Earnings Call Transcript - DEI Q3 2025

Operator, Operator

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.

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. I will now turn the call over to Jordan.

Jordan Kaplan, President and CEO

Good morning, and thank you for joining us. Office leasing during the third quarter was obviously not what we had hoped. While July was strong with over 300,000 square feet leased, our typical August slowdown in new leasing was deeper than usual and lasted into September. Fortunately, renewals did better with tenant retention above our 70% long-term average. Fourth quarter office leasing is off to a good start, but we're now hesitant to be encouraging until we complete the quarter. We've seen that multifamily growth rates have slowed in other parts of the country and other markets in L.A. County, but we're not seeing that in our portfolio. Our multifamily same-store cash NOI increased almost 7% compared to the prior year. Same-property cash NOI for the whole portfolio was up 3.5%, with office benefiting from higher property tax refunds. We expect property tax refunds to be impactful for the foreseeable future, though the timing remains unpredictable. Our two multifamily development projects in Brentwood and Westwood will add over 1,000 premium units to our portfolio. In addition, recent changes to state municipal law allow us to build more multifamily units at a number of our existing locations. For example, we can now build a new 500-unit residential tower at the corner of Wilshire and Barrington in Brentwood. During the third quarter, we refinanced almost $1.2 billion of debt at very competitive rates. We are also actively working on a number of off-market office opportunities with full engagement from our joint venture partners. I will now turn the call over to Kevin.

Kevin Crummy, CIO

Thanks, Jordan, and good morning. At 10900 Wilshire and Westwood, we are finalizing plans for converting the existing office tower to apartments and building a new ground-up apartment building. Construction should begin in 2026. At The Landmark Residences in Brentwood, construction is in full swing. When we finish the project, it will meaningfully add to our in-service residential portfolio. Finally, we continue to make good progress leasing at Studio Plaza in Burbank. During the quarter, we completed three financing transactions that extend our debt maturities at very competitive fixed interest rates. As we mentioned in our last call, in July, we refinanced a $200 million office term loan that was scheduled to mature in September 2026. The new nonrecourse interest-only term loan matures in July 2032, with interest effectively fixed at 5.6% through July 2030. In August, we closed a package of new residential term loans. The new secured nonrecourse interest-only loans total approximately $941.5 million, bear interest at a fixed rate of 4.8% and mature in September 2030. They replaced loans aggregating $930 million that were scheduled to mature in 2027 and 2029. We also repaid the debt that encumbered The Landmark Residences and added that property to our pool of unencumbered assets. We continue to work on refinancing our next loan maturities, now scheduled for late 2026, and to look for attractive acquisitions. With that, I will turn the call over to Stuart.

Stuart McElhinney, Vice President of Investor Relations

Thanks, Kevin. Good morning, everyone. During the third quarter, we signed 215 office leases, covering 840,000 square feet in our in-service portfolio. This included roughly 200,000 square feet of new leases, which reflects the slowdown in the latter half of the quarter that Jordan mentioned. Office rental rates and concessions are steady. Looking ahead, our remaining office expirations in 2026 and 2027 are below our historical averages. The overall straight-line value of new leases we signed in the quarter increased by 1.8%, with cash spreads down 11.4%. At an average of only $5.63 per square foot per year, our office leasing costs during the third quarter remained well below the average for other office REITs in our benchmark group. Our residential portfolio continues to enjoy strong demand and remained essentially fully leased. With that, I'll turn the call over to Peter to discuss our results.

Peter Seymour, CFO

Thanks, Stuart. Good morning, everyone. Compared to the third quarter of 2024, revenue was flat at $251 million. FFO decreased to $0.34 per share, and AFFO decreased to $52 million with increased interest expense outpacing higher contribution from operations. Same-property cash NOI increased 3.5%, reflecting a strong 6.8% increase from multifamily and a healthy 2.6% increase from office. As Jordan mentioned, we continue to receive significant property tax refunds whose timing varies unpredictably from quarter-to-quarter. Excluding property tax refunds, our office same-property cash NOI growth would have been essentially flat. At approximately 4.3% of revenue, our G&A remains low. Turning to guidance. We still expect our 2025 net income per common share diluted to be between $0.07 and $0.11, and our FFO per fully diluted share to be between $1.43 and $1.47. 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

The first question comes from Nick Yulico with Scotiabank.

Nicholas Yulico, Analyst

I guess starting off with leasing. If we go back to last quarter in the call, you guys had some optimism on the leasing pipeline, you still had your occupancy guidance intact, and then this quarter didn't play out as expected. I'm just hoping to get a little bit more detail on sort of what exactly did not materialize in the new leasing plan? There were certain markets, buildings, anything you could just sort of quantify a little bit more on that?

Jordan Kaplan, President and CEO

I don't have a great answer. I can't point to an industry, I can't point to a market, I can't point to a building. There was a slowdown. We actually still did a number of deals over 10,000 feet. All of that worked, it just slowed down. And if you ask the question, where are we now? It seems like the slowdown is temporary, and it looks like we're off on this quarter to a good start, but I don't want to make any predictions because we were so surprised by July. From July to August, we were like, 'Oh, this is going to be a great quarter.' Then you had August and September, just kind of fell off or actually like the later part of August. And maybe it will be timing, I'm not sure.

Nicholas Yulico, Analyst

Okay. And I guess the second question, Jordan, is you're a larger shareholder in the stock, I'm sure you're not happy with how the stock has done and some of that has to do with leasing and performance there. But are you starting to think about other alternatives? You mentioned some acquisitions, but I guess I'm wondering do you think about trying to prune the portfolio? Do you think about stock buybacks? Are there other opportunities to do something sort of pivot here a little bit in terms of a strategy to sort of improve the stock performance outside of just the leasing focus that needs to be addressed?

Jordan Kaplan, President and CEO

I feel very optimistic about our office and residential portfolios. We're expanding our residential portfolio and actively working on increasing our office portfolio. I believe the markets will recover well. Although there have been some challenges, primarily political ones at the local level, I see positive changes in that area. Nationally, some other markets are bouncing back. We have excellent tenants and high renewal rates, which boosts my confidence in our office prospects. As Kevin mentioned, I'm focused on acquiring more office space. We're also being more aggressive in developing residential properties, which are performing exceptionally well. We have many opportunities in L.A. due to recent changes in laws. Despite the challenges of the last quarter, I remain committed to doing our best.

Operator, Operator

The next question comes from Steve Sakwa with Evercore ISI.

Steve Sakwa, Analyst

Stuart, you provided a little bit of comment on kind of the tax refunds and Peter did as well. But I'm just trying to make sure when we look at kind of the third quarter office expenses, is that $74 million kind of a good run rate? Or are there some kind of onetime true-up payments that sort of hit in the quarter that benefited Q3, but won't carry forward into Q4 and beyond?

Peter Seymour, CFO

Peter here. Whenever we receive tax refunds, they will appear in the expense line. As mentioned, we anticipate continued property tax refunds that will have a significant impact. However, it’s challenging for us to forecast the numbers from quarter to quarter or year to year.

Steve Sakwa, Analyst

No, I understand that, but is the $74 million kind of like the new base with which you grow from? Or were there like past refunds that were kind of onetime in nature that the run rate is higher than that?

Peter Seymour, CFO

It's kind of hard to pull it all apart, but there's a little bit of both. There's some of it that's onetime and there's some of it that you reset for a period of time.

Jordan Kaplan, President and CEO

I mean I don't think we have guidance for you on expenses for the next few years, but I can tell you this, Steve: We have been receiving rolling tax refunds for quite a while, and I think they are going to keep rolling forward because they're just very slow, the money comes in very slow. We don't recognize the money until we receive it. I mean, but it's been coming in, and I think it's going to keep coming in, when I look at the amount we have in front of them.

Steve Sakwa, Analyst

Okay. And then maybe, Jordan, just going back to kind of leasing broadly, I mean, I did see that UCLA downsized kind of their footprint with you in the third quarter. But just any comments kind of around the industries that did lease in kind of the third quarter, maybe were you positively surprised at activity? And were there any industries that just are still kind of stuck and maybe underperforming your expectations?

Jordan Kaplan, President and CEO

I appreciate you bringing that up. One area where I'm noticing some weakness is in government, particularly with UCLA being the exception. The government is facing significant challenges, including difficulties in bringing employees back and budgetary constraints. Most of our other sectors appear to be performing well. Each time we encounter a setback, I find myself thinking, 'Oh, great, UCLA experienced a setback too.' However, I believe UCLA will eventually bring employees back. It's uncertain where they will end up, but they could become a key growth driver for us in terms of new leasing, as they have been contracting for some time and need to reintegrate people more effectively. I don't want to criticize them too harshly, as they are heavily dependent on both federal and state government support, especially as part of the state government. It’s clear that the government has significantly impacted downtown, and that's the only sector where I can provide some insight.

Operator, Operator

Next question comes from Alexander Goldfarb with Piper Sandler.

Alexander Goldfarb, Analyst

Thank you for keeping your conference call old school, not going the high-tech route, so I appreciate that. Jordan, your stock is trading at a 9 implied. I understand the enthusiasm for apartment development. It's been something long in the making over the past few decades, and it's great to see you guys be able to take advantage. You also mentioned potential more acquisitions. But from a funding perspective, you can't really issue equity, that makes no sense. You're always hesitant to sell assets to gin up additional cash. So with everything that's on your plate and where the stock is, how would you think about funding new acquisitions if you have demands on your capital for the development projects?

Jordan Kaplan, President and CEO

We have strong engagement from our joint venture platform. While we are not issuing stock, we have not historically used stock for acquisitions regardless of the stock price. We are generating positive cash flow, which we are utilizing in various ways. We have significant financing capabilities, and a large part of our portfolio is free of loans, allowing us to leverage that for financing. We can invest our free cash flow alongside our joint venture partners. So far, we've primarily used our free cash flow to invest with our joint venture partners and also to support our two development projects, although one of those projects has several joint venture partners, which lessens our financial burden.

Alexander Goldfarb, Analyst

Okay. But your point is that between the demands to fund the current development pipeline, there's still excess cash that you're generating to fund joint venture acquisitions?

Jordan Kaplan, President and CEO

That's 100% true.

Alexander Goldfarb, Analyst

Okay. Second question is just playing off of that. Again, given where the stock is trading and you guys haven't been huge issuers over time, why would the joint venture partners not be interested with you guys in just maybe taking the company private? I mean the public markets haven't rewarded what you guys have achieved, you certainly have a lot of growth ahead of you, but it would seem like an opportune moment to arbitrage the difference.

Jordan Kaplan, President and CEO

Well, yes, they ask that a lot. I don't think it's a very good time to go private from the perspective of my shareholders, of which I'm one, and many of us feel that way because I believe the stock is significantly undervalued, and I want to do my best for the shareholders. But yes, you're right; that's what they all lead with.

Alexander Goldfarb, Analyst

I'm just saying that you guys are doing a lot of good things, but that's not showing in the stock price.

Jordan Kaplan, President and CEO

Yes, I know it's not. And that's a point in time. The stock kind of moves around vis-à-vis what's going on. And most of the time I'm wrong. It should be up, it's down. It's just like things slow down and it's up. But I think over the long haul, we're going to have a great opportunity to do a good job for our shareholders. I don't want to like crawl out with my tail between my legs. I want to do a good job for them.

Operator, Operator

The next question comes from Blaine Heck with Wells Fargo.

Blaine Heck, Analyst

Great. Jordan, I appreciate the commentary. Can you just talk a little bit more about the size of the opportunity set within your portfolio to potentially do more office to residential conversions or ground-up residential development? And maybe where in the timeline of getting the required permitting or zoning you are? Is the opportunity you mentioned in prepared remarks something that you think could be shovel-ready in 2026? And are there any others that you think could be started in the next couple of years?

Jordan Kaplan, President and CEO

We have identified several exceptional locations where we believe we can significantly expand residential development. Ken and I have been in ongoing discussions about this. Historically, our main challenge has been our capacity to manage more projects, and we are actively addressing that. We are already in the early phases of this process. We are currently planning and evaluating some of these sites and consulting with architects on potential developments. If you were to ask me whether we have numerous sites that could be prepared for construction by the end of 2026, I would say we likely do, but we need to complete our current projects effectively first. Therefore, we are refining our project list to ensure they are more than just theoretically ready. However, determining the pace at which we can launch these projects is a bit more complex.

Blaine Heck, Analyst

Okay. Great. And just a follow-up. Similarly on the acquisition side, do you think you're close to closing on any other interesting opportunities? And maybe how have your return requirements evolved along with the changes in your cost of capital?

Jordan Kaplan, President and CEO

I believe we'll make some meaningful acquisitions in a reasonable timeline. I'm extremely confident of that. What was the second part of your question? You want to know how my return metrics...

Blaine Heck, Analyst

Just how your targeted yields return requirements...

Jordan Kaplan, President and CEO

Our return metrics are among the best in the industry, which aligns with the current climate of returns. We aim to secure top deals, as those perform best for us, particularly within the top quartile of our portfolio. I believe this is more attainable now than ever, and I am very confident it will happen. Consequently, we will not miss out on these opportunities. The return metrics are an improvement compared to 2019, although I’m uncertain if they will fully meet your expectations. Nonetheless, we will be satisfied with them.

Operator, Operator

The next question comes from Seth Bergey with Citi.

Nicholas Joseph, Analyst

It's Nick Joseph here with Seth. Maybe just following up on the transaction market. Are you feeling that there's more competition as you're bidding for assets? How are you seeing kind of the competition landscape changing?

Jordan Kaplan, President and CEO

I think we're experiencing a feeling similar to when Ken and I first entered this industry. During the early '90s and throughout that decade, we engaged in a lot of purchasing. I recall examining the proportions of broker transactions versus off-market deals and how we attracted people to us. I'm noticing that shift again, with a significantly larger percentage of off-market transactions. We know that you’ll succeed and finalize these deals, which is wonderful. It's a nice reward for years spent building our reputation. This has bolstered my confidence. We are encountering genuine opportunities and actively pursuing them, including deals I've sought for a long time.

Nicholas Joseph, Analyst

A couple of questions have been about the discount and how to address it. I understand you are not satisfied with the current stock price and see a way to reduce that discount. You mentioned that the limited partners might have some interest. Has this been a broader discussion among the Board, or is it more your personal viewpoint on the opportunity to bridge that gap at this time?

Jordan Kaplan, President and CEO

I didn't see that as a chance to close the gap. I mentioned that I wouldn't want to do that at this moment because the stock price is too low, which is not an acceptable situation. All I was trying to express is that they constantly ask me about it. However, why would I make a move at such a low point in the stock? You all are looking at me as if I don't understand. I truly believe there is significant potential in both the office and residential sectors, so why wouldn't we focus on delivering value to our existing shareholders?

Operator, Operator

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

John Kim, Analyst

I wanted to ask a two-part question on leasing. Jordan, you mentioned October, it seems like it picked up. I'm wondering what you attribute that to? And secondly, is there anything that you can do to stimulate demand? We're seeing here in New York a lot of landlords really stepping up on amenities. And I know your portfolio doesn't really have the same footprint to do that, but I was wondering if any amenities would resonate in your market?

Jordan Kaplan, President and CEO

We've successfully implemented various amenities that make a difference, particularly by partnering with high-end gyms as part of our projects, which also generates revenue for us. Our portfolio is located in areas rich with amenities, including access to high-end housing and a variety of restaurants. Therefore, we don't see a significant additional demand for those amenities. When it comes to boosting demand, we excel at identifying opportunities and pursuing every possible deal. Our portfolio is characterized by proactive outreach and aggressive efforts to convert opportunities. Despite some fluctuations in the real estate market and a quarter that didn't perform well, I remain optimistic about our growth. I believe in our strategy and the efforts we are making, and I'm confident that we will achieve our goals if we stay focused and work hard. I am certain we will deliver excellent results for everyone involved.

John Kim, Analyst

Okay. And then my second question was on Barrington Landmark. Any update on the litigation progress? If you think we'll get some news on that in the next year-or-so? And you added a new development site there this quarter. Do you expect that to get off the ground before Landmark Residences?

Jordan Kaplan, President and CEO

We won't proceed with that before we have the Landmark Residences completed and leased, as they would compete directly with each other. We already have 700 units there. We will put in the effort to prepare for it, which is beneficial, and we are currently working on integrating it into the project. However, we need to focus on what we are building now. It might also be wise for us to continue the preparation work on several other sites to ensure we are ready when the time comes to move forward. This is part of the preliminary work that Ken and I have discussed and are actively pursuing.

John Kim, Analyst

And then litigation?

Jordan Kaplan, President and CEO

The litigation involves processing a vast amount of documents. We feel optimistic about our position. However, these processes take time, and the pace of the courts is very slow, almost as slow as a sloth. So please keep that in mind as we move forward.

Operator, Operator

Next question comes from Jana Galan with Bank of America.

Jana Galan, Analyst

When you talk about the slowdown experienced in August and September, was that more that touring and top of funnel activity slowed or the activity was there and then the decision-making just kind of got paused? And when you think about the improvement in October, is it more just a normal month or is it seeing that kind of delayed activity from the summer coming now into the fourth quarter?

Jordan Kaplan, President and CEO

I think there was likely a slowdown in decision-making to finalize deals. Regarding this quarter, I'm hesitant to make predictions. I would prefer to see concrete results. Let's focus on delivering the answers. If you examine the situation, what is the issue? Let's monitor the closing and everything else. We will see how we perform this quarter.

Jana Galan, Analyst

Great. And then just curious if you could kind of talk about the decision or the strategy to refinance the multifamily properties early and to unencumber The Landmark Residences?

Jordan Kaplan, President and CEO

Fannie Mae has been an excellent partner in this process. They kept their loan intact, enabling us to vacate the buildings efficiently. They are supportive of housing developments and were encouraging when we expressed our plans to rebuild. I mentioned that repaying the loan immediately would pose challenges for me, and they agreed to let us move forward with construction without immediate repayment, which I greatly appreciate as it significantly impacts our housing initiative. I also indicated that when we could find a good opportunity to repay them, we would. As other residential deals matured and cash flow improved, we were able to extend our arrangements at favorable pricing and reduce Barrington's leverage off their watchlist. It’s beneficial to be able to contribute positively to our lender’s interests, and we successfully achieved that.

Operator, Operator

Next question comes from Rich Anderson with Cantor Fitzgerald.

Richard Anderson, Analyst

Is there anything about the upcoming Olympics economic activity that you see as a short-term or long-term opportunity, given the typical impact of an Olympic event, considering your position as a landlord of office and multifamily properties in the area? Are there any thoughts you have on this, or do you view it as a non-event from Douglas Emmett's perspective?

Jordan Kaplan, President and CEO

A key point is that the council member has a strong desire to implement significant positive changes in the area. UCLA will serve as the Olympic athletic village, housing all the athletes in their dorms. The focus will be on enhancing the Westwood Village area. She is actively seeking various forms of funding to improve that area and present it well to the world. She has approached several major stakeholders, us included, and asked for our support. We agreed to collaborate with her. This is similar to our engagement with Santa Monica, which is also undertaking improvements in the downtown area, although not specifically for the Olympics. Overall, I believe the Olympics will benefit the region greatly. The city, county, and state are all eager to enhance the village, and there are plans for improvements such as creating pedestrian-friendly streets, enhancing retail spaces, and optimizing transportation access. She is dedicated to accomplishing these goals, and I am confident that many of them will be realized.

Richard Anderson, Analyst

Okay. Great. Not so bad a question after all. And then the second question, you mentioned progress at Studio Plaza. Can you put a finer point on that in terms of anything around leasing activity, where you're at? I know you're hesitant typically do not get too specific, but I'm wondering if you could share anything about progress there.

Jordan Kaplan, President and CEO

I had some concerns about the entertainment industry and its challenges, but we're making significant progress at Studio Plaza with numerous entertainment deals in place. We're attracting a diverse range of tenants, including both larger multi-floor and single-floor spaces. While we still need to finalize some agreements, we have already closed several deals, and some tenants are currently paying rent. The project has turned out extremely well, and I feel relieved to see it perform successfully. I have strong confidence in its future. Owning the property has been beneficial, as it has been leased to a mix of tenants for 30 years. However, since Warner Brothers took over, there have been challenges. Now, it’s evolving into a robust multi-office project, which reduces our dependence on large single tenants, something we prefer to avoid. I'm genuinely pleased with the progress and the impressive renovations, which include excellent outdoor and indoor amenities.

Richard Anderson, Analyst

Yes. So when do you think you're kind of sort of done getting that back leased, do you have a timeline in mind?

Jordan Kaplan, President and CEO

Yes. But if I give a timeline, I'll blow it. So I don't want to do that.

Operator, Operator

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

Upal Rana, Analyst

Great. Jordan, you mentioned doing more acquisitions. And I wanted to get your thoughts on the Beverly Hills office market. Some assets have traded there recently, including one of your peers buying Maple Plaza. So I just want to get your thoughts there. And maybe if you tell us if you were part of the bidding there as well?

Jordan Kaplan, President and CEO

Well, I saw the stuff they sold, and I saw what they bought and what I have for them is applause. I mean that was a great trade to move out of that other stuff and into that, I'm like well done. And I love the Beverly Hills market. I think it's a great market.

Upal Rana, Analyst

Okay. Great. And then could you talk about any of the larger tenants coming back to the market? You mentioned in the past that you're seeing an increase there, but just curious what your thoughts are today?

Stuart McElhinney, Vice President of Investor Relations

Yes, we observed strong leasing activity over 10,000 square feet in the third quarter, which was encouraging to see. More than a year ago, this category was underperforming, but it has shown good health in the last couple of quarters.

Operator, Operator

The next question comes from Dylan Burzinski with Green Street.

Dylan Burzinski, Analyst

Just a quick one for me. You mentioned the amount of acquisition opportunities that you guys are looking at on the office side. I guess presumably these are mostly sort of value-add type deals where Douglas Emmett can bring them into their operating platform and execute lease-up. But I guess how do you guys weigh that with the existing portfolio level of vacancy that you guys have in the office portfolio today?

Jordan Kaplan, President and CEO

We executed a value-add deal, which might be why you're asking. We acquired a 220,000-square-foot building with a development site that we're converting. My main focus is on acquiring the best properties available and maintaining control over those assets because I still have faith in the markets. The top properties may have some vacancy, or they may be fully leased. But my primary criterion isn't about being value-add focused; rather, it's to invest in the best buildings located in markets we consider long-term strong investments that have limited supply, a solid tenant base, amenities, and good access to upscale housing. This approach, while it may sound cliched from our initial S-11 documentation, truly drives our strategy.

Operator, Operator

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

Jordan Kaplan, President and CEO

Well, thank you for joining us, and we look forward to meeting with a number of you individually soon. Bye-bye.

Operator, Operator

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