Earnings Call Transcript - DEI Q1 2022

Stuart McElhinney, Vice President of Investor Relations

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. Thank you. 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 2022 is off to a good start. Compared to a year ago, FFO was up over 15% and AFFO is up over 20%. We continue to see strong demand from our affluent small tenant base and increasing interest from larger tenants. We leased almost 900,000 square feet last quarter, including more than 325,000 square feet of new leasing. I was very pleased to see positive absorption for the third consecutive quarter, especially considering our typically high roll during the first quarter each year. In addition, our leasing spreads meaningfully improved. After quarter end, we acquired 1221 Ocean Avenue in Santa Monica, one of the most prestigious and best-located multifamily assets on the West Coast with panoramic ocean views from every unit. Looking forward, rising interest rates and inflation will present us with both challenges and opportunities. We are prepared for the challenges and remain ready to take advantage of the opportunities. With that, I will turn the call over to Kevin.

Kevin Crummy, CIO

Thanks, Jordan, and good morning, everyone. As Jordan said, on April 26, we acquired 1221 Ocean Avenue, an iconic apartment property overlooking the beach in Santa Monica. The property is currently 98% leased and includes 120 units, with an average unit size of 1,500 square feet. The purchase price is $330 million, which works out to $2.75 million per unit or $1,800 per square foot. The purchase is made by a new joint venture that we manage and in which we own a 55% interest. The joint venture obtained $175 million secured, nonrecourse interest-only term loan that matures in April 2029. The loan bears interest at SOFR plus 1.25%, which we fixed at 3.9% through April 2026 with an interest rate swap. Turning to development, we continue to see strong tenant interest and rents above our pro formas at both 1132 Bishop in downtown Honolulu and the Landmark Los Angeles in Brentwood. When completed, these projects along with the 1221 Ocean, will add almost 1,000 units to our portfolio. As I mentioned last quarter, we are also working on repositioning a number of properties that should substantially boost rents. At our recently acquired 1221 Ocean Avenue, we will be continuing a major renovation project, which includes significant upgrades to every unit as well as the common areas. We have plenty of dry powder and strong JV relationships. I remain hopeful that 2022 will bring more transactions to the market.

Stuart McElhinney, Vice President of Investor Relations

Thanks, Kevin. Good morning, everyone. Leasing demand was strong during the first quarter. In Q1, we signed 246 office leases, covering almost 900,000 square feet, including 571,000 square feet of renewal leases and 326,000 square feet of new leases. As Jordan mentioned, we achieved our third consecutive quarter of positive absorption, with our office lease rate increasing to 87.7%. Our leased-occupied spread increased to 3.1%, an all-time high. I'm happy to report that our leasing spreads this quarter improved to positive 9.4% for straight line and negative 3.7% for cash. We remain focused on recovering occupancy at this point in the cycle and expect rent spreads to remain choppy. Our multifamily portfolio remains full at 99.7% leased, and rents continue to rise at a strong clip. With that, I'll turn the call over to Peter to discuss our results.

Peter Seymour, CFO

Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the first quarter of 2021, revenues increased by 10.4%. Same property cash NOI increased by 10.7%. FFO increased by 15.4% to $0.50 per share, mostly driven by both office and residential revenue increases, partly offset by higher expenses, and AFFO increased 20.2% to $94.1 million. Our G&A, at only 4.7% of revenues, remains very low relative to our benchmark group. Turning to guidance, we are raising our FFO guidance for 2022 by $0.01 to be between $2.02 and $2.08 per share, which reflects an increase from our recent acquisition, partially offset by higher interest rate assumptions. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future acquisitions, dispositions, or financings. I will now turn the call over to the operator, so we can take your questions.

Operator, Operator

Our first question today comes from Jamie Feldman from Bank of America.

James Feldman, Analyst

I guess I just want to go back to your first comment. You said strong demand from affluent small tenant base and increasing interest from larger tenants. Can you talk more about the leases you did sign in the quarter? And how the pipeline looks today? Do you think you can maintain this 800-plus thousand leasing volume, especially given your expirations start to moderate going into the back half of the year?

Stuart McElhinney, Vice President of Investor Relations

Jamie, yes, I mean it was, like I said, a strong quarter for leasing. We signed 246 office leases, which is a really good number for us. And like we're seeing good demand from small tenants, medium-sized tenants, larger tenants for us, which I think are small for most people but larger for us. So a really good quarter, and the pipeline still remains healthy. So we're happy about that.

James Feldman, Analyst

Can you provide any information about who is currently signing leases? Are there different sectors involved? Are there any tenants, particularly larger ones, who have been waiting for a while? Additionally, how does the current pipeline compare to the previous quarter?

Stuart McElhinney, Vice President of Investor Relations

Yes, I think one of the strengths of our portfolio is how diverse our tenant base is and the demand drivers we have here, and that continues to be true. We put that nice pie chart in the supplemental for you guys that shows kind of all the industries that we have. And we haven't seen any real material changes to those groups. We're still getting demand from all those industries that we've typically had. So no notable shift there that I would point to. We're in kind of a slow business here, and we don't call out individual leases. We're doing a lot of transactions, several a day, really. Every business day, we signed 3 or 4 office leases. So that continues to be the case, and we're seeing good broad-based demand.

James Feldman, Analyst

You mentioned that the pipeline is currently as strong as it was three months ago, suggesting that similar numbers could be achieved next quarter?

Stuart McElhinney, Vice President of Investor Relations

Yes. I mean, I'm not going to make a prediction for Q2 or early in the quarter, but the pipeline remains healthy, yes.

John Kim, Analyst

I was wondering if you could share any characteristics of your new joint venture on multifamily? Any characteristics about the partner that you're with? How big can this fund be? Is it a one-off acquisition, or are you pursuing other apartment acquisitions?

Kevin Crummy, CIO

John, it's Kevin. The partners are an existing sovereign partner that we have in some of our other joint ventures. And we haven't set up anything formal, where we've got a plan to go out and buy a certain amount of multifamily, but it's certainly an asset class that when we can get larger properties with the right-sized units, we're all over it and very aggressive for it.

Jordan Kaplan, President and CEO

I don't think your question is a problem of having the money available. If we set up a fund to pursue additional deals, we have an obligation to ensure there are deals to support it. The challenge lies more in finding those deals. I believe we have no issues accessing the equity needed to execute the deals. So when opportunities arise, it's straightforward to make the necessary calls and we have a partner in place.

John Kim, Analyst

So I was just wondering, this is a more luxury higher-price-point asset than typical in your portfolio. So I was just wondering if you were targeting the higher-end run to market.

Jordan Kaplan, President and CEO

We definitely are. We definitely are. So all the way across our portfolio, both in office and residential, we are targeting the high end, and this was a fantastic fit for us. We just built something that at the top end, we own other assets along the coast that we're working on, that is at the top end. All the moves we've made have been to have the highest and most premium residential and office portfolio.

John Kim, Analyst

You mentioned doing renovations on the assets. Can you describe the timeline of that? Will that be as the units vacate? Because I would imagine the turnover on that asset is pretty low.

Jordan Kaplan, President and CEO

The turnover is a little lower in this asset, but we're just continuing a program that the previous owners started, where when we get back a unit that's unrenovated, we spend the money to upgrade it and then lease it.

Emmanuel Korchman, Analyst

Jordan, just following on the line of question about the renovation program. How much money do you intend to put into the asset by the time that program is done? And how should we think about certainly yield on that incremental capital?

Jordan Kaplan, President and CEO

Most of these deals are yielding over 20% on capital invested to reduce the buildings, and this one is no exception. I anticipate we will invest slightly under $20 million in the project, which will be within that range. Additionally, we are working on a new deal we just acquired for the lobby and the rival experience, which I believe will require a modest investment but will create a significant impact.

Emmanuel Korchman, Analyst

And then, I appreciate the point on moving to sort of the higher end of the market on the residential assets. I mean, if that's the goal, why not take this one on wholly owned and JVs, some of your more run-rate properties you've owned for a while, and have the public investors exposure to the high-end be higher and the JV exposure to sort of more be a commodity market?

Jordan Kaplan, President and CEO

We don't have a lot that is commodity, but I will tell you that you're right lined up with our investors, you'd also like to have us put those projects in JVs along with the new assets we're purchasing. So you need an agreement with them. It's much harder to put a joint venture together, where I'm selling something. It's much easier when we're buying something; we're all going in at the same price. That's a really easy phone call. We have documents done to say to people that, 'Okay, here's what we're going to do, I'm going to buy this,' which we want a part of that, 'but I'm also going to put these other things in,' which then they have to value those. They haven't been trusting me to do the valuing because they have to have outside value come back to the seller. It's just a harder deal to put together.

Emmanuel Korchman, Analyst

And I might have missed this, but have you spoken about the cap rate valuation on this purchase?

Jordan Kaplan, President and CEO

I mean, you know from the past, I'm not in love with cap rates. But I think that this deal will stabilize somewhere in the mid-4s, but we're going in, in the low 3s.

Emmanuel Korchman, Analyst

Okay. I have a quick question for Stuart. The gap between occupied space and leased space has increased a bit. In the past, you mentioned this was due to lighter traffic on the tour side. Is there anything notable about that? When do you expect to see a change that reverses this trend?

Stuart McElhinney, Vice President of Investor Relations

I think you're talking about the lease to occupied spread, Manny?

Emmanuel Korchman, Analyst

Right. Yes.

Stuart McElhinney, Vice President of Investor Relations

Yes, we have observed that gap widen. It's primarily in the semi sector, as I've mentioned. I truly hope we can maintain a significant level of leasing in the upcoming quarters, keeping it elevated. However, it’s likely to moderate. What we've experienced is that during the pandemic slowdown, our build times have been extended, which has delayed moving people in. This has contributed to the gap remaining wider than what we are accustomed to.

Steve Sakwa, Analyst

Jordan, I guess, I just wanted to understand a little bit more kind of the absorption trend. And I guess I was a little surprised that given the strength in leasing, you had over 300,000 square feet of new deals, and you had very good renewal activity. And if I look back to your fourth quarter supplement, it only showed about 475,000 square feet expiring in the first quarter. So you did almost double the amount of activity, and you had absorption. And the lease trade only went up 10 basis points. So I'm just trying to figure out what am I missing in the math here. And if you continue at this pace or what pace do you need to actually see more absorption than kind of 10 basis points a quarter?

Jordan Kaplan, President and CEO

The first half of the year has been quite challenging. I can't provide specific numbers since I don't know what you're referencing. We anticipated a strong performance in the first quarter and a decent one in the second quarter, followed by a calmer second half. I was pleasantly surprised that leasing turned out positive in the first quarter, as I expected we'd need significant leasing activity for a positive outcome. We're still seeing a strong pipeline, which is great news. The leasing activity this quarter resulted in 900,000 square feet and a positive 10 basis points. This indicates a lot was happening. If we were simply shifting leases around, we might not have seen such a positive outcome. It was a tough quarter, but the team did an amazing job, and the market appears very active. I've been monitoring whether we can backfill and fill vacancies, and we've seen that for three consecutive quarters, if not four, but definitely three, including this quarter. As long as the economy continues to recover, I'm optimistic about our direction in replenishing the portfolio after the losses we faced during the pandemic.

Stephen Sakwa, Analyst

Okay. Well, we can certainly follow up offline and go through Page 19 of the supplemental in more detail. I guess, as it relates to the Landmark, when we toured the asset, I guess, in the late March, you were having some very early success on the rents you were achieving against your pro formas. Is there anything you can just sort of share with us on the volume and kind of the pricing since that time?

Jordan Kaplan, President and CEO

Yes, we continue to see success. People are moving in, and we're very pleased with the leasing activity. While I still believe it will take two years to fully lease the project, all indicators suggest we might achieve this sooner, and I'm confident we will definitely reach our goal within that timeframe. Additionally, we're experiencing rental rates significantly higher than our initial construction expectations.

Connor Mitchell, Analyst

So given the success and outperformance of Brentwood and Bishop, does it make you want to accelerate the next round of projects?

Jordan Kaplan, President and CEO

We would certainly like to speed up the next round of projects. Unfortunately, over the last few periods due to COVID and other factors, the city has been in a deceleration phase. We have just begun having meaningful meetings again in their offices with council members and various stakeholders in both Honolulu and L.A. We are not working in isolation; we need to coordinate with the cities, and things are just beginning to move forward now. Despite inflation and rising construction costs, we have a strong pipeline of opportunities, particularly for residential construction on properties we already own. Navigating the system to obtain permits and complete all necessary processes requires time, as we've mentioned previously. However, this has been very successful, and we would love to expedite the process.

Blaine Heck, Analyst

Jordan, just to be clear on the initial cap rate you quoted on 1221 in the low 3s; does that cap rate include management fees that you guys will be paid by your partner? Or is that just on the NOI?

Jordan Kaplan, President and CEO

The cap rate you mentioned does include property management fees, if that’s your question. Essentially, the cap rate is calculated by dividing the net operating income by the purchase price. You take the initial net operating income along with any expenses associated with the building and perform the division. That’s the calculation. I might not fully grasp your question.

Unidentified Company Representative, Company Representative

He thinks management fee for…

Blaine Heck, Analyst

I'm just asking whether it's...

Jordan Kaplan, President and CEO

You mean something like a promoter or an asset management fee? No, it doesn't include that.

Blaine Heck, Analyst

Could you share any interesting trends you are observing in your Valley markets? Are you noticing any additional demand from companies interested in relocating to less urban or less densely populated areas? Is the utilization different in the Valley? Additionally, how do you anticipate these markets will perform during the return to office compared to the west side?

Jordan Kaplan, President and CEO

The Encino to Sherman Oaks area is performing well and has followed the trends of the west side. It's challenging to build there due to high housing costs and numerous amenities on Ventura Boulevard. For years, I made excuses for Warner Center at Hawaii, but recently, it has rebounded strongly and has been one of our top markets throughout the pandemic. Now, Warner Center is experiencing significant developments. We faced increased office supply, but we're now seeing multiple companies shifting there for studio space and other needs. The practice field being built right next to Warner Center will help enhance the area. There's another office project that is likely to convert to residential, which will improve the surroundings further. Additionally, companies like Amazon are committing to that area for their facilities, which will create a lot of jobs nearby. The positive developments keep coming, and I am very optimistic. Residential development in that area has been impressive and continues, with new residential buildings popping up everywhere. There’s an increase in retail development as well, and larger companies are establishing their facilities there to be close to their workforce. All these factors will greatly impact our success in the region.

Richard Anderson, Analyst

So can you give some color on the latest sort of cadence of tenant behaviors in the L.A. area as it relates to rent relief applications and all that noise? And whether or not this may be closing in on the last time we have to have this conversation, but just curious what the latest observations are?

Jordan Kaplan, President and CEO

We previously mentioned that our defaults were under 2%, and I believe we are still under that threshold. Additionally, we anticipate collecting even more. Overall, I'm feeling quite optimistic. We're set to recover a significant majority of the funds owed to us, and the amount owed has significantly decreased. As I have mentioned before, I don't expect the remaining collections to make a notable impact on the figures we present. The funds are either being received, reinvested into new deals, or have been disappearing quickly. There are three major factors to consider. First, when we entered this pandemic recession, we faced significant challenges, including reduced occupancy and lease rates, which we've discussed extensively and have since improved, allowing us to focus on retaining tenants. Second, we experienced a downturn in parking revenues, but we've seen a strong recovery. Many people are back, and our parking lots are now full. I believe we will capture the remaining lost revenue as long as the economy continues to perform well. Finally, something quite unexpected happened: the government advised people not to pay their rent, which led to a mixed response. However, those who paused payments are now settling their debts, either through repayment programs or other arrangements, leaving us with only a handful of situations to resolve. All three of these areas, which we initially struggled with, are now trending positively.

Richard Anderson, Analyst

I remember the owed rent was around $50 million or $60 million. What is that number now?

Jordan Kaplan, President and CEO

We're like closer to half that. I think $30 million or some...

Peter Seymour, CFO

It's in the 30s.

Richard Anderson, Analyst

You mentioned that you're ready for the opportunities that inflation presents. Can you explain what those opportunities are? Specifically, is 1221 one of those opportunities, considering the pool of potential buyers might have decreased? You have the financial capability to make the purchase. Is that what you mean by standing out against the competition in acquiring assets? Could you clarify what kinds of opportunities arise from an inflationary environment for your company?

Jordan Kaplan, President and CEO

There are two main opportunities arising from inflation in real estate. First, real estate is often seen as a strong hedge against inflation. Even though higher interest rates can impact leveraged assets like real estate, once the situation stabilizes, we typically see significant value growth due to rising rents and other factors. In the mid- to long-term, inflationary conditions can be very beneficial for real estate. Second, as financing costs rise, some property owners may feel the pressure to improve their management efforts or consider selling. This can lead to more properties becoming available for purchase, presenting potential opportunities for buyers in the market. We're optimistic about this possibility.

Richard Anderson, Analyst

So was 1221 tethered to the environment? Or is that why it became available or maybe not?

Jordan Kaplan, President and CEO

I believe that 1221 wasn't the reason for the situation, as the seller did not see it as the right fit. It was actually a strong match for us, and we were able to reach a deal that satisfied everyone involved.

David Rodgers, Analyst

I think last quarter, you said something to the effect of expecting most of the deferrals to come back in the way of blend-and-extend transactions or at least kind of model it out that way as you go forward. Can you talk about maybe the impact of those transactions on the leasing economics that you quoted? And I guess the second part of that question is just trying to reconcile same-store cash revenues between last year and this year. There seems like a bigger delta maybe in where you're collecting a little bit more on the cash side? So those two questions, please.

Jordan Kaplan, President and CEO

Well, I think the main reason we're collecting more on the cash side is even if people owe us money, almost everybody has come current. So like some people that weren't paying us are paying us now. And what we're dealing with is the part that they owe us. So that's going to make a big difference. Is that what you're asking?

Peter Seymour, CFO

They're currently paying this month's rent and maintaining regular payments. They also have an outstanding balance from the past that we are addressing. When it comes to blend-and-extend, we typically acknowledge the outstanding amount and establish a payment plan. The new lease then operates independently at market rates.

James Feldman, Analyst

You may have just answered but maybe I didn't hear it right or misunderstood the answer. So your leasing spread spiked up to kind of minus 3% this quarter on a cash basis, they were as low as minus 9% last quarter, and they've been kind of on this sequential quarterly decline. I mean, how would you explain that move?

Peter Seymour, CFO

Leasing spreads are on the sequential quarterly increase and not on a decline.

James Feldman, Analyst

No, I'm saying, last quarter, I think it was minus 9% cash. This quarter, it was minus 3% cash.

Peter Seymour, CFO

Yes.

James Feldman, Analyst

I think in the past you said...

Peter Seymour, CFO

Yes, they are improving. That number provides some insight, but it can fluctuate significantly depending on what happens each quarter. Generally, as things recover, this number should ideally become positive again. What reflects this, especially in the minus 9% cash, is that during the pandemic, many people were questioning the state of rents, and we indicated that rents might not be as low as presumed. In fact, I'm not convinced that rents decreased drastically. They did decline, but we shared our best estimates, which this reflects when you consider various factors. However, they haven't dropped significantly. All these figures are influenced by the fact that our leases have substantial increases. So when you compare ending cash to starting cash and see a 3% difference, that represents one year of growth. Additionally, you still have four more years of growth from when that lease was established. This is an encouraging sign that suggests people are returning and rents are remaining stable.

Unidentified Company Representative, Company Representative

I think the straight-line comparison gives you the total value of the lease compared to the prior lease. And you see those positive spreads. We don't have a lot of free rent anyway. So it's really giving you a pretty good measure of the change in value of the lease.

James Feldman, Analyst

Okay. Yes, just I'm thinking about your messaging over the last year or so, and you kept talking about, well, if we can get to extra occupancy in the portfolio, we can really start pushing rents. Has that changed?

Kenneth Panzer, Analyst

Yes. No, no. I think that it's one thing to push rent; it's another thing to not lose ground on rents. And I just don't think we've lost as much ground as you might have thought through that tough period over the last 2 years, and now we just need to lease the portfolio. But I will also say, while I'm happy that we aren't losing as much in rental rates, the thing that we want is to lease up the portfolio. That's the job.

James Feldman, Analyst

It seems like the main point is that it was certainly a better quarter. While it may not be a definite trend for the future, there is a sense that things are improving.

Stuart McElhinney, Vice President of Investor Relations

Yes, this quarter reflects some fluctuations, as I mentioned earlier. It's important to note that these numbers can vary significantly from one quarter to the next. Much of this depends on the variety of leases that are signed during the quarter. So, it's not advisable to view this as a constant pattern moving forward. While we are pleased with improvements, it's not going to be a straightforward path. This was simply a strong leasing quarter. I hope that upcoming quarters will be equally strong, but recoveries rarely proceed in a straight line.

Peter Seymour, CFO

No, nothing noteworthy. I mean, we have a pretty steady role. We always have some of our larger guys rolling out. So nothing that's noteworthy.

William Crow, Analyst

That last discussion actually led me into my two questions that I had. And the first one is, Jordan, you talked about rents not really going down, but do you see more tenants leaving because of asking rents or lack of TIs? Or I guess, is there any reason why any commonality of the reason why tenants don't renew?

Jordan Kaplan, President and CEO

Our renewal rate has been pretty steady and it's been pretty good. As a matter of fact, already last year, it was higher than normal. The reason for the lost lease rate has totally to do with the fact that the new tenants weren't moving around as much. So they were moving less. Now they're moving more. Now we're getting more new tenants. That's why you guys have gotten focused on that number. I mean, the reason I said it was such a spectacular quarter is 330,000 in renewals. So if that new number is the key number to grow us back up, we've held steady, very good on our renewal. And the new number is also a good sign if you say what's going on in the economy, what's going on with people going back to work, okay, you're going to see all that in the new number, the new leasing.

Peter Seymour, CFO

Bill, when we survey our tenants moving out, there are obviously, if you guess, there's a million reasons why tenants move out. They're shrinking or they're growing or they're going out of business or they're moving to another market, something like that. And we're just getting the same list of reasons why guys are moving out. There's no major shift in that. It's still a big spread of different reasons.

William Crow, Analyst

Right. No, that's helpful. And then, Jordan, you just mentioned you look at the new leasing and the side of the local economy. So where are we relative to 2019, whether it's based on new leasing or back-to-office rates or parking revenue? Are we 50% back, 75% back of what we've lost? Where are you in the momentum scale?

Jordan Kaplan, President and CEO

We are almost reaching 2019 levels due to the new business we've generated. Once the company operates at full capacity, we expect to see remarkable numbers. However, it’s important to acknowledge that we are still down nearly 600 basis points, which is a significant amount. As we recover, it will lead to substantial improvements. The positive aspect is the surge in new tenant activity, with rents remaining strong. As long as the economy holds up, all signs indicate that we are on a very promising path. The political environment is definitely improving with the removal of rent moratoriums and similar issues. While I may not be enthusiastic about the politics, it is not my primary concern at the moment.

Daniel Ismail, Analyst

Maybe just going back to the acquisition in Santa Monica. I'm just curious, is that a rent-controlled building? And if so, how many units are currently well below market, if you're able to share that figure?

Jordan Kaplan, President and CEO

A good number of them. But it is a rent-controlled building, but I'm not sure that rent control plays as big a role in that building as it has in other buildings. I mean some of what's happened in that building is that rents have just moved up very quickly. So even maybe deals that were done during the pandemic or earlier are pretty far off the market of where current rents are. So as those roll, we'll pick that up. That's why there's such a meaningful spread between the going-in cap and what I would call the stabilized cap.

Daniel Ismail, Analyst

Got it. And then, Jordan, I appreciate the comments on inflation and interest rates. I'm just curious, have you guys noticed any tangible price movements, either on the office or residential side, in terms of cap rate movements due to rising rates?

Jordan Kaplan, President and CEO

I don't think there have been enough transactions yet. This situation is relatively new and only a few months old. Therefore, I'm not convinced we have sufficient transactions to make a definitive statement. The area where transactions are most prevalent is in the single-family housing market, which is already showing signs of slowdown due to rising interest rates. This shift in rates has quickly affected both pricing and transaction volumes in that market.

Steve Sakwa, Analyst

Just a quick one. Jordan, I guess there was a story or an article about a potential mansion tax in L.A. that would really go to fund homeless issues. And I mean, the article reads as if it's just on housing that's over like $10 million. I just wanted to be certain that was truly on housing and nothing on commercial.

Jordan Kaplan, President and CEO

Yes, I believe that is a transfer tax. Referring to it as a mansion tax seems somewhat misleading. Similar to many cities, this is a proposed transfer tax. Given the current negative sentiment towards taxes, this might be another hurdle. We are not looking at all these factors to strategize against them; it's simply a transfer tax. To my knowledge, the article you sent me is extremely misleading. It's simply a transfer tax, regardless of whether the house is industrial or something else. The way it was described in the article was so unusual that I haven't heard of it being applicable only to mansions, even though that's how the newspaper chose to characterize it.

Stuart McElhinney, Vice President of Investor Relations

We have no further questions. I will now hand back to Jordan Kaplan for closing remarks.

Jordan Kaplan, President and CEO

Okay. Well, thank you all for joining us, and we will speak to you again in a quarter.

Operator, Operator

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.