Douglas Emmett Inc (DEI) March 3, 2026 Conference Transcript

Welcome to day two of Citi's 2026 Global Property CEO Conference. I'm Seth Berge with Citi Research and we're pleased to have with us Douglas Emmett and CEO Jordan Kaplan. This session is for Citi clients only and disclosures have been made available at the corporate access desk. To ask a question you can raise your hand or go to liveqa.com and enter code GPC26 to submit questions. With that, Jordan will turn it over to you to introduce your company and the team, provide any opening remarks, and then tell the audience the top reasons an investor should buy your stock today, and then we can dive into some Q&A.

And the Capital Markets team. Douglas Semin is an office for residential REIT. We're mostly focused on the high-end markets in Los Angeles and in Honolulu. our portfolio is around 18 million square feet of office and 5,000 apartment units with a big apartment unit pipeline and from there I think most people know most of that so I'll just start asking questions.

Sounds good you know maybe you kind of noticed noted on the fourth quarter call just an uptick in interest I think there had been some slowness kind of um in the third quarter you know what industries or tenant types are kind of driving that uptick um you know and and your focus is obviously kind of on on smaller tenants so you know just just within the context of of la um you know what what are you seeing in terms of leasing activity in the first quarter so far so we went a bunch of quarters where we were like a little bit positive kind of felt like we were near you know at the bottom then we had a negative quarter in the

third quarter then we have it a very positive quarter in the fourth quarter and you're talking about net absorption right so fourth quarter was over a hundred thousand feet so that was very positive that's where we kind of need to get to to really make substantial gains and now i mean we're in the middle of and i have told people and i'll say again the pipeline at this time looks just as strong as it looked in the fourth quarter. But, you know, in the end, we'll have our results at the end of the quarter, and we'll certainly publish them.

And then, you know, just as you think about the pipeline and tour activity, you know, are you seeing kind of any uptick in terms of, you know, tours to conversions? Is that changing at all? And just any kind of different industries that are growing or shrinking and then just you know as tenants kind of evaluate their space needs are they you know expanding are they keeping their existing footprint on the renewal side just any comments you can make around that okay so first of all in terms of the types of tenants that are coming in it's pretty well distributed exactly like the pie chart we have on our thing I mean, there's no one group that represents more than 20% of the growth.

The renewal rate has actually been abnormally high. I think last quarter was over 80%, but it historically and very reliably zeros in on 69% to 70%. So that's what people should expect. um in terms of the you know understanding and knowing the pipeline uh there are two things that we look at one is like leases in like fully in negotiation they're going to our law that have gone to our lawyers the other is showings letters of intent a bunch of other stuff right and so when I say the pipeline looks strong that's the stuff we're looking at to say to you it looks strong like our results are going to be strong like they were let's go now that doesn't always mean that's going to happen because it's a view of like an assembly line from literally the beginning of how many showings have been to the end of how much has been signed but it's as good an indicator as you can have during the quarter and then you know one of the topics with an office um you know at least with the headlines has been on on ai you know and your conversations with tenants is that coming up at all as they kind of talk about needing space um well to answer one part of your last question that i guess i didn't get to answer we track expansions over contractions and our expansions have been greater than our contractions. That might refer a little bit to this question. I don't have a lot of information about where tenants are saying to us, we need more or less space because of AI. We do, as most people here do, have experience with new technologies. I actually started in computers in 1986 and introduced the first microcomputers at UCLA and a lot of other places, so I have not seen a new technology, especially a new technology that empowered individuals to be more productive that didn't result in more people being hired that are able to be productive that way, and another thing that strikes me is that this particular technology, not unlike websites, this particular technology allows a very small group of people three to five to ten to form a company entrepreneurial literally create apps do all kinds of things they didn't used to be able to do without having the money to hire programmers and all the rest of it and start a business and dose the thing that Los Angeles is most known for is being a small company incubator market. So my expectation is that as a result of that empowerment, you will see more people in offices, just like you did with the internet, microcomputers, and all the rest of those things, not less, because when someone is very productive, you want more of them because you make more money with more of them.

And I suspect that we'll have more small business formation because a small group of people have the ability to have greater outreach and use technology to create their own website or their own app without hiring a bunch of programmers so we'll we'll see though and then thinking about kind of the overall demand drivers for your market you know you sounds like you're you're pretty positive on on ai um and business formation you know how are you kind of thinking about you know kind of any effects for la with with some of the, you know, large media consolidation, um, that's been in the headlines and then, you know, just any kind of incremental demand, um, you know, from, from the Olympics, uh, in 2028?

Well, so obviously the demand is up because we're releasing a lot lately. Okay. Uh, I'm not sure the Olympics, I don't know if the Olympics are going to create any kind of meaningful additional office demand to be perfectly frank i think they're kind of putting their headquarters downtown for like all those people i do believe the olympics is going to have one very good impact on us which is um we're a primary owner in westwood ucla is the olympic village um for the athletes and so the city the the state and the federal government are focused on putting our best foot forward in Westwood so I think there's gonna be a lot of capital to go in there to get Westwood the village in Westwood looking good and that's the primary amenity for our buildings so we might have a little boost for a short time not sure how meaningful it'll be I mean I'm sure all our venues at our buildings and will be full but the only lasting effect I think will be that Westwood will be in much better shape after they leave because they're going to spend capital on it and then on the technology side with with some of the headlines around consolidation do you think that changes anything with the office market in la well my when you say technology you mean the movie industry or technology you meant media right yeah media merger media yeah yeah so so that merger which now has been decided which is going to be paramount and Ellison family with Warner Brothers I think there's three there's a few aspects to it one is just going back there's been some concern about that industry revolving around like are they not making movies anymore in california are they making it in other places i think that's been going on for a long time and frankly the uh tax structure and some other things i think make it kind of hard to make movies in california right and employment laws and all the rest of it now they aren't even necessarily staying in the united states on some of these things they're looking for most favorable literally countries where they can make some of this stuff now at the same time kind of the heart of creativity for movies is in LA and it's actually in West LA and a lot of those people are powerful and they'll say hey yeah I got it you saved some money by sending me to like Georgia outside of Russia but I don't feel like living there for a year and so you're going to make it here okay that's happening a lot and it's happening a lot with TV series and some movies and the rest of it, right? So that's one thing. Another thing is the industry just slowed down in terms of content production, okay? I think that this merger is going to significantly increase content production. Okay, David Ellison has said, I'm going to make more movies. I think he will make more movies. He said it when he bought Paramount, and I think he's going to even make more with the series and the control he has over some of the things that are at warner brothers so i think him kind of winning this battle is going to be very very good for la and our market because i think he's going to produce a lot more product okay um and i know people are talking about layoffs and i am sure there will be layoffs because there's a lot of duplicated jobs but i think a lot of those layoffs not that i'm saying layoffs are good or i want to have them or anything but i think they're going to happen on the studio lots they have a lot of those jobs are on the lots they're not renting space for it anyway um and i think it'll happen on the lots and i don't know how they're reuse those lots whether it's for production or other uses but i think it's going to happen on the lots right because he has two whole now big studios not to meant not even to mention skydance so that's where i think that's going to happen and i also think as a final thing that the um whether it be netflix or otherwise i think because uh david ellison and that family is so committed to like literally the movie industry it's not just

the business of movies it's the movie i think that he's going to force a response from them and i think they will respond by having to make more content too so i i think that this merger will be good for la and i think it'll be very good for the industry and then on that um you know there's been some tax credits that kind of incentivize movie production in la and then maybe just on the regulatory piece um you know i think in some of your gna you mentioned it's an upcoming election year can you just kind of walk us through kind of you know maybe any any impact you're seeing from the tax credits for for kind of studio production

and movie production in LA and then you know the other kind of ballot initiatives that you're you're focused on and think can impact demand whether that's in LA specifically or just for California overall so we're not impacted by tax initiatives for making movies we don't own any sound stages who run any like even close to that business i just give you commentary on it gratuitously because you asked um in terms of the politics in california and los angeles we are extremely involved and i and extremely understates it uh we're spending real money on it we're engaging our partner companies and other reeds and other companies outside the real estate industry in it, raising money for it, promoting candidates. We just were one of the large sponsors of a proposition that was just submitted last week called the Local Taxpayer Protection Act. It was submitted to the state so they could count our signatures. We collected enough signatures to have it on the ballot. So I hope you'll all see that there. You can read about it's not hard to learn about effectively if it passed it would wipe out all the transfer taxes in the state it and it does a couple of other things we're involved in city council races I mean we're kind of across the board in the cities that we're in you know and how does maybe saying with with the regulatory side you know there's been some state municipal zoning changes that kind of, you know, incentivize or allow for additional multifamily development.

You know, kind of what does that mean for Douglas Emmett and kind of the multifamily development opportunity?

Well, it has been incredible. I can't, I mean, that has to be the right word. We own most of the meaningful developable sites along Wilshire all the way from Santa Monica all the way down to the end of Beverly Hills. And it's on corridors like that that they were upzoned primarily by the state, but then secondarily through a couple of different things that happened at the city level to force new housing, which has allowed sites that we had that I never thought we would be able to even build on because it would have been such a battle to be kind of by-right development sites. We're right now in the process of building about, we're in construction on about 1,000 units. 700 plus of them is in landmark residences, which is at Barrington and Wilshire, which we've had to rebuild that whole thing due to a fire some years ago. And then there is another 300 plus in Westwood in an office tower that we're converting that we purchased with partners. We also have sites all through the west side where we can build an additional more than thousand units. We have a total across our portfolio of probably eight to ten thousand units that the state action enabled including in some other key locations where we were going through the process of trying to get the entitlements which now we have by right construction now it's expensive to build and so it hasn't launched as much building as you might expense excuse it's so expensive we happen to have sites that are so valuable that it's worthwhile for us and therefore we're focused on it and i said on our last call we're actually working on the architectural drawings for another

thousand units but uh they need to get control over the cost they need to loosen up on uh rent regulations and things like that if they really want to launch off a lot more units and then just with that opportunity set the eight thousand to ten thousand you know how much of your portfolio can kind of be multifamily, kind of, you know, as you look out in the forward years, just with that opportunity set?

Well, right now in revenue, we're about a 22, 78 split, 22% multifamily. I think that we obviously can build a lot. I don't have on our list of buying multifamily. I think we can build for much better cap rates, eight plus. Of course, I'm not concluding the value of the land, but we already own the land. Then you can buy for multifamily, quality multifamily in our markets is still trading in the fours, called mid four and a half, something of that range, right? I know people are saying five, but it's not trading there it's trading around four and a half so so we're much better off putting capital into building than we are to buy on multifamily i think the opportunity is in office but but to to to buy office it's i need a seller and kind of the quality the scarcity of new product the quality of the tenants the industries that are there while i feel like we're always defending that it's a good market it's going to come back it's not lost on the owners and they know the value of what they have so it's very hard to get the remaining good quality office buildings to trade there's probably some fatigue there i mean we've been through covid we've been through a potential recession there's a whole number of things that have happened but they're you know they're also tough and so you know making a deal has not been particularly easy i am seeing more off-market stuff than on market which is a good sign they're coming to us saying well maybe we'd make a deal here's kind of where we would be but um so that's a long-winded answer to your question because if i'm able to make a few big office deals then you know the ratio could float back down to 20 right and if most of our capital and ends up in just building apartments it's going

to float resi is going to float up to 30 right so i don't know it depends on how you know what comes available and what we're able to do and you know as you kind of think about the opportunity to kind of recycle um you know maybe out of some some office and and purchase additional office you know what kind of qualities would you look for in new acquisitions um in terms of location or you know how old the asset is that you don't already have and then you know if you look to kind of fund that through recycling some of your existing assets you know you talk a little bit

about you know what the bid for that office is and pricing that you could potentially get okay okay so i think when i hear people talk about recycling i think they're thinking about one of two things one is like you built a building maybe you leased it for 20 years to a credit company and go well i'm going to sell it because it's worth the most it's going to be worth and i'm going to go do something else because now you know the return profile this is going to be some fixed number whatever it is we don't have a lot of single tenant buildings like that so we don't have that the other connotation of recycling is i'm taking some old and garbagey my empty aluminum cans i'm turning into something bitching like a pillow or whatever right but we own the best buildings right now so why would i sell the best building to buy maybe another building that maybe could be equal or less so i i'm probably not a guy that's running around trying to do a lot of quote-unquote recycling, right? We're in the best markets and we dominate those markets with the buildings we have and we own the best buildings in those markets. I think that's literally undisputed. Okay? Now, there are other buildings that would be in the top quartile of our portfolio that are office buildings and I'd very much like to get them. But then those owners have their own opinion about that, so we already talked about that. What was the second part of your question?

I guess just, you know, you talked about maybe looking at some of those buildings that are in the top quartile. I guess, you know, how would you think about funding if it is with dispositions?

The capital for it. The capital for it. Okay. So we have always, and we've had these discussions, actually in this room I've had these discussions many times where I've said, even when we were extremely flush with cash, we were paying down debt. We had so much cash. We're building buildings through pure cash flow. Most of that, all the construction from 1996 to the point where we're now doing that landmark residences project was done pure cash flow, no construction loan. My last construction loan was in 1996. Okay. Now, our cash is tighter. We still have a lot of excess cash. You're able to see that because you can see it from our AFFO and what percent our dividend is of our AFFO. but we don't have as much as we used to have during that time when we even had a like overwhelming amount of cash and we were paying off buildings remember we went public with a loan on everything and we went into covid with a loan on roughly half the value of our apartment portfolio and and half of our office buildings did not even have loans on them and all of our debt is non-recourse first trustee debt we didn't even we just paid the buildings off right now and those have been held as reserved they were just holding equity we were just storing it in there right all that time i was also doing deals with sovereign partners and building our sovereign equity platform and i kept saying people would say to me billerman said to me hey if it's such a good deal why don't you take the whole thing and i said because if i don't give them deals now of the stuff they want they're not going to be there for me when like there's no capital in the market and you have to be very contrarian to do deals they're not going to be there for me because they're going to say you're a cherry picker right so that has played out to be extremely true okay so you know we're not big fans of issuing equity we we don't use public equity to really raise money I don't like diluting ownership across our shareholder base or effectively selling pieces of our buildings but also I think any deal I do any deal I do right you never know for sure market timing if it's going to be a good deal. So it's always good to diversify your risk on the equity, especially when it's a very big check. With all that said, they have been with us. And while today we have less cash and have been forced to take a smaller piece of the deals, we used to take 30 plus, now we're down 20% of the deals. They're there, they're doing deals with us. So we have enough equity with our partners to just continue buying there's nothing that's out of our reach so we're still able to be active when it's not super popular to let's say buy office buildings in west la and that's an extremely valuable asset that doesn't get counted on your balance sheet but it's a it's a optionality that's very valuable and then you know would you how would you think about kind of the funding needs for some of the multi-development that we talked on earlier would you would you kind of look to the similar kind of JV partners there or look to fund that in a different way? So you saw the choice I made on landmark residences. We needed not a large amount of money for that project. It's extremely valuable project when it's done, like multiples of the loan so we went and got a 375 million dollar construction loan because it my thought in the market today you know market moves around oddly I thought residential construction was strangely cheap those loans there's a lot of people that wanted to make it we had a lot of bidding for that loan so I went that construction loan route to build that we already owned it right we'd already spent a lot of money on getting it right we'd already started construction. And so, you know, it didn't take a lot left to finish it, and I don't want to stress our cash position or our balance sheet. If we were to take on, on some of our sites, a lot of new resi construction that was a drain, my guess is, because I don't have a high tolerance for debt, my guess is I would move over and diversify that risk. I don't think that the one construction loan that I got is very risky considering the value of the project and where it's at today and the income coming off it. I mean, we can miss by 50 percent, still a good deal. So that's an easy one. But we're not big consumers of debt. So my guess is another big draw on capital would come with some partners. And then, you know, at what stage in kind of the development process do you look to engage a jv partner um just in the construction oh if i were to do that with a resi deal with a resi construction deal yeah um we usually like to have it totally baked so that when they come in the deal the kind of the only risk is maybe we screw up on construction although we even have to sign construction contracts and uh or that maybe i got the rental rates wrong or something like that but usually we own buildings right there and the rental rate's pretty easy to see because we're already renting at that you know we're doing those deals so so um i like to make it as low risk a project as possible so that the cost of the equity is not exorbitant because they feel there's a lot of risk associated with the construction project and then you mentioned being debt kind of adverse you know where do you think the right kind of leverage level is for for the balance sheet um as you think about kind of just over the long term the right leverage for our balance sheet yep um when we went public we were running the company at around like in the 40s the low 40s uh when we went into covid we were in the high 20s uh some of that was a function of just we had just like a lot of extra cash and i need to put it somewhere so i was paying off debt uh some of that was a function of how cheap debt was for a long time uh but uh we're not very aggressive users of of debt i mean if i if i don't have something I really like to use the cash flow my go-to move is to just pay down debt and and and I did have done that for most of the 20 years we've been public and I did it when we started the company in 91 and we had funds and we started making cash flow we were just reducing our leverage in those funds so

that kind of that's the trajectory I tend to follow great and then one of the questions we're asking all the companies is you know how is Douglas Emmett using AI and you know we've we talked a little bit about the impact on on company formation and office demand but how are you guys uh specifically using it within your within your company um and are you looking to build anything proprietary with with respect to leasing or just look to use it in a third-party manner we're we're not a creator of new software and we we house it on the cloud uh we try and use

you know big saas companies uh we have a number of programmers but they're really like more focused on taking established software and the adjustments that they let you make for the type of reports we want to draw data out of that software, whether it be accounting software or we have some database software that does a lot of functions in the company. I don't think we'll create using AI any kind of new softwares or not that I know of. Now, I do know that we're testing AI solutions for lease abstracting and a couple of other things.

I think we hope to have the lease abstracting completely operating by the end of the year but we're not innovators around software i mean we're users of established working products that makes sense um and then maybe just you know an overarching kind of question and we've we've talked a little bit about it but you know why is kind of the the multi-tenant uh you know smaller tenant space kind of been the right uh business strategy for Douglas Summit over the years versus going over kind of larger tenant spaces well that's a that's actually a good question which I have an answer to but that's a good question so at its core

uh we're a small tenant market so if we wanted to ignore small tenants we probably shouldn't be buying buildings in West LA or in the markets that we're in but it's come with this really great benefit, which is that it takes a very robust and encompassing platform to be effective with small tenants and to make it as effective as, let's say, a residential platform where the tenant doesn't expect to overly negotiate the lease or do big TIs or big commissions need to be involved. And so because we've spent the money to train and build our platform, we get a lot more bang out of our out of small tenants than most companies get out of large tenants we uh and we have these depicted in some of the stuff on our website but our uh our cost of leasing or you know our leasing costs commissions downtime etc are about a third a third less than our comp set i think most of that is because they're using large tenants who have a lot of leverage and demand a lot of TI's and free rent and all the rest of it and we don't tend to have to give that we provide a more of a full service structure tenant comes in we can quickly say to them you know if you need this one wall changed we'll do it don't worry about the cost because we have 100 people in our construction company and we can take them to a design room with designers and and they will sit right there and they'll go here's carpet paint mullion colors that go together uh you can choose them if you like cool colors warm colors etc and we buy huge amounts of this stuff and we also are able to control the build outs of our tenants uh because they're smaller and make them very useful for future tenants instead of something odd with like circular conference rooms in the middle and stuff like that so it's really brought down our releasing costs, and that's depicted in how much AFFO we tend to have, how much cash flow. We've used that cash flow, as I already mentioned, to pay down debt. We've used it to build new buildings. We've used it to take our position with joint venture partners to buy buildings and funds. So that's been a very valuable process. So having small tenants has been good in more than one way. All right. Thank you so much. Thank you.