Q3 2020 Douglas Emmett Inc Earnings Call

Ladies and gentlemen, thank you for standing by welcome to <unk>.

Quarterly earnings call today's call is being recorded.

At this time, all participants are in listen only mode.

After management's prepared remarks, you're already seeing instructions for participating in the question and answer session.

I'll turn the conference over to Mr. store, not going <unk>, Vice President Investor Relations for Douglas. Please go ahead.

Thank you joining us today on the call are Jordan Kaplan, our president and CEO, Kevin Crummy, our CIO and Peter CE, Mark 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 and 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 at <unk>.

We reach the question and answer portion in consideration of others. Please limit yourself to one question and one follow up.

I will now turn the call over to Jordan.

Good morning, everyone.

I know, we're competing with the election news.

Don't worry it's either candidate for President concedes during the call, we'll let you know.

Our third quarter results still reflect major challenges from a pandemic, though we did see some incremental improvement in rent collection kind of utilization and leasing activity compared to second quarter.

As of today, we have collected 91.4% of our combined second and third quarter revenue, including 95.9% of our residential rent, 93.7% of our office rent and 39.7% of our retail.

Once the addiction more trends in our markets expire or even just come in line with other major U.S. cities, we expect current collections to improve and to collect a large portion of the past due amounts.

In prior downturns, the impact of personal guarantees and small business owners commitment to their companies have kept our default very low.

Compared to last quarter, we increased our deal flow from 125 deals to 175 deals with increases in both new and renewal transactions.

We accomplished this despite the fact that many tenants are deferring their decisions during this uncertain period.

We have not observed a trend toward tenants, giving up space to work from home and in fact, we are seeing more tenants coming back into the office.

Our small tenants don't pay significant mass transit parking or vertical transportation concerns, making it much easier for them to reoccupy their offices.

While cash rent spreads are down and straight line growth is slower since had become less focused on T.I.s, which has enhanced our net effective rent.

Having managed through three prior sessions.

Each of which seem unique we are confident that we will.

Merge from this downturn stronger than we entered it.

That I will turn the call over to Kevin.

Thanks, Jordan and good morning, everyone.

Recent Fortunately moratoriums remain in effect in California, and I considerably more restrictive than those in place and most other major U.S. cities.

We continue to work towards making enjoy there's less onerous are likely to remain in place for the foreseeable future.

Turning to construction, we remain focused on our two large multifamily development projects, which are progressing nicely.

We are now fully leased in a first phase of 98 units in our office to residential conversion project in downtown Honolulu.

The demand for this new high quality product in the center of the CBD has been outstanding.

To complete the next phase, which is comprised of 76 units and building amenities in the next few months.

I brought one high rise apartment construction remains on schedule to deliver our first units in 2022.

We also continue to work on securing additional entitlements to build more apartment units on sites we already.

In September we successfully increased the allowable density at Atlanta apartment community in Honolulu.

The 12 acre parcel since a short walk from the CBD and currently has 460 apartment units.

A news only increased our heitman at the 400 feet and allows us to build up to 2800 additional units on the site.

As I discussed last quarter property sales in our markets remain significantly below normal levels.

Reflecting today's low interest rate environment, we have seen a few smaller trades at record prices for long term leased office properties.

I'll now turn the call over to Stewart.

Thanks, Kevin Good morning, everyone.

In Q3, we signed 175 office leases, 40% more than during Q2.

These leases covered 735000 square feet.

Putting 171000 square feet of new leases and five.

<unk> hundred 64000 square feet of renewal leases.

As Jordan mentioned, we're seeing kind of more willing to trade tenant improvements for competitive office rents.

As a result, we reduced our annualized office leasing costs per square foot this quarter by 30% from a year ago and 20% from last quarter.

Cash leasing spreads for the third quarter were 14.7% for straight line rent roll up and negative 0.7 per cent for casual.

While our tenant retention was in line with long term averages.

Our office lease percentage declined 1%.

89.8% at new leasing volume remains below pre covered level.

On the multifamily side, our leased rate declined from 98.7%.

97.5% that's.

That's continued university closures.

And military deployments in Hawaii, I call it slightly higher than usual they compete at a couple of our properties.

I'll now turn the call over to Peter to discuss our results.

Thanks, Stuart good morning, everyone.

First to show the gross impact of the pandemic and very tenant oriented we've been fortunate moratoriums in Los Angeles I'll compare this quarter to Q3 2019.

AFFO was 40 cents down 11 cents per share from Q3 2019.

Major items contributing to this decline were the following.

Write offs from slower office collections reduced her epo by about eight cents per share.

Parking utilization, though up from last quarter reduced our EPS by about four and a half cents per share.

Lower office leasing, resulting in lower occupancy reduced our AFFO by about two cents per share.

Uncollected insurance recoveries related to this quarter from an apartment fire reduced our AFFO by just over one cents per share.

He's negative Epo impacts were offset by about three cents from higher than average in place rent and about three cents from operating expense savings.

Hey, I thought, though declined to 26.6% to $69.2 million.

Same property cash NOI declined by 15.5% at lower revenue was partly offset by office operating expense savings.

Now I will compare Q3 2020 to Q2 2020 to highlight the most recent trends.

Apropos went down a net one cent per share up from last quarter largely as a result of the following.

At our office collections, lower write offs and slightly higher parking income increased our ethanol by about four cents per share.

Normal seasonality in our utility and higher insurance premiums reduced our EPS by about four cents per share.

And the uncollected insurance recoveries, where do you start out with a by just over one cents per share.

At only 4.4% of revenue our DNA for the third quarter remained well below that of our benchmark group.

Given the continued uncertainties around the pandemic and local government ordinances, we're not providing guidance.

No. It's still early in Q4 trends in cash collections in parking so far appear to be consistent with the trends in Q3.

We expect occupancy to continue to decline until leasing volume improves.

Once the election moratoriums in our markets are allowed to expire or come in line with other major U.S. cities, we expect collections to improve and to collect some of the past due amounts that.

That is unlikely to have the material impact on the current year.

I will now turn the call over to the operator, so we can take your questions.

Well begin the question and exercise.

Well that's a good question you May Press Star then one on your Touchtone phone.

Fuse in a speakerphone, please pick up your handset before pressing the keys.

Withdraw your question. Please press Star then too.

As a reminder, please limit yourself to one question and one follow up.

This time, well pause momentarily to assemble the roster.

First question.

Comes from Dave Rodgers of Baird. Please go ahead.

Yeah. Good morning out there Jordan, maybe start with you or Stuart I wanted to talk a little bit about pricing power and the pricing that you saw in the quarter. You you guys talked at length. There just about.

How customers were trading a the T.I.s an LT is I guess for the lower face rent, but what do you expect to see in terms of pricing power as you move forward both on the renewals on the new leases one I guess overall and then two I guess as you divided up between the valley, the Westside and maybe a lesser extent Honolulu, what type of pressure do you expect to see in those particular.

Yes.

Well I mean.

Pricing power that's a that's a.

Great way to put it I don't know if we have pricing power I mean were always react in a market that we're facing but but.

Just to back up a little bit in general what we want to do is keep occupancy as high as possible because that puts pressure on rental rates right I mean vacancy, but the pressure off I continued to pressure up we're in markets that are relatively well occupied so that it's allowed us to hold.

Our own pretty well, we're doing even better than that and why.

So put quite a decide where to very tight market, but if you look at our markets here in L.A.

We've been able to.

Do fairly well in terms of Brad what I think you're climb rental rates.

But you're seeing a little bit of slippage each quarter and that's as a result of the fact that while we're holding our own on renewals or it's hard to get the new deal flow all the way up to where we need it to be now I'll say and I say this all the time I mean I'm just so happy with the response from our operations because.

We were off about a point and a half in the second quarter. We've now started narrowing that and working that number down hopefully we can keep working it down because that's kind of the game until the thing turns around their heads back.

Heads back up which I'm optimistic will happen sometime in 2021.

Maybe that's not totally differently just in L.A., what's what's the difference in your new rents on a new versus renewal basis. It. If you said that are getting that I didn't see it but is there a meaningful delta between those two right now.

Well it's.

It's very you know since you don't do an office lease you know two years in a row that the best stats that we can get you that are based on stats not have feelings are that roll up roll downs stats, which we give and we're still obviously rolling up on me since I think the straight lines about 14, 14%.

So if you were to say Wow it used to be up in the high Twentys now it's 14% that you give me some instinct that things are moving off of that which is why we tried to say during the call, which you would expect that they are but in fact, the overall lease economics seem to be holding up pretty well because as you heard.

And Stuart section, our other leasing costs are down dramatically compared to last year, and even down compared to last quarter.

Okay. Thanks, and then maybe just a follow up for Peter can you break down the write off that you talked about between anything accounts receivable related the straight line rent write off and then any security deposits. Your flight third quarters. Those details would be helpful. Thank you.

Yeah. So a lot of the impacts I mean was that in sports that's better than.

In the previous quarter, there's that includes the better collections. It includes a small amount of write offs for.

There's very little straight line and that number this quarter.

And it also includes a small positive impact from a improved parking.

<unk>.

Right.

Okay. Thank you. The next question is from Alexander Goldfarb of Piper Sandler. Please go ahead.

Hey, good morning, good morning out there.

Uh huh.

Hey, how are you toward so just you know a few questions here two questions first on the Red collections. Yeah would you guys look at your portfolio, especially now that you've been through two quarters of the cobot what percent of the depressed collection are people just ghosting you like choosing voluntarily.

To not pay the rent versus people, who literally have gone.

So I'm assuming on the retail side, there are probably a lot of tenants who are either closed or just you know don't have literally the means to pay the right, but there's still occupied space trying to provide the amenity that they're probably a bunch of other tenants who have decided hey, we don't need to pay will just keep occupying but that will settle up with the house you know whenever the moratoriums are lifted I'm trying to understand.

From a recollection, what the snap back would be once the eviction moratoriums and.

Well.

Got a pretty good idea how it first of all I would say if you go back and we believe that mean numbers will hold for this recession. If you go back to the last big recession, which was in 2000. They are actual default losses ran around 3%. Okay. If you look at what's going on right now and you look at that.

Collections that were missing from our office tenants we have that.

Very strong feeling that we'll be able to collect that money into that and most of that money, but you know we'll see it's it's very hard to see through the fact that the moratoriums.

You can tell when people just kind of horrible attitude towards units like stop Bugging me I'm told I don't have to pay in their front just trying to not to pay all right. So we're definitely getting that on the retail side.

Especially small retail not large retail, it's pretty easy to see what's going on with them and so and they represent as we've told you in the past about.

Half of the money that we are collecting and you know you know you you might take a guess at some portion of that we're going to make deals and that's where we're trying to make deals because most of that retail access an amenity to our office and retail is only 5% of our portfolio anyway and there you know we want to protect that protect that group.

Right because you went on was the amenity.

Okay. So so on the office side Gordon.

Most of the people who are paying you were just goes thing you, whereas on the retail side, it's a jet.

I don't know how much of the retail sites, the Jay but I could tell you. If you look at our office buildings on our tenants I'm.

I suspect our collections would be dramatically higher if we did not have the more times I mean, I see people that aren't paying that fits it super activating I mean [noise].

Super I mean, some of them have are managing more capital than many of them are managing more capital than we are.

Okay I.

Second the second question Peter on the effective Brad can you just give us a sense of the impact so lower T.I.s for lower right, but when you boil it down on effective rent basis, where do you stand for third quarter leasing versus prior quarter. So our net effective yep Yep Yep improved a little.

But a lot of the same just trying to get a comparison for for the net effect is now with the new lease economics versus prior periods.

We were talking about Peter to answer, but I can just tell you quickly we were talking about that and looking at it and I think our net effect is there still as strong as they were like pre pre.

Free pandemic, we'll call it so.

So if you look at the net effect is before any pandemic ended last year or whatever we're hitting those numbers because of that big drop off from.

From that on the T. eyesight.

Okay.

Thank you Jordan.

Alright.

Thank you next question is from Jamie Feldman of Bank of America. Please go ahead.

Great. Thanks, guys.

Right. So I guess as you you talked about how you think occupancy continues to slip. So you see and so you see leasing volumes pick up.

Where tenants going obviously that implies that you're just going to continue to see move outs. What are you hearing from people that are moving out.

Yeah, I think what we're seeing is kind of a normal course of business from our retention.

In standpoint, so we've got a drop off in the volume of new business that we're doing.

To do what we're used to and we have our normal course of move out. So we're not seeing any trends like we said, we're not seeing trends.

I want to go work from home or anything like that are you seeing the normal level move outs that we would normally see the less backfill on them.

Usually rely on to hold.

Hold on to occupancy and grow up.

Okay.

And then you know if you read some of the press reports or the broker reports you know there's definitely different pockets on the west side that seemed to have larger spikes in sub lease can you just talk about across the different markets, where you think things are or maybe better or worse.

Yeah Yeah.

We've seen those reports.

We sublease space. If you read those reports is picking up and everything were reading through that's largely concentrated in the larger season, so doesn't tend to impact the smaller.

<unk>.

There are.

Well I think the market stays in Santa Monica.

The city are.

Ticking up a little bit but again.

Those are concentrated in a very large tenant spaces.

Are you seeing any does get broken up though to become more competitive with smaller.

No I mean, I can't remember you know full floors multiple floors come back stuff like that it's a bigger spaces, but I don't think people are proactively breaking up space I mean that tends to be something that we do that most of our competitors.

It break up.

Okay.

I think some of that space is also in buildings that would not be very breakup bubble you know.

Okay, and if I could just ask a follow up to one of the earlier questions like what what would you say your current mark to market is in terms of portfolio rents to market rents.

It's about 6%.

Hello.

6% below.

Right.

We had a 6% markup to market yet.

Okay alright, thank you.

Yep.

Thank you next question comes from Frank Lee of BMO. Please go ahead.

Hi, Good morning, everyone I'd Jordan you you mentioned in the past that I loved 32 is it conversion it was going to cause some disruption in the market and possibly create some tightness from that office vacancy standpoint I.

Just wondering how you think that is playing out or is there anything else to read into at least percentage being down in Honolulu during the quarter.

Well I don't know about the slight lease percentage reduction, but I can tell you did 11 32 bisha planned that we been going through in terms of occupancy in downtown Honolulu as worked spectacularly I mean, maybe one of the best ideas. It's come out of this company right.

Frankly, I'd be completely changed the market metrics.

In terms of office leasing and that downtown market, but even more.

Importantly, it's it's starting something then you yeah I mean, we're obviously we're in front of the city Council lot, we're talking them about what we're doing and it's it's starting to change the face and feel of downtown because of not just that project. The work there but are there what are we doing around that building and now whats happening in <unk>.

Right in the center of town. So it's been it just.

Spectacularly successful and and.

Both on the outside and I mean boy, we brought out almost 100 units.

And leased all of 'em within a quarter.

No that was.

I have to almost say unexpected it moves so fast so our feel for demand or feel for rental rate all extremely well confirm our feel for the impact on downtown extremely well confirmed there's a little bit of movement from tenants moving in and out in that market, but.

Still a the occupancy is high and the pressure on rental rates is good.

Down from 11, 32 way more office tenants either.

<unk>.

So you are going to see some timing noise quarter to quarter, but there.

Good up arrow.

Okay and then second question have you noticed some incremental increase in office utilization rates from last quarter do you have a sense of what percentage of your tenant base are back in office now and where we can see that increased as we close out the year.

Well, we think <unk> I would tell you that we think it's around 30% to 40%.

Is the utilization numbers, but its body and on off or whatever but more importantly.

And I mean, I, particularly see I think we all see it is that.

Wall offices are not.

For maybe formally opened they're not all showing up in a 30 or nine amazing I was sitting at all different times people coming into the office, including weekends and all the rest of it. So if you were to say Oh I'm going to do a consensus count at a specific time in a weekend and see where we stand you're kind of talking about 30% to 40% number but if you.

Said to me across our portfolio of office tenants, how many of our tenants have some people come in at different times it seems like.

You know we are you know at one point were able turn one elevator off we have floors that we didn't think were being addressed I mean now we have people.

People are all through the buildings.

Okay. Thank you.

All right.

Thank you next question comes from Manny Korchman of Citi. Please go ahead.

Hey, its Michael Bilerman here with many Jordan I was wondering if you can talk a little bit about sort of your eagerness.

For external growth and it looked like they recognize that your stock.

Price doesn't allow you to sort of go raise capital.

Today to make those deals accretive.

But can you talk a little bit about sort of how private landlords are sort of dealing with the struggle that you have as a large organization a public company you can weather the storm pretty well, but I got to assume a lot of your private landlords that may have leverage they rent collection issues may have capex issues Nate.

We have a larger desire to flip those assets into an entity like yours and you've done okay. You that deals before the difficulty is your stocks at 25 26 box and I think you would believe that an idea the hell of a lot higher so is there some way to structure transactions.

Yeah for the NIM, where one plus one is greater than two.

Or thats, just not really a focus of yours.

We're working I can't tell you how hard so the <unk> the foundation of what you're asking is do we still believe in the market. So much that we want to continue to grow in the market and the answer is absolutely, yes, and we're doing everything we can to acquire assets at believe me every trick every.

They figure out a way for the obviously I don't want us I don't want to do an LP unit deal, where I'm selling them my building for $500 Lenin mine, there's a three for $1000 a foot, but we are working on that.

On every front that we can now I will tell you.

If were successful.

That.

The market.

As would be the case for you or anybody else right. If you own a building in this market and you have weathered a lot a recession, you know about that sort of long term strength in the market and you're not going to sit there and do a deal and their recession that you feel has what I'll quote on recessionary pricing.

But even if we can just break these people lose at the normal good pricing, we would do it and we are working on it but.

But you know even slower now than usual, but yeah were vote. We're we're doing our best I don't think we have a.

The stock being down it hasn't been that big of a problem I people without piano deals they understand that and we have plenty of other ways to access capital, but you know we're we're working on it the best we can certainly there are some older families that could be wearing out.

But they also have been emboldened by living through many recessions and especially this one where they feel like Wow why would I take any kind of discount or anything at a time when I'm pretty sure that next year, we're going to be back to where we were in 2019.

And so right, which is why I'm only take those assumptions if we can get him to make deals. So you know we're doing our best.

Well I guess, if you if you take those two comments one just your enthusiasm for staying invested in the market. But then also potentially sellers wanting to hold on to them they sort of view the other side positively.

Why are you using some capital more aggressively to buy into your portfolio would you know extraordinarily well and.

You know on the screen, where it trades on a per foot at a yield basis.

Well, you're saying why are we buying back stock and I would say this.

I.

I don't believe the way you're kind of implying it's that simple of a decision for a company to buy back at some stock. It has a lot of other ramifications what your debt levels are.

And frankly, when you buy back stock you know if I if I was to buy back stock. At 25, then it went to 20 would you say that was a smart guy 25, <unk>, probably not right. So it puts me in a business and I'm, not saying I'm against buying back stock by the way that it puts me in a business in your guys' business right now, making a decision about.

The stock price and where its moving around as opposed to decision about real estate, where I have a lot more confident.

Not again, obviously not been against buying back stock I bought personally I've been buying the stock.

But it's a very different decision for the company than it is for me personally and so I mean I'm slow on careful to make that decision.

I'm I'm not necessarily against that either.

Right I guess the the difficulty is if you do find an acquisition the story about it right if you're you're not going to be paying 500 Bucks a foot right, you're not going to be paying where your stocks trading it's going to be something higher right, where you said I Wanna get good pricing not pre recession pricing, it's going to be able to demonstrate the value of that acquisition.

To the street relative to you know.

Purchasing your own portfolio. So I think that's the <unk>.

Their capital allocation decisions are linked together.

I don't think they're linked as tightly as you're saying, but I mean that's.

It'd be longer conversation I mean I would.

Well, we had good quality real estate into markets wherever focus, which I think we get great long term gains on and I think it's a you have to have.

Tremendous extraordinary confidence to trade with in your stock against were not where my real estate is gone, but where the stock market is going and right and in stock market trades you know.

<unk> remark to its own drop not the drop of a a real estate market, which are which.

I have a lot more confidence around directionally in supply demand characteristics and industries driving demand.

And all the rest of that.

Just last one that I assume joint venture capital is one of the arrows in your quiver that you can use can you talk a little bit about their desire to partner with you today to buy office assets.

They have a high desire to partner to buy a house handsets and it it it it's killing me that we're not able to provide them a more profit I want to provide a more product we're trying to provide them with more product.

And and you know when you hear me discussing <unk> you know do you, you're saying I know you're trying to buy assets, believing in our conversations with them, we're saying that double I mean, we're going we get it we are doing our best we're trying to take anything this weekend.

And I think it's great that you're buying stock personally I don't want to make it seem as though that's not a good thing that I'm, certainly demonstrating you or.

Obviously focused obviously on a lot of the stock already so it was just much more talking about sort of capital allocation at the at the firm level. So thank you and have a great afternoon.

Thanks, you too.

Thank you next question, Steve Calk ball of Evercore ISI. Please go ahead.

Hi.

I guess two quick questions I noticed the the income a multifamily was down the other income I guess and Peter talked about the insurance up payment I'm, just curious sort of what happened there and if it's just a timing issue was there a reason that wasn't booked in the quarter and I guess what are you expecting for fourth quarter is there a kind of a catch up payment we all get to.

Well, how does that sort of work going forward.

Yeah, It's it's theater insurance is always unpredictable.

Maybe a little slower than we would have liked and you know we hope it moves fast and we catch up but it's.

It's deeper it's too early to tell.

So we should not expect any additional payments or this was just a kind of an off quarter no.

We're going to recover this you know it's just a question of what [laughter].

This quarter.

This quarter <unk>.

End up with.

Yeah, one quarter's worth.

Yeah. So it gave me you realized you can't book it until we get it yeah. So we know each quarter monies owed to us, but then you have a bigger negotiation with insurance companies like you know getting checked out of them.

So okay and attract the checks he can make it go Oh. This is for your work on new units not for the rate you're still talking about how much rent. So its not such an obvious I mean, it just comes in in Oh on say, a bad way, but in a way that wouldn't be smooth <unk> just to match up.

Perfectly with the quarters of income that should go to because you can't book and he get it yeah. So it's coming it's just a question of when.

Got it Okay, and then you know I was a little surprised that you are office expenses were up.

There were a lot higher than what we were assuming and I know, there's some seasonality in the business on expenses, but you know given still the low utilization rates of the buildings you know any thoughts on maybe what expenses due in the fourth quarter and maybe in the first half of next year I, just I guess I would have thought they would have been a little lower.

Well, so I mean, let's start with just the seasonality, we typically get about 30% of our utility cost in the third quarter, it's the summer months rights.

In July August September people are running air conditioning and Apple.

At the utilization rates that we've been talking about 30% to 40%.

On the air condition, that's for one person.

Running for the entire suite.

So that kind of pushes pushes US you know the numbers are down versus the prior year, So we're still saving money versus versus prior year.

Oh this was the fourth quarter goes I mean, typically we see utilities come back down, but we have we have others.

Things.

<unk> spending.

We expect to see about a two cents impact or so that you know in Q4. We also had in a in those expenses an increase in our insurance premiums and we only had two months worth in the quarter. So.

<unk> impact of that in the fourth quarter. So yeah, we're going to see.

It's an office there on expenses in the fourth quarter.

Okay. Thanks.

Thank you. The next question is from Nick Yulico of Scotiabank. Please go ahead.

Oh. Thanks. So just first question is on the.

You know the write off the eight cents I just wanted to be clear if that was that's a new receivable write off in the quarter.

And you know what what drove that happening ill third quarter versus the second quarter. How we should think about going forward or you had a chance to do it. They were there would be additional write off on the office side.

Yeah. So what we gave you.

We gave you.

Eight cents is the comparison to last year.

You know what we're really focused on there there's I'd say earlier in the call that there's very little in terms of new write offs at new tenants.

So most of that is just the impact of continued non collection.

Against the people that we wrote off last quarter.

Okay. That's helpful. Thanks. My second question is is just about you know your your portfolio and you know I guess any lessons you're learning or hearing from tenants as they are doing renewals are contemplating changing their space now and.

Yeah, Colgate World going forward, and what you're kind of learning about your buildings and you know what do you think they are well set off the well position for you know the office environment that could change now Ah post coated.

Hi, I have to say I mean, one of the things that's a lot of concern obviously, we listen to other People's calls me here I can see some 15% unless your numbers and one of the reasons I think we're at such high numbers is that in general not the very large tenant giant floor plates, but in general our tenants across our.

Portfolio and I think actually most of the west side since it's a small tenant market, they're already built out of like 225 feet per person. So I don't think there's a lot of T.I. are rebuilding meeting to go on and you're seeing it in our renewals, they're not coming in sandy to renew and I need to rebuild my space.

I think people space, it's been pretty much built for a little bit of a more relaxed environment and and and it already accommodates the six feet or eight feet or whatever you want to go here in terms of occupancy.

So I mean, I think frankly, if I was guessing I commend you'd be even higher if we were in markets, where there were saying people could go back into work in the office and even without that they seem to be coming in.

Okay. Thanks. That's helpful. Just just last question is on a profit 15, what what did you guys spend a assume you guys are spending money to two.

To fight this yeah. What did you spend have you already incurred any charges to AFFO is there another choice to calm in the fourth quarter.

And then I guess the other question is are you guys still feel I must say hey, let's say there's a stairway. This does pass are you guys still gonna take the approach of ER, yeah, not giving an estimate on what your tax liability would be if this passes.

So all right on sensor so they actually the question of what we spend which Peter said and done in the last call. It's about probably about two cents.

On that and some other political stuff in the fourth quarter, and maybe like a little less than a penny in the third quarter.

In terms of.

Not giving an estimate it's not that you know there's a number we know and we're keeping a close in because we don't want to make it out we really don't think even when people do give estimates there's any way to get any kind of estimate I don't think functionally its operational I don't think they are functionally would be able.

I'll do it if it passed so you know start out with.

How many for how many years is there going to be before someone figured out somebody to do this or does someone come up and saying Hey, This just doesn't work and as I noted proposition or something like that that's number one and then number two is.

Across all these properties, telling me, where you're going to end up in a board approved a board three judges of figuring out a new value for it when there hasn't been any market transaction related to that that property.

There's a huge swings in that process all the time right now even without all the properties being to be reappraise. So I.

I just don't think it's reasonable to make any kind of an estimate it's not that we haven't secret Ethernet, we're not giving it out.

Okay. Thanks to it.

All right.

Thank you next question is from Rich Anderson S.M.B.C. Please go ahead. Thanks.

Thanks, Good morning, so on the a issue of Moratoriums I guess, it's true that there is no credit impact if they take advantage of it regardless of their circumstances, but is there a kind of a card it black market [laughter], where you know their their reputation would proceed them up.

The landlords in the in the area is that a is that a real dynamic that could happen to folks that are sort of playing this this card.

No.

I.

<unk> you could only hope right I I mean, there's not going any any great way to know until <unk> and recovery.

And to see to what degree.

A landlord start saying people yeah, I I got it you're saying your credit, but we saw the way you asked it and therefore, we're going to require whatever that the bigger I'll see a bigger this a bigger that I. You know you you will see the market reconcile that you'll probably see some reaction from long term owner.

As maybe short term owners, you'll see less of a reaction that's always been the case.

I would say for Douglas found that we've always been such a hawk on credit anyway that it is.

Unfortunate that did more speaks to the morality in these people than anything that they're choosing not to pay but I.

I do think in the end no end up paying because I have confidence in the way, we evaluate credit and when I look at the tenant base. So I'm not sure how whether there is a shadow mark on their on their on their credit profile or not I will see what happens.

And then you know your commentary about work from home not being a kind of a a factor in your tenants decisions and I guess, you're seeing that in the numbers just by the way you know the cadence of your your renewals and all that sort of stuff seems kinda normal but are you asking the question. I mean are you you got all these tenants that.

<unk> that can provide you a lot of information about just mindset centered around work from home and how it might change I know all your peers are kind of saying the same thing and I happen to agree.

That work from home will perhaps be a you know the exception not the rule, but maybe that's an option here or there, but not as big as the <unk> motion for the moment are suggesting I'm wondering if you're really asking the question to sort of form a really you know informed opinion about it.

So.

We track when we lose a tenant out of our portfolio and we also track new tenants that we chase and don't get.

Okay.

Yeah.

And what you saw in the prepared remarks was we're not no nothing of overseen as any kind of trend of work from homes, playing a factor in that okay. Obviously, new tenants I mean, they're saying, we're looking to lease space, we're trying to get him our portfolio. When we don't get them, they went somewhere else right and and and and on the.

Renewals I mean, you said it yourself.

The you know there's a lot of levels of work from home are people going to just take you know.

And I don't I don't think many people are so extreme to go you know the <unk>.

Yes, mark its going to waste everyone's going to work from home, but you see stuff as well will be a little less 'cause. There's some kind of you know some percent of people work from home or some sort of people do this thing of sharing office or hot seating yeah.

Yeah I have to tell you the only mechanical thing.

That makes sense when you address work from home at least in our markets.

Could be four tenants because we're not hearing anybody say you know <unk> I'm going to have a a group of people working for me that are never gonna coming out of it. So mechanically the only thing that makes sense is there's going to be a come from person. If people are going we really embraced hockey didnt, even when it comes to offices, which is that you know.

[noise] plug in your on Monday, and Tuesday, PGR on Wednesday, and Thursday, and Stuart have added on Friday, Okay, So and I'm everything we're hearing it's the opposite I.

I mean everything.

People don't like sharing space, they want their own space and people want them in the office the entire week and you know certainly covert doesn't encourage people towards a hot seeding type of environment. So you.

You know when you look at the.

Mechanics of.

It didn't it for some percent reducing the amount of office to Matt I was just speaking for our market.

There are mechanics that nobody likes I mean, nobody so I I don't know how a work from home scenario.

Would have a more we would be.

Particularly impactful in fact, I think it might be the reverse a little bit of people appreciating the space being back in their office wanting to be back in your office when they feel like they can come back in I think you will have people looking forward to getting back to that rocky routine I'm going to work I think a lot of people Miss it.

And <unk>.

That's because I don't want to be the one the lysol the seat after stuart's been sitting at it anyway. So.

That's absolutely, but also you don't want to be the one that gets told everyone is coming back is that for you.

I I actually probably people take that Rob you know poorly.

All right I agree thanks very much.

All right.

Thank you next question is from Craig Melman.

Keybanc capital. Please go ahead.

You know you guys were very successful at keeping capex down on the renewals are this quarter and you kind of mentioned that that was a net effective basis, you're still kind of positive here I'm, just curious as new leasing kind of revenue back up here and the market may be getting used to kinda lower face rents I mean, what's your prediction or expectation.

On your ability to maintain positive net effect does even in kind of a negative fixed rate environment.

I think that I.

I mean I I.

I think that all depends on how long how many quarters, we go with a negative number and how well we're able to hold our own in terms of occupancy if we if the world starts you know if we go through the fourth quarter or first quarter next year, and then things start backing you know back the <unk>.

Improving.

Improving again and people sort of come out of the come out and.

Start focusing on growth.

I think we should be able to do pretty well I mean, if this thing becomes it all up 2021 experience than I don't know how any markets hold their own against that its going to be very tough, but I'm optimistic that especially considering the performance of the company, particularly operations leasing profit.

The management the way it's operated in second quarter third quarter, what I see going on right now that we certainly can hold our own well for the next couple of quarters and be very well positioned to come out of it with a lot of strength and that's I'm, hoping.

That's helpful. And then you know maybe taking the other side of profit 15, assuming maybe it doesn't pass today you know do you think this issue ever dies or does it just come back to the new iteration is the mid terms and maybe next presidential election, I kinda market ever where California ever kind of shake this overhang.

Uh huh.

Yeah, I think you can yeah, I think if it gets beaten Dan Dan.

I think that.

It will not be something that you see again and again, but you know I had to make a prediction about it who knows there's certainly.

[noise] a trend towards taxation, but at the moment. Its so heavily discussed it might be an overstated transfer we actually have to see what happens I think people are even more on guard than what the reality will be but I I don't know.

Okay, and then just one other quick though aren't.

Yeah Kelly.

California was in a very before the pandemic, California was in a very strong cash positive position in terms of taxation like we were adding money to savings I think we were like 25 billion dollar plus.

In terms of taxes versus the expenses. So we're not a state that.

We need to cover from what we spent on the pandemic, but we're not a state that has a.

Permanent negative it's in a permanent negative or deficit spending situation, where the federal government is.

Okay understood and then just one quick what Peter did you say the two cents of political spending within operating expenses are GNS.

I expect that to run through operating expenses in the fourth quarter yeah.

Okay, so margins should get better once.

Oh, the spending on the election goes away.

[laughter] [laughter] alright. Thanks.

<unk>.

Thank you next question comes from Vencat comment any Amazonas. Please go ahead.

Hi, good morning on is actually more towards is there any update in terms of carving out exclusions for office tenants in Santa Monica Beverly Hills, and it seems like commercial tenants in Cinemark are now required to pay 50% of Red Oak.

Oh, sorry, 50% right do you during Fourq here if that applies do you think that leads you and incremental treatment right question and for Q.

Wall.

Santa Monica <unk> look our collections in Santa Monica very good Santa Monica frankly is already carved out most office.

Beverly Hills is the place where we have our largest problems because they've included all office.

And of course, so has a functionally show house outlet.

And then our collections are good again in Hawaii, which has had it has much less a oh in a more trends.

So I I don't know about the 50% that I think you might be talking about residential but.

That that are in terms of the office collections.

They don't need any improvement in Santa Monica. They already you know, there's still little bit that's covered but basically what's covered down Santa Monica's retail.

Okay. That's helpful and in the multifamily segment it looks like Santa Monica the outperforming so way in terms of occupancy rate any color you can provide there.

I talk a little bit about it on the call I mean, we're having some university closures, it's a military deployment issues in Hawaii. So those are in fact, those are impacting kind of the properties. We got closer you feel that way and obviously the warning stuff more.

Okay. Thank you.

Thank you next question comes from Bill Crow Raymond James. Please go ahead.

Good morning.

Sure enough I want to get back into the political question and ask if I look in a profit 15 and and work from home, we're not missing the bigger picture, which is you know higher state income taxes potentially wealth tax maybe an exit taxes.

You've been outspoken on these things in the past I'm just you know.

The number of headlines, indicating move outs or.

From California is picking up speed I, just could you give us a picture of of the environment out there and the challenges that may pose.

Well I'd say covenant I think see.

I know there was talk about a well pacsun and you know we're not even going to let people leave we're gonna trap the well I mean I saw some of that I think that talk was bigger than the walk.

In terms of people.

Exiting or or leaving I think.

There's more anecdotal.

You know people that are leaving out of frustration maybe.

Me, making more noise about it than people than people that are coming and working and I I.

I just have a hard time, believing economy as large as ours that's.

That still has.

Pretty strong population growth.

He is going to you well.

Everybody's frustrated by the tax situation.

But I also think that the state is focused on business recovering and getting back to me and will employ people and so while I know there's been a lot of conversation about additional taxes and folks on taxes I also think that.

That in every area people are focused on creating a better environment for jobs unemployment recovery. So that's why I just don't think it's so obvious what's going to happen in the next year or so following <unk> as the pandemic really is relieved.

And and following the election I, just don't think its not obvious.

Okay. Appreciate that and then my follow up is focused on the multifamily.

Portfolio can you kind of give us an estimate of what percentage of your tenant base is in the kind of restaurant retail hospitality area, that's been particularly hard hit.

Well about.

They are about 5% of our tenants or retail.

I think you're asking of our multifamily tenants how cool correct correct.

Industries.

I don't know that we have to go out and I know we have a good feel for that Mike. My guess is that the rent levels, we're talking about in Santa Monica West L.A. that we're not you know most of our tenants are not in the service industry no no they're not if you're saying like working at Starbucks and stuff I'd say that very little of that.

Okay.

All right that's it thank you.

Thank you next we have a follow up question from Jamie Feldman of Bank of America. Please go ahead.

Thank you.

I think you guys said your recollections are improving and then you provided when collection data that's to queue. In Threeq you combined if I heard that right do you have a breakout for Twoq you versus threeq versus even October.

[noise] [noise], Jamie its Peter you know, we actually combine them because.

You get a lot of noise based side and you know when you collect the cash or putting that against the old balance April balance July balances September balance it yeah, so on and rather than do that and then try to explain why a one month looks like this in another month looks like that.

We think the best picture is just into the average since I started and you can see that.

Average as a whole is slightly better than that.

You know we're trending better.

We didn't give you that we collected more cash, but it does get applied backwards and so if you get beyond just did you collect more cash it gets very complicated.

Okay.

So it could get to boil it all down how much better is it like can you say basis point wise.

Gut feel.

Yes, it's approved.

We probably had about 6 million more cash this quarter than we.

Did the previous quarter, so it's moving in the right direction, but.

There's a lot of work.

Okay all right. Thank you.

Thank you again to ask a question. Please press Star then one.

Our next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Hey, Thanks, just a quick one for me can you talk about any interesting trends that you're seeing in your daily markets are you seeing any any incremental demand from companies that may want to have a location and less and less of an urban environment or kind of less density is utilization many higher end.

The only than than what you're seeing on the west side and you know I guess just generally how do you how do you see those submarkets fairing throughout the pandemic and and the recovery relative to the web site.

I don't think we've seen big difference is quite frankly, I I mean, there there are maybe a few but not many anymore, a larger tenants and our valley portfolio than there are in the west side portfolio, which Oh well.

Mainly small tenants, but then when you say utilization and Conor responses to the pandemic in terms of kind of the market I don't think there's a big difference.

Maybe it's purely that Oh, I don't know you know.

All righty.

This concludes our question and answer session.

I will turn the conference back over to Mr. Jordan Kaplan for closing remarks. Please go ahead.

All right well. Thank you all for joining us this quarter and we will speak to you again in three months.

This concludes the conference. Thank you for attending today's presentation you may now disconnect.