Q4 2020 Douglas Emmett Inc Earnings Call

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Douglas Emmett and quarterly earnings call.

This call is being recorded and at this time all participants are in a listen only mode.

After management's prepared remarks, you will receive instructions for participating and the question and answer session.

I'd now like to turn the conference over to Stuart Mcelhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

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 and 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.

And for a more detailed description of some potential risks. Please refer to our SEC filings, which can be found and the investor Relations section of our website.

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

Now I'll turn the call over to Jordan.

Good morning, everyone. Thank you for joining us.

And I'm pleased to report that our rent collection and leasing activity improved during the fourth quarter. Despite continued headwinds from the pandemic and tenant oriented lease enforcement moratoriums.

In recent months, we have started to see movement on tenant payment plans for rent deferred under the pandemic.

Good day, we have reached agreements with tenants who are at about 15% of the outstanding balances.

These deals are exempt from the moratorium protections and we have already begun collecting deferred rent under that.

Except for immaterial amounts, we have not forgiven rent and we still expect to collect a large majority of all past due amounts.

And prior downturns, the impacted personal guarantees and small business owners commitment to their companies have kept our default rate extremely low.

Our cash collections have also improved as of today, we have collected 92, 7% of our rent from the three quarters affected by the pandemic, including 96% of our residential rent, 95% of our office rent and 45% of our retail rent.

We saw stronger leasing demand last quarter, driven primarily by small tenants.

And we signed an impressive 197 leases and retention was also above average.

We see the economy, beginning to recover with tenants increasingly confident about their future as more tenants engage we should shift back to positive absorption of course predicting the pace of recovery remains challenging at this early stage.

And because occupancy is a lagging indicator we expect to see some further decline during the first half of this year.

Overall, we remain confident over the longer term.

And as I've said throughout the pandemic I believe that companies will return to the office.

Our tenants generally have short commutes and they don't face significant mass transit parking or vertical transportation and barriers to re occupancy and.

In the meantime, Douglas Emmett remains well capitalized with no debt maturities before 2023.

We own a dominant share of the best buildings, and the best markets and L. A and there is no threat of material new office supply and the near future.

Our integrated operating platform is built to withstand recessions and our team continues working to get better every day.

With that I will turn the call over to Kevin.

Thanks, Jordan and good morning, everyone.

Our two multifamily development projects continue to make impressive headway the.

And the demand for new units at 11, 32, Bishop our office to residential conversion project and downtown Honolulu remains robust.

As I previously mentioned, we have fully leased the first phase of <unk> 98 units and by year and had already leased 29 out of the 76 units and the second phase.

Construction on our Brentwood high rise apartment is nearly topped off and delivery of the first units remains on schedule for early 2022.

And December one of our joint venture sold and 80000 square foot Honolulu office property for $21 million on.

Our decision to close the health club as a result of the pandemic triggered interest from a number of owner users targeting and that type of space and <unk>.

And we use the club for space for youth vocational training and after school programs.

Property transactions and our markets remained slow as many potential sellers and a watch and wait mode given current uncertainties.

And we'll now turn the call over to Stuart.

Thanks, Kevin and good morning, everyone. In Q4, we signed 197 office leases covering 612000 square feet, including 202000 square feet of new leases and 410000 square feet of renewal leases.

As Jordan said, the recovery and demand from our tenants last quarter was led by our smaller tenants.

As a result, the average size of the leases, we signed last quarter was 3100 feet compared to our overall portfolio average of 5006 hundred square feet.

This resulted on our office.

<unk> percentage declining to 88, 6%.

The leases we signed during the fourth quarter will provide almost 10% more rent than the expiring leases for the same space. Although the initial cash rents were five 8% lower as a result of large annual rent bumps over the term of the prior leases.

On the multifamily side, our leased rate improved to 98, 2% from 97, 5% with gains in both West L a and Hawaii.

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

Thanks, Stuart and good morning, everyone on the fourth quarter, reflecting the continuing impacts from the pandemic.

<unk> was <unk> 46 per share down 15% from Q4 2019.

<unk> declined 16% to $76 million and same property cash NOI declined by 20%.

Compared to the third quarter <unk> increased by <unk> <unk> from fire insurance proceeds and <unk>.

From better collections and lower expenses those.

And those increases were partly offset by two tenths of issue advocacy and expenses for the November election.

As a result, <unk> increased by a net <unk> <unk> per share compared to Q3.

And only four 6% of revenues our G&A for the fourth quarter remains well below that of our benchmark group.

Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance.

However, I do want to share some general observations based on what we currently see.

We expect further improvements in collections and parking revenue as the economy opens up and local moratoriums on looser.

Will be gradual at first but prior history suggests that we will collect a large majority of past due amounts and the yen.

We expect that leasing will recover over the course of the year.

Because it is a lagging indicator, we expect occupancy to decline at least through the first half of the year.

We expect straight line rent to be minimal in 2021, largely as a result of tenants and were put on a cash basis and 2020.

We expect revenue from above and below market leases to resume its normal decline.

As usual these observations do not assume the impact on future acquisitions dispositions or financings.

I will now turn the call over to the operators and we can take your questions.

And we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

And you all your question. Please press Star then two again and consideration of other participants. Please limit your inquiries to one question and one follow up at this time, we will pause momentarily to assemble the roster.

And our first question today will come from Nick <unk> with Scotiabank. Please go ahead.

Hey, this is Josh Baer on with Nick So I was hoping you could dig into kind of what drove the decision not to provide 2021 guidance and then maybe you could provide some of your assumptions a little deeper on our office occupancy such as like retention rates on upcoming lease expirations, and then new leasing volumes versus pre COVID-19 levels.

So.

Okay, and there's a lot of questions, but I'll hit them. All we didn't we didn't provide guidance because we don't have.

Our confidence and the way the.

And then Nick is going to kind of withdraw and the economy is going to recover and that just plays a huge role and net more so even in our markets because.

And when all the stay at home and the Moratoriums are off we think we're going to see a big change.

And you saw.

And we and we said it and our.

And our prepared remarks that we're happy with what we're seeing on the leasing.

Because as you know.

And you look at the last three quarters, where the impacted quarters you.

You saw 125, new deals are the <unk>.

Second quarter 150, a third and now 200, new deals the fourth quarter, that's a very good trajectory and it gives us confidence debt when the market loosens up when the stay at home orders are off when.

People are feeling more confident about going out.

We're going to do a lot of leasing and we know we have a strong market share, but the question of when that happened to play such a huge role and the way we lease and what our numbers end up being net.

We don't feel confident that we can give you good information and guidance of the way the year is going to rollout. So that's why we didn't give guidance.

In terms of the leasing it depends on that same set of issues well what was your last question.

Yeah. It was just your thoughts on retention rates and then on the what level of new leasing you'd need for occupancy to actually improve.

Well I would say that.

Retention, usually runs and the very high <unk> up to 70%. So when you get above 70, Youre doing youre doing very good on retention.

I would say that what kind of leasing do we need to reverse things.

Our history has been 750000 to 1 million square feet and when we were we were.

Running at those kinds of numbers and even plus you saw our lease rate go up and even at the 93 plus level, we were still moving up.

And we're operating down and the six to 700000, Okay. Now now you start slowly sliding backwards, even with good retention.

So it's somewhere in that range that we need to get you to reverse things.

I feel the reason I'll say again and I feel good about all of that is I mean last quarter was brutal right. We got everybody got sent and once it was poking their head up got sent back home again right because it was such so tough vis vis the pandemic and.

And still we get a lot of deals and not and I understand that it was 3100 feet, but and our typical 5600 feet, but that gives you a very good feel free.

Where how the market feels about wanting to come back and.

And it supports the fact that we've said are one of our core strategy and our expectation was that the small tenants, we're going to lead the recovery and they are.

And without too much or did I answer all your questions.

Yeah, you bet. Thank you.

Alrighty.

And our next question will come from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning out there and sorry.

Sorry, I, just hopped off another call. So apologies if you if you answered, but Jordan I think in your opening comments you said that you have addressed 50% of the uncollected rents and I recall, you guys mentioning that there was about $6 million.

From people basically opting to voluntarily not pay you.

So is that 50% addressed is that around the 6 million that people, who are voluntary voluntarily not and you or is that Alex a salary.

It's 15 15.

And 50, that's what okay.

Okay, that's why I asked.

Okay.

Yeah.

Thank you for convincing.

Okay, and I was when I was practicing reading a script.

I think debt.

Stuart or some months are Peter actually said.

And Theyre going to think you said 50, no way I'm, such a good oratory and Theres no way that'll have debt [laughter] apparently.

Okay, well I hope whoever took the over on that you settle up with them, but based on the 15% then of that 6 million monthly that's not that's not paying that you've addressed.

Do you how did those discussions go and do you anticipate that increasing or was that 15%. Those were the tenants who are who are going to settle up and the rest are only going to do it when the eviction moratoriums.

And.

And.

It's.

I think that process is going to continue I think it will be much more rapid and once the moratoriums on Rover, but I think people want to are trying to get back to work and are trying to settle up on on all their impacts from the pandemic and that's why we're able to start making deals now.

And.

Basically if you look at what we're showing you outstanding it.

It was kind of all of them all of the rent that was due to US we made deals on 15% of those deals, but what I thought was noteworthy about is we didn't really have to give up any rent.

It was really immaterial amounts the timing amount and so so that tells you that as we had expected debt.

<unk>.

And these people have the ability to pay and they're getting to the point now where they're like on you to make a deal now because we're on a more turns up they're going to just tell us I have to pay the whole thing so they'll do it now while the moratoriums, there and say well I'll make a deal and I'll get some trajectory to pay because they have to kind of see it come to a net right vaccines are out.

The level of hospitalizations is dropping very fast and our area. So.

With that visibility offset against the vaccines I think people figure out.

On to Reengage and didn't want to get back into their space.

Okay and then the second question is Stuart.

Stuart I appreciate the comments on the increase and our leasing activity the smaller tenants, but on your rent spreads.

Uh huh.

Sort of eroding from where they were and the third quarter.

You know as you guys mentioned that drop and anticipated occupancy just residual how should we think about the sort of trajectory of rents going forward. So the market returns to normal leasing resumes and you'll get more active.

How do you think about where the rents will ultimately go and sort of at the prospective view that when we see your upcoming earnings releases over the next few quarters sort of what we should anticipate as far as rent trajectory.

Uh huh.

And I'll, let and you just pointed and all I can tell you. This.

Number one you need you need to see.

Absorption positive absorption.

I think once you start seeing positive absorption you need a couple of quarters of positive absorption and youll see rent and take off again.

I think the markets are still relatively full and they are in pretty good shape.

And as long as people view going forward is a positive view once we get beyond the kind of all the lockdowns and the moratoriums and I think you'll see rent pick up again.

And I think you already see.

That level of attitude from the number of small tenants that came in and made deals day.

And they they want space they want to keep their space and reason our renewal rates are highest said tenants are coming in and saying Ah.

And I don't want to lose my space and May be easy for small guys say I've been on my space and months' I'll, just leave space and the future, but theyre not doing that they want to hold onto their space. So.

First step is we need to see some positive absorption quarters, but then I feel confident that rental will return.

To that.

Start their trajectory to return to the levels they were at before.

Okay. Thank you Jordan.

Okay.

And our next question will come from Frank Lee with BMO. Please go ahead.

Hi, everyone and just a follow up on your comments on occupancy and expecting to decline through the first half of 'twenty one.

And you guys seeing any green shoots and any markets, where occupancy is perhaps bottom a bit or is the expectation that occupancy could continue slip across each of the submarkets.

Well.

Like Green shoots Okay that reminds me of a decade I've had these conversations and Alaska session to me. The biggest green shoots are I love the number of deals that were done and I've said.

Got it and I have been very focused on that because in terms of telling me that the market is still healthy and its ability to recover strong and that was the most important thing and then.

And actually told me a second thing too which was debt.

We've retooled our leasing operation that backbone is so much stronger now.

The way it works online and should think debt in a quarter, where we were the most shutdown. We did the most new deals is just absolutely incredible so that's a plus to that group.

When you say, it's one market impacted differently than another market the impact is coming and its city level right. So you would say la Beverly Hills, Santa Monica and Honolulu, Okay, Honolulu doing obviously better than.

And those other market Santa Monica I know you guys see some negative numbers and Santa Monica, but were in downtown Santa Monica and the numbers that Youre seeing are east Santa Monica downtown Santa Monica is still pretty strong Santa Monica has also backed off quite a bit on the moratoriums doesn't really apply to office, but then when you move debt the city of L. A the city of Beverly Hills.

Which covers a lot of markets and I know Beverly Hills, one market, but that would cover Westwood century city et cetera.

They are all impacted by this.

Same thing and so it's going to be hard to see a reverse.

And occupancy are positive absorption until that until the senior lightens up on us.

Okay. Thanks.

And then any initial thoughts on the bill that's being floated around and Hawaii regarding the eviction moratoriums and commercial leases and it seems to be even more tenant friendly vs. The ordinances and California.

Just curious what do you think the likelihood that this passes and.

Thoughts on the impact it could have on the office market there.

You know, we're just you know at the beginning of the funds political season, and there is a lot of stuff that floats around I can't.

We got to get more into it I can't comment on office.

I just finished the last round.

So on that much for you on that stuff yet.

Alright, okay. Thank you.

And our next question will come from Steve <unk> with Evercore ISI. Please go ahead.

Yes. Thanks, Good morning, Jordan, you mentioned parking, but one line item and it's also been negatively impacted has been tenant reimbursements I assume you know that.

And that's largely a function of occupancy going down, but you had a pretty big drop between 19 and 20, how do we think about the recovery of tenant reimbursements is that solely a function of occupancy or is there something else going on.

Yeah well.

And frankly, the tenure and that's X.

Extremely complicated line item, but I think the primary thing going on there is debt we're in a.

Our cogs or costs of running the buildings have really gone down a lot relative to last year and previous years, maybe even people base years.

So it's hard if.

If you say, what's going to happen on the bottom line heart. That's a different issue I think we're just looking at things and saying, we're just have less cost and then.

And they keep kind of re looking at where cans are going to come in and it's more a function of that than anything.

It's not that there's low rocket there is low occupancy so that is a very small impact, but I think the bigger impact on why you see.

When you see smaller expenses, which are expenses are way down.

And then I would say you better see smaller camps right and.

And we are.

Okay.

Just the percentage if you looked at reimbursements as a percentage of extensive and it went down about six or 700 basis points. So I realized expenses may be coming down, but it just seemed like the percentage dropped quite a bit so.

I can follow up with Peter offline.

Maybe just switching to the fire insurance proceeds and kind of business interruption I know, that's a very lumpy sort of figure that you guys get how do we sort of think about the timing of getting the units that were damaged back online and and what what's the kind of the timetable is that is that going to be ended by 'twenty.

Or does that sort of an indefinite time period there.

I'll tell you what.

What's going on is we're working with the city.

To make some very substantial changes to the fire life safety across all all.

All three towers that are and that project.

And.

When you say working with the city there is a lot of it.

Fire Department or department of building and safety, there's the pardon me on housing because this is subject to rent stabilization and.

Yes, and if you've said typical Douglas Emmett and it's getting those units back online and moving slower than we would like yes.

But I would say.

I like the progress, we're making with the city every department and I named said, we're going to find a way to get there to get you to put and be able to do a lot of it.

<unk> and those fire life safety stuff modifications that you wanted to do so IMAX I actually feel good about where that's headed but just like many things.

You don't always get what you want and get what you need and I think we will get what we need and the end of the day, but.

What we're not getting as speed out of the city.

But I think we will end up with.

Something that was worth waiting for.

Okay.

Got it thank you.

Yeah.

And our next question will come from Emmanuel Korchman with Citi. Please go ahead.

Everyone a good afternoon.

Jordan on maybe.

Stewart can we can we can dig into those small tenant leases that you discussed earlier the larger volume just give us some flavor as to maybe the types of tenants they are and where they're coming from and where these tenants maybe that broke leases earlier and I was just coming back as the moratoriums and start to wear off.

And the answer I think what we've seen is it's.

Our typical diverse set of industries, we're seeing.

Demand from tenants across the board, which is typical it's not concentrated in one area or one type of tenant.

So that was good.

The second part of your question was the industry was there and industry country, and I think that the O&M businessman and ability.

Theres, many sorry am I started on cell and preliminary.

Yeah, you've been working with them for too long ago.

You want to rephrase and you want me to rephrase the question for him.

And what we're trying to get into all the leasing of of where it's coming from and is there any differences from what you'd been doing before before any green shoots of the types of people that are leasing and I'm just trying to get more details around it.

Yeah. The only thing I check was it wasn't because I think I saw something was it industry specific and it wasn't it was.

The same kind of spread on industries that did get that and both a lot of deals.

Right.

And I don't think it's any one market that got it.

Lions share of the deals beyond that I don't have a lot and made that to me. The green shoot is I'm really happy we did 200 deal that has a lot of deal I mean, if this is non pandemic time and I know, it's only 3100 feet average instead of normal 5600.

You would normally say Wow that was a lot of deal flow for new deals to be 200 deals.

Alright, and then if we can turn back to operating expenses for a minute.

I guess you guys have cut those as much and you put into buildings.

How much of that is sustainable whether or not.

And as you've come off or is it going to be.

And lockstep with with people coming back to the buildings at the expense increase.

[laughter].

And if you say look at our goals for next year I think their energy savings.

We will continue to get over the next few years and we will get this year.

I think there are.

Not necessarily huge.

Payrolls.

Style savings those just come back as people come back.

<unk>.

You know.

We've cut the cost from on the buildings dramatically and when.

And the buildings are full again, we will keep a little bit, but not a ton and of course.

Insurance is up so we'll be living with higher insurance.

And.

Thankfully property taxes will only move at the pace that they are prescribed and move under prop 13.

With that increase.

Yes, I don't have a I would I think every year, we've done a good job on controlling and keeping the growth and expenses down I don't know that something happened. This year that caused us and say wow expenses compared to a full building before and a full building and they will be down and some dramatic way beyond that.

Gains.

That we've made on energy conservation.

Thanks Jordan.

Okay.

And our next question will come from Jamie Feldman with Bank of America. Please go ahead.

Great. Thank you can you remind us.

And just the timing on some of them on the moratoriums that are impacting you and your thoughts on leasing and I guess as we think about when they do start to burn off and we think about the fact that occupancy was down 100 basis points this quarter.

We think the decline starts to moderate from here until then until the time, the moratoriums burn off or how should we be thinking about debt.

You know first of all I don't have that answer let me just start I don't have that answer.

And you know.

The only two things that I think about and you asked that question is first.

And I hate to keep coming back to this but we did a lot of new deals. Okay. So that's that means that the guidance not paying us on a guy and moved in next door to on that just lease the space. Okay.

Giving a different feel to our community. The second thing is.

15% and money that was owed to us they showed up on our door and said we want to make deals and you know we're going to have to pay you and we want to make deals and blah blah blah.

That's a very good sign this is all about attitude.

Yeah on the Mark.

And if they can see debt.

These cities have kept them and moratoriums and stay the Moratoria ml and on such such a date and then they go out on that date and a good political pressure and like Okay now extended and another month now extended three months snack net okay.

I think the community is now thinking Wow. These extensions are coming in to an and and.

And therefore, they're making their own decision about those moratoriums and theyre coming in and wanted to Mcdeal free space whatever the case might be.

So.

That makes me very hopeful for next year, and and I don't know whether that will play out.

And a logarithmic way or.

Just had a 45 to granular on what will happen.

But it's obviously starting to happen.

Okay, but do you have the latest dates for these moratoriums and youre, saying it doesn't even matter because they can always get extended.

Yeah.

Hi.

Don't want to be such a negative guy, but youre, probably right Jordan.

I've gone and testified in front of city councils and done all kinds of stuff.

And.

And you get a lot of non.

On their head and neck on you're right, we need to pull office out because I don't know why but debt nature.

Don't seem to be able to do it and maybe it's just too complicated them. I mean, you got a lot of people on the city County, and City Council never thought they were going to ever be doing this type of thank many of them and have never seen a commercial lease.

So you know.

Yeah.

I'm not sure how it.

And how it wound and I'm not sure how it's going to unwind.

Okay Alright.

Alright.

We'll watch we'll watch closely.

And then you made the comment about share.

Short commute times to your buildings I'm. Just curious have you guys run data that shows the commute time by the different Submarkets that you guys are in.

Or a different buildings here and I'm just curious how it ranges across the different assets you own.

So if you say do we.

Real surveying on what's your commute to work.

The answer is no if you're saying do we have a feel for the communities that we draw from for that what buildings, there and that answer is yes, and we put that together and it's in a chart that we have.

It's on our.

Our investor overview presentation and Jamie.

Basically what we've done and the decision maker of the guidance the honeymoon deciding where the office is likely to live and the policies or Brentwood or Bel Air Beverly Hills right on the street from Wilshire and where we are concentrated on the west side and then in Sherman Oaks, Encino, and the valley and those key user 10, and 15 minutes down the hill to those major Boulevard.

Versus on the west side as Youre going from the Palisades to downtown.

You're more than on our you know you're on.

On the car for two hours total flow.

The day, so we compare those and we haven't turned on there that that illustrated that and Thats whats driving the decision to stay closer to home for those decision makers to have that short from you.

And we know that because our leasing people.

Look at where the decision maker lives.

And when they're showing them space and when they're making a decision about whether.

They're going to engage and space for showing them or whether they're going to renew or whatever the case and IP that is one of the factors that we look at.

And that Guy that lives in Beverly Hills, the four or five acts as a pretty big barrier right either.

And I want to stay on the east side of the 405 to one of <unk>, and Westwood or Beverly Hills or Centricity and.

And then for the central West of the flow of funds.

And Santa Monica Brentwood that once a day west of the flow of funds.

And would you say that building and you bought in recent years extend the Canadian average can be time for your portfolio or not necessarily.

No I don't think and extensive commute.

And we most of what we bought spin on the West side, we're looking at.

Yes, I think it shortly and I think we have a.

Concentration of bear concentration and Beverly Hills, which dropped a lot from that kind of debt.

Bel Air Beverly Hills, and even the east Brentwood market.

And then the stuff, we bought kind of rolling down towards Santa Monica draws out of out of Palisades Santa Monica.

And these areas.

Okay alright, thank you.

Yeah.

And our next question will come from Rich Anderson with F&B C. Please go ahead hey, good.

Good morning folks.

So you talked about this 15% of the non.

Maybe more.

Moratorium manipulators and what are we going to call them.

And I was trying to make deals.

Assuming you Werent you werent booking that revenue last year, how will this impact your earnings profile. This year will you have like sort of a recapture numbers and and.

And some of your quarterly results that could make it kind of lumpy and just in terms of the revenue stream.

Well I think most of these deals.

Kind of goal during this year and they pay monthly and they pay what they owe so.

As more and more deals are made lumpy might not be exactly the right word, but it is additive to the.

To the rental income each year of the rental revenue each quarter right. So you were you were not because they don't we didn't include it last year right right, So you're kind of getting double double.

Doubling up on the number even though maybe it's small impact but.

That's the right way.

Yeah.

I don't know if I'd say doubling up since we didnt get it last year, but youre right. It will it will it will be a boost to this year since we didnt get it last year.

The question I have is you mentioned the the leasing smaller average users.

Think you said that the GAAP rents are up 10%, but the starting rent is down five 8% and you attributed that to big bumps over the course of lease can you can you give some color on that how much bigger are these rent escalators and how were you able to negotiate it.

Okay.

And I think what we're saying rich and so if you balance it.

If you have a pfizer and our typical five year lease from the 4% bump the ending rent is 17% higher than the starting rent was so that's and that's a big GAAP overcome on the end.

And the starting number which is the down 5%, but the overall economics are still 10% better for the new lease were just pointing out that our our average contractual increases are probably higher than a lot of other markets that you look at it.

That was the point there what are the what our typical rent escalators and then relative to say.

Other.

Areas of the country.

Yeah, typically we're getting free.

And selling to five three to five up until recently a lot of our deals three and a house and for US on the majority of our deals.

And here.

Okay and stuff.

Thanks.

Got it.

And our next question will come from Blaine Heck with Wells Fargo. Please go ahead.

Thanks, Good morning out there maybe for Kevin and Jordan can you just talk about what you guys are seeing on the investment sales side of things, it's clearly been.

Pretty subdued recently relative to normal deal flow, but are you seeing any deals start to shake loose and and if so are you focused more on office or multifamily opportunities or just kind of the the best deal that comes across your table.

So the.

The answer is yes, we're always looking for the best deal.

Recently, we've been underwriting more and multifamily and office, but frankly, it's been.

It's been slammed taken so I mean, if you look nationally.

On hand is industrial and so theres a lot of trades and the industrial market because thats, a very very strong market and.

And on the office side its been relatively anemic, we don't have a lot of high leverage players and our market and so.

There hasn't been a huge pressure for people to.

Put things on the market and.

We're starting to see the green shoots so as that happens and people get more bullish about the market theyre going to be.

More inclined to put their assets out into a market and people are more positive about it.

Okay, that's helpful and kind of dovetails into the next question.

You know given your low leverage profile your discount to any day you are high implied cap rate. However, you want to look at it and and the lack of the current lack of deals to bid on and Jordan I know you've addressed this on prior calls, but just just for an update does it doesn't make any sense to get active on share buybacks here or you know do you.

Thank you want to keep that dry powder for opportunistic acquisitions that might come about and the future.

And I'm not against share buybacks. The problem is share buybacks for the company are very different decision than buyback decision for an investor and I know you guys know I've been buying the stock myself, because I'm an investor.

But when I look at decisions for the company I know that if I'm doing share buybacks, it's either because I'm selling assets and getting cash from that as was pointed out to me last time on.

Or it just because im raising my leverage level.

And trading debt for equity, which has a double sided sort of a compounding effect and.

And you know and.

Got it.

So.

Okay.

I would say debt because of those facts.

I lean more to the conservative way that we manage the company's cash balance sheet and capital structure, and because I mean and.

Balance sheet and capital structure, Eileen very conservative it caused there to be less times when.

And I'm pounding on a drama of share buybacks for the company not not for investors.

And it makes sense. Thanks.

And our next question will come from Craig Mailman with Keybanc capital markets. Please go ahead.

Hey, guys I'm.

Just a question on the leasing from a I did notice your short term leases and the expiration schedule kind of ticked up about 60000 square feet quarter over quarter could you just talk about what was going on there or is that just.

Kind of limited visibility on the tenant side, they want shorter term renewals or or maybe theres something else going on there.

Yes, I think you said it right, which is typical for us and a downturn tenants feel less secure about the future. They tend to go a little shorter on their lease terms. So that's what we'd expect and that's what we saw.

With the all of the uncertainty we did see some tenants that want and elected to sign and shorter term extensions, which is great on that they're not giving up there. They don't want to give up their space and I want to just go home and work they want to keep their space, but they want assurance signing shorter term. During this period and then when they feel more certain about their business going forward, but they tend to sign a little longer.

So it's very typical for what we've seen through the cycle.

I I ask was clouded what ive noticed over a long time on the strength of the company is.

And everybody does this but.

When the market soft and rents are off people sign shorter deals and then when the market's up and rents are high they sign longer deals, which would be obviously and the opposite of what you would normally want to do but you know.

It is coordinated with their.

Two types of fear right for the company so that they sign shorter deals line, there's a bad economy, and then fear keeping their space and sign longer deals were on the rates higher and that's been very good for us obviously.

And because.

And.

So allowed us to have a very good kind of accelerated growth path in terms of our and tomo and <unk> and <unk> all of those numbers.

Okay. That's helpful and then.

I know with whats been going on do you guys clearly turned off kind of the redevelopment program here, but it sounds like you know you're encouraged by the number of leases you've been signing and and the platform and you guys have there I mean at what point, what do you need to see for you guys to feel confident.

And restart some of those plans that you had pre pandemic.

I would I can answer that two ways, if you're saying what do we need to see to start planning some of those projects, we've already seen that and we've already started planning on again.

If you say to actually start them I named more visibility on the economy opening up again, but we know it's coming and therefore, we are starting to plan again.

For for some of that stuff.

Does the math change at all and I know on a GAAP basis, you guys are seeing.

Still upticks, but at least on the cash side of things Theres been some roll downs to does the are you underwriting rents kind of getting impacted at all with what's going on in your markets or are those still.

Generally and a place that it pencils from an economic perspective.

Most of the repositioning and work we were doing was.

It would be hard not to be worth doing other than you know right now the markets and such turmoil because you can't.

And frankly, it's very hard to tell where rents are at the moment, but but.

I still feel let me say it definitely we feel very good about where these margin was going to end up with us and silver and therefore, we're still wanted to do the planning.

To do the hard analysis that we always do about what you can spend as much money. What's the return on kind of be I mean, we're certainly not using what's happening today to figure that out because we are seeing.

Negative absorption line.

But we feel confident enough that we think that as things trend and this year debt.

We will see something that will cause us to really start spending money.

Great. Thanks.

And our next question will come from Bill Crow with Raymond James. Please go ahead.

And I appreciate it thanks, Jordan, how confused or your tenants about the future use and demand of this space. I mean, you signed a lot of short term leases I assume it didn't have expansion space per day, Densification and I'm just kidding.

Kind of take us inside the mine and the tenants and maybe if there's a difference between smaller tenants larger tenants that you're saying.

Sure.

And that's what Paul asked I forget let me give some debt I know this.

More expansions and contractions on on renewals.

So it is actually a lot of expansion.

Aye.

I am not.

Talk to any of my friends that are financing, both on our portfolio and and other portfolios.

I'm not talking to anybody that's saying.

Oh yeah.

And we're sending.

People home and we think we're going to stay that way.

I know some people are making adjustments to their space or just figured I'd just coming back to their space and they were already felt out there, but sort of very liberal numbers.

You want to add something on yeah, I'd say the way that we were building. Our if you think about our typical sweet or small suite 3000 feet. The way. It was built out pre pandemic was probably Jordan said $2 25, a square foot per person window line offices, a couple of workstation to come from sort of a kitchen and thats a very typical build out for us that doesn't really need to change.

We haven't seen a massive change and the way people are planning their space going forward, because they were already distance and a way that they feel comfortable and thats why I think you've seen our attendance and be a lot higher.

And then some of the other markets Youre looking at.

What what has happened about attendance rate if you go back six months ago to today.

Well that's.

The very beginning I'd say they were definitely confused and so her way.

So that would be and second quarter.

And on occupancy rates are very low now.

Now I think the last time buy.

Saw some type of real look at this we figured our buildings are about 30% to 40% occupied.

I can tell you that everyone on all four of US on this call for sure would tell you that the traffic and the morning and everything is up.

And talking about just driving your car trying to come to work whatever the case might be so you know I get my best read on the building I am sitting in and I know that parking garage and as more fall now because I can see it.

And I know there's more traffic.

I don't know everybody else's buildings, and what's going on but there is weighted more traffic on the road and the go into work time and they're going to go on a home time and there was even.

Like four to six weeks ago.

Alright. Thanks.

Thanks for the color.

Mhm.

And on our next question will come from Daniel Ismail with Green Street Advisors.

Right.

Great. Thank you.

Maybe just sticking with the the mine to the tenants on how you are perceiving a tenants looking to upgrade their space or are you noticing any like from class B to class eight and its what the trade up or how are they looking at the quality of their spaces there.

Out of the market.

Ooh.

That's a good question I remember when we came out of.

We were coming out of the last recession.

We had a ton of rebalancing now that recession was long and it gave a lot of people opportunities to you know that still had businesses. They were confident and to move into a much nicer space and let's say they typically would be on and then as we came out of the recession, we started literally and letting them out of leases and releasing that space and moving them to.

Bass and lets say were they more properly would be.

I don't know that this has been around long enough for that kind of shift the Hoffman and I haven't heard anyone say that theres, a shift and that way.

So.

I think this will be and.

In terms of us kind of returning to some sort of normalcy I don't think we'll see that kind.

Kind of shift back and forth that we saw and the recession and that happened in 2008, 910 on where I remember like 11, and 12, you guys were asking us questions and right Yeah. We're on.

We're literally letting people out of leases and our most expensive markets and letting them signed leases and cheaper markets because we have tenants for that space right now.

But I don't think.

We've seen that shit resonating the time for people to do that shift so I doubt that will happen. This time.

And then last quarter, you mentioned and rats are sitting I believe portfolio wide about 6% above markets and thats still a decent.

Line to use or is this most recent quarters cash releasing spread and more indicative of where rents sit relative to market.

Yes, that's still a good estimate for where things are.

Okay, Great that's all I had.

Okay.

Right.

And this will conclude the question and answer session I'd like to turn the conference back over to Jordan Kaplan for any closing remarks.

Well. Thank you all for joining us and I look forward to speaking with you next quarter.

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