 5% compared to last year's fourth quarter, continues to enjoy strong demand and remains essentially fully leased. With that, I will turn the call over to Peter to discuss our results.

Peter Seymour, CFO

Thanks, Stuart. Good morning, everyone. Compared to 2024, revenue increased 1.8% to $249 million reflecting increases in both office and multifamily revenues. FFO decreased to $0.35 per share and AFFO decreased to $53 million reflecting increased interest expense and lower interest income partly offset by strong multifamily performance. Same property cash NOI decreased 1.4% for the quarter largely as a result of higher office operating expenses, offset by multifamily NOI growth. At approximately 4.9% of revenue, our G&A remains low. Turning to guidance, we expect our 2026 net income per common share diluted to be between negative $0.20 and negative $0.14 and our FFO per fully diluted share to be between $1.39 and $1.45. Our guidance primarily reflects the impact of increased interest expense. We have not assumed occupancy growth despite our fourth quarter results, though we will be watching it closely. 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.

Operator, Operator

Thank you. We will now begin the question and answer session. Our first question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb, Analyst

Jordan, hey. How are you? I guess maybe we will just go to the stock first. You spoke, I think Kevin spoke about doing acquisitions, but obviously, the stock has languished on our numbers, trading around a nine cap. How do you, as I know that you want to assemble more assets, but at the same time, the stock just seems to be incredibly attractive versus buying office directly. So given the persistent depressed value that the stock is trading, are you more inclined to dial back from acquisitions and focus more on stock buybacks? Or is your view that you still want to grow assets still there?

Jordan Kaplan, Chairman and CEO

Okay. So when you talk about stock buyback at a time like this, one of the problems for it, which I like, I mean, I understand what you are saying, because it does seem like quite an opportunity. Is that for the company to buy back stock, mathematically and every other way, it means I am increasing our leverage. And I am just con I could I will say right now for everybody, I am not working to increase our leverage much other than where I know it would really be need to be judiciously used to protect the company. We have; you know, we know we have leasing, we have debt that we have to be, you know, very careful and monitor. It is in a good place. We have a lot of room on it, but I do not want to let it get away. Times like this and when it can get away from you. Right? We have our development projects that have to get finished. Right? And then we have our kind of growth platform that we wanted. Build, right? So we are trying to watch all of them and moderate all of them. But for new stuff, the growth platform in buying is very forgiving because we are able to make deals with our joint venture partners. We have done a lot of work to make sure that we have them there and we are able to get control of great properties at great prices without stretching the balance sheet very hard because we just take a piece of those deals. And so for us now, that is the best way to go. And I am just not comfortable doing this kind of double whammy regardless of how great the price is buying stock, which effectively I am doing with leverage and it is like two different ways I am increasing our loan to value.

Alexander Goldfarb, Analyst

Okay. And then the second question is, the positive absorption, clearly a good thing. You have had fits and starts before. Are you seeing a fundamental shift in market demand? Or was it just some year-end activity that drove the absorption? Just trying to understand you know, if LA is finally healing or if there is still a long way to go. Obviously, your guidance suggests, you know, some caution for the upcoming year.

Jordan Kaplan, Chairman and CEO

Well, I mean, one point does not create a line. But I mean, I am I am I am obviously hopeful that that is the case. Our pipeline today is equally as strong as it was last quarter. Now we need to you know, perform well for many quarters in a row for us to say that we are, like, solidly on the path to recovery. But, I mean, I feel very good about going on and I feel great about the way the last quarter rolled out. And my hopes for this quarter.

Operator, Operator

Thank you. And our next question comes from Andrew Sakwa at Evercore. Please go ahead.

Andrew Sakwa, Analyst

Yes, good morning out there. Jordan, maybe just a follow-up on Alex's question on kind of leasing. We are obviously going through a bunch of kind of larger mergers within the media business. And, I realize the large tenants per se are not your kind of focal point for leasing, but there are obviously derivatives that kind of come off of those larger companies and probably would be in your portfolio. So I guess what concerns, if any, do you have about kind of industry consolidation within kind of the media space right now?

Jordan Kaplan, Chairman and CEO

Well, I am not concerned that the consolidation will impact us. Impact us if you are saying concerns with respect to Douglas Emmett, Inc. I do think the consolidation will help to kind of rejuvenate the making of movies and all of that. But because I think the guys that are buying those other platforms are not buying them to shrink them. But whether it be Netflix or Ellison's I I do not see the tenants we have probably at this time are growing and making money because of consolidation because they are all the service providers of those guys and the lawyers and all the rest of it. I do not see them going going down. Now, of course, at the same time, we feel pretty good with how things are going at Studio Plaza. So maybe it is having a positive impact for us out there. I do not know. But we are certainly still leasing there.

Andrew Sakwa, Analyst

Okay. And the second question, you guess last quarter, this quarter you have disclosed you have about 9,000 apartment units that you could develop, I think, primarily on either vacant land or parking garages. It really does not disrupt much of the income-producing assets that you have. I am just curious how quickly are you able to kind of put those in the service? Are most of those kind of entitled and ready to go? And it is just a question of, you know, designing buildings or what do you think the rollout of that pipeline looks like? And what are the yields that you can get on those assets if you were to start them today?

Jordan Kaplan, Chairman and CEO

So I actually mentioned in the prepared remarks, there was one little short sentence. That we have already started on planning, architectural planning on two more projects. And we got, you know, kind of first rounds on that, and that is now moving through the system. And that that will represent pretty that is another pretty good amount of units, similar to what we have got going on right now. So that has been started with the architects. That is on both on Westside sites. I am excited about both of those because funded this part is fun. Every other part is not fun after this. But those those have gotten going. So to answer your question directly, we are already moving to another, I know, do not know, 500 or 1,000 units. And what was the second part of your question? What kind of yields would we get? I do not think Yes. What kind of yields on cost? Yeah. So I do not like, obviously, we own the land, and you stated correctly that it is not very disruptive. Most of these sites are not very disruptive to the income-producing properties that are already on that land. And I just cannot imagine we are going to do anything that is being less than, like, you know, when finished in a cap rate. I I mean and and I hope better. And historically has been better. But I nothing is going to be below an eight. Of course, it is not including the cost of the land and you know, so I am not saying something that is so spectacular.

Operator, Operator

Alright. Thank you. Our next question today comes from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico, Analyst

Hi, Nick. Thanks. Good morning. Good morning, everyone. Hi, Jordan. Ken, I guess, first off, I just had a question on the guidance. Can you explain in terms of the straight-line rent this year is higher than it has been in prior years, kind of what is driving that? I was not sure if it was all related to Studio Plaza. And if you could also just tell us, you know, sort of what is assumed in terms of NOI benefit for Studio Plaza this year? If any?

Peter Seymour, CFO

Yes. Hi, Nick, it is Peter. So yes, our guidance for straight-line is higher this year. It is an, of what we think it is going to be. Obviously, a lot goes into that Studio Plaza is a piece of it. You will see the last year straight line was higher than the year before. So, you know, it reflects the existing leases that we have. It reflects the new leasing that we do and the occupancy that takes place. And we are not ready at this point to give a breakout on NOI on Studio Plaza.

Nick Yulico, Analyst

Okay. And then the second question is, in terms of leasing and just thinking about kind of the bogey you guys have to hit each quarter. I mean, it does feel like it is sort of in that 250,000 square feet of new leasing which you did got got done above that. This quarter to kind of drive absorption versus your expiration. Does that, is that kind of the right way to think about it in terms of the math of how you could keep up positive net is hitting that type of new leasing number each quarter? Thanks.

Stuart McElhinney, Vice President, Investor Relations

Hey Nick, it is Stuart. I think better than a number like $2.50 or 300 look at the percentage of leasing we are doing new versus renewal. We know pretty reliably that our retention rate is around 70%. So if we are doing 30% or more of our leasing as new leasing, when we look at those quarters, those are generally positive quarters. That was true this quarter. It was at about 30% new leasing overall versus new versus renewal. So sometimes we have had quarters that are positive less than 250 and sometimes maybe do more than $250,000 and it is still a negative quarter. But I think that kind of 30% is more reliable.

Operator, Operator

Thank you. And our next question today comes from Blaine Heck at Wells Fargo. Please go ahead.

Blaine Heck, Analyst

Great, thanks. Hoping you could talk about UCLA. They obviously are still your largest expiration this year and have additional space expiring through 2033. Jordan, last quarter, you talked about some issues with government funding impacting them, but it looks like their total lease with you increased this quarter. So maybe talk about what happened there. And whether you have any updated color to provide on your ability to retain them as their leases expire?

Jordan Kaplan, Chairman and CEO

So when you look at UCLA, I know you are looking at, like, that you know, largest tenant thing and all the leases together. They really do operate as completely separate groups. Leasing or not leasing based on the departmental or whether it be the medical center or whatever's needs. And they are just just many independent divisions that could be or not be leasing. I think that in general, I do not see them substantially trying to shrink anymore. But it, like I said, to make a global statement about the universe and their desire for outside office space, is a huge mistake. I mean, you gotta look at whether individually the medical center or individually. What is happening in the other departments that ex MBA program or whatever that had space scattered around or admin divisions. But, you know, I think have something you want to say? Yeah. Blade, I was just gonna mention that the, you know, the expirations this year, that is five leases. So they are not large leases. I mean, they are around 12,000 feet on average. They are not very big. So some might go out. Got it. But some might pay, some might expand. You just do not, okay.

Blaine Heck, Analyst

No, that is fair. That is helpful color. Second, I was hoping you could just provide a little color on any initiatives you guys are pursuing in 2026. I guess, what specific regulations are you kind of targeting in that process? And how is that impacting G and A in 'twenty six?

Jordan Kaplan, Chairman and CEO

So over the last, I do not know, six years, on the even years, which is when elections are, we have seen politics having a meaningful impact on the operation of the company, and we realized we have to get engaged in that. And so when there are things going on that can impact Douglas Emmett, Inc., we have to get engaged in it, and we are. And, therefore, we are running into these additional costs that run through G and A. In each of these periods. I hope that will I hope that will wane over time, but certainly, politics are a hot topic right now, and it impacts real estate in California. And in our city. Yes. It is Peter. I would also just point out, we have historically had lower G and A than our office peers and we do expect that to continue even with a little bit of room for advocacy spending.

Operator, Operator

And our next question today comes from Seth Bergey with Citi. Please go ahead.

Seth Bergey, Analyst

Hey, thanks for taking my question. I just wanted to a little bit more on the additional residential development sites that you mentioned in your prepared remarks. What is kind of the size and scope of those projects? And how do you think about funding needs for those?

Jordan Kaplan, Chairman and CEO

They range from you know, 300 to 500 units for each of them, maybe as low as two fifty, but really more of 300 to 500. That, you might be able to build more, but probably kind of the type of sizing we would build. We typically fund all the early stages and then we look at the cost to do the construction. And then at the time we are doing that, we gotta look at you know, our equity our cash positions and the rest of things regarding the company. And you know, we can bring in; it is very those are the type of deals that very easy understates how easy it is to bring in partners on those. On those deals. But, also, they are pretty high yielding deals. It is because remember I was asked before, and I said, I think it is like an A cap and put a plus sign on that. So some and because it does not take a huge amount of capital out of the gate. Right? Because when you are doing construction, you are leaking equity in over a couple of years as you are doing the work. Most of many times, we can fund it ourselves, but then, of course, could be a time when we have to bring in a partner.

Seth Bergey, Analyst

Thanks. That is helpful. And then I guess just on the leasing, I think you kind of said the pipeline size is kind of similar to last quarter. Are you seeing any of that change between the mix of new versus kind of renewal leases? And then just broadly, kind of changes that you are seeing with tenant behavior, whether continuing to look for additional space or anything to call out with different industry groups there?

Stuart McElhinney, Vice President, Investor Relations

Yeah. Hey, Seth. Yeah. When we are talking about the pipeline, that is kind of only talking about new. Our renewal our renewals, like I said, very reliably gonna be that 70% range. Last quarter was a little higher, which was good. But typically, it is right around 70%. So the pipeline that Jordan referred to is on the new side. You asked about industries. Or you asked about expansions and contractions. Last quarter, our expansions outpaced our contractions, which look at that every quarter. It is generally been more expansions than contractions the last few quarters, which is also good to see.

Operator, Operator

Thank you. And our next question today comes from Rich Anderson at Cantor Fitzgerald. Please go ahead.

Rich Anderson, Analyst

So I know you do not want to divulge too much on the process at Studio Plaza only to say that it is progressing nicely. But 450,000 square feet, obviously going multi-tenant, what do you do you think that the average tenant size at the end of the day will be still larger than your typical for the company? Or do you think it can get, you know, into that sort of 5,000 square foot average range? I am just wondering what what the end tenant might look like at the facility.

Jordan Kaplan, Chairman and CEO

It is larger. My guess is we end up with, an average size of full floor. Something and maybe even bigger.

Rich Anderson, Analyst

Was that equate to?

Jordan Kaplan, Chairman and CEO

Not so far. They are, like, 25,000 feet. Okay. I think those floors are really bigger than that. But, yeah, we will it will start out larger. And then over time probably shrink, but it is going to start out much larger than our typical building. I do not really have a couple floors that Ken's broken up to smaller tenants. I do not think we have a lot of that.

Operator, Operator

Thank you. And that concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

Jordan Kaplan, Chairman and CEO

Well, thank you all for joining us, and I am sure we will be seeing many of you during the quarter. Goodbye.

Operator, Operator

Thank you. That concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.