Q2 2021 Douglas Emmett Inc Earnings Call
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.
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 1 question and 1 follow up.
I will now turn the call over to Jordan.
Good morning, everyone. Thank you for joining us.
During the second quarter, we signed a record 253 office leases covering and all time high of 1.3 million square feet.
That included our second highest quarter of new leasing since becoming a public company and a substantial increase and the average tenant size.
As expected.
And record leasing was not enough to completely offset our abnormally high lease expirations during the quarter. So we still had a slight decline and our leased rate.
In addition.
It takes time for new tenants to move in our leased to occupied spread is at its highest point and many years.
Happily we are once again recording straight line rent roll up and are continuing to see substantial savings and a re tenant and costs.
While our leasing pipeline remains healthy we still face headwinds from our local government's response to the pandemic.
Los Angeles has extended its lease enforcement moratorium until September 30th and has returned to a masked mandate. Despite our submarkets vaccination rate of approximately 80% for people over 16 and over 65% for teens.
Even with the moratorium and extension we have made additional progress collecting past due balances.
And without getting any meaningful rent forgiveness, our aggregate rent collections for the 5 quarters affected by the pandemic is now 95%, including 96% of our residential and 96% of our office rent and 63% of our retail rent.
The next few quarters may be choppy, depending on the course of the pandemic and the timing of the exploration of the moratoriums.
I have said, we expect to collect much of our remaining unpaid rent once the moratoriums expire, although those collections will be spread over a number of quarters.
In addition, some tenants who have not been paying rent during the moratoriums will move out once we can enforce their leases, though we do not expect the impact on our occupancy to be meaningful.
Once the turbulent smoothed out and I'm excited about our future. We are emerging from this downturn as a stronger and more efficient company. For example, I am confident that our new seamless leasing platform as well as the diversity and strength of our markets resulted in this quarter's record leasing volume.
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I'll now turn the call over to Kevin who will give you an update on our development efforts and recent balance sheet activity Kevin.
Thanks, Jordan and good morning, everyone.
Our 2 multifamily development projects continue to progress nicely, we have leased all of the 174 apartments from completed at 11.32 Bishop.
Our 493 units downtown Honolulu office to residential and conversion.
Our Brentwood apartment tower is ahead of schedule as we now expect to deliver our first units and the fourth quarter of 2021, we plan to begin pre leasing units and the coming months.
During the quarter and closed a new secured non recourse $300 million interest only term loan that matures in may 2028.
The loan bears interest at LIBOR, plus 140, which we have effectively fixed at 2.1% until June 2026.
The loan is secured by 3 previously unencumbered office properties.
Used $175 million and the proceeds to pay off our revolving credit facility balance.
This new loan lowered our weighted average fixed interest rate for only 294%.
We still have no debt maturities before 2023.
And 46% of our office portfolio remains unencumbered.
Given the current attractive interest rates, we continue to pursue opportunities to lower our average rate and further ladder out our debt maturities.
As I've discussed in prior quarters, although property sales and our markets remained slow we have and ample liquidity for acquisitions as they become available.
I will now turn the call over to Stuart.
Thanks, Kevin and good morning, everyone.
And Q2, we signed 253 office leases covering a record $1.3 million square feet.
And we signed 451000 square feet of new leases and 846000 square feet of renewal leases.
Our leasing and recovery was initially led by smaller tenants, but and the second quarter, we saw progress with medium and large tenants. Indeed, the average lease signed in Q2 increased to 5100 square feet, which is not only about the last few quarters, but also exceeds our long term average.
As we wait for tenants to move in a record leasing activity and have increased the spread between our leased and occupied rate to 250 basis points.
Our leasing spreads during the second quarter improved to positive 9.5% for straight line and negative 6.6% for cash.
Our net effective rents continue to benefit from lower leasing costs, which declined again in Q2 to the to their lowest level and almost a decade.
At 99, 4% leased our multifamily portfolio is essentially full with.
And with rents now increasing across all of our residential submarkets.
With that I'll turn the call over to Peter to discuss our results.
Thanks, Stuart good morning, everyone.
Turning to our results compared to the second quarter of 2020.
<unk> increased 14, 3% to <unk> 47 per share.
<unk> declined 3.3% to $77.9 million and.
And same property cash NOI increased by <unk>, 7%.
Compared to the first quarter of 2021.
<unk> per share increased by 3.
Primarily due to better rent collections and about 1 penny per share of higher business interruption insurance recoveries.
It's worth noting that only 1.2% of our revenue came from non cash straight line rent and above and below market lease adjustments.
The decline and as I saw this quarter was due to higher Ti and leasing commissions driven by the strong leasing volume and the last couple of quarters.
And it only for 2% of revenues our G&A for the second quarter remains well below that of our benchmark group.
Turning to guidance, we expect third quarter <unk> per share to be between 44 and <unk> 46.
This reflects the usual higher seasonal and utility expenses as well as additional interest expense from our new loan and lower office occupancy and lower business interruption insurance recoveries.
We are not comfortable giving guidance for the fourth quarter.
As our results will depend on the course of the pandemic and the timing and immediate impact of the expiration of the moratoriums.
As usual this guidance does not assume and the impact of future acquisitions dispositions financings for property damage recoveries.
I will now turn the call over to the operator, so we can take your questions.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then run and your Touchtone phone for.
And you're using a speakerphone. Please pick up your handset preferred price and the keys to withdraw your question. Please press Star then 2 and at this time, we will pause momentarily to assemble the roster.
Okay.
Well the first question today will come from Craig Mailman with Keybanc capital markets. Please go ahead.
Hey, there this is already Cameron on for Craig I appreciate the color on the rent collections, but can you guys give an update on the cash rent outstanding on kind of a nominal dollar basis I know last quarter. You mentioned it was closer to the $60 million to $70 million range, but where does that kind of stand today and as you guys continue to make deals.
And with tenants can you talk about what these deals look like in terms of timing in term of repayment.
Yeah, so well.
And well, depending on where you are and the bump because that number rise a little bit, but if you go to the metal other month here and the <unk>.
And as the number of Mezz 50 to 60.
And like you asked me, how much cash and snapped our fingers, we would collect if.
Our turns are often everyone pegged what they owed.
<unk>.
In terms of the deals that are being made.
Basically people are making.
Making early deals to be able to extend their payments over more than 3 or 6 months, but you know.
For quarters, 5 quarters, 6 quarters, where other occasions, maybe and there also maybe extending leases or doing something else or putting interest on it and doing something to give us some benefit for for being willing to do that.
Yes.
Great Thanks and.
Just on the leasing front you guys did a nice job and the second quarter can you comment on kind of how that momentum has continued into the third quarter given some of the recent COVID-19 related rollbacks and on the occupancy front, how should we think about occupancy you guys mentioned the spread so it seems like youre going to get a gross debt of a pickup in occupancy, but how should we kind of think about that.
Through the remaining of the year and how are you guys kind of underwriting the bottom and occupancy.
Well.
And obviously you know I started out my remarks talking about the leasing because I felt like over the last I don't know wanted to diverse and 5 quarters of the pandemic people big questioning.
The strength of the market market coming back are tenants coming back are only small guys coming back are big guys coming back well. This if there was ever a question about the pulse and the market I mean the market.
And Michael Olympic athlete, and I'm, and I was really impressed and and Thats aside from <unk>.
Our platform and how well the platform is able to take advantage of that now.
I'm really happy about that in terms of moving forward, obviously and you got some better quarters coming up.
Because we don't have as much move out and the next few quarters and we're hopeful that we can turn things what was what was your second question.
Just kind of thinking about.
So you kind of mentioned that less.
And less move outs, but like thinking about kind of how leasing has picked up and the last quarter to date, given how things have kind of rolled back I mean have you noticed any store.
Impact.
Well they'll be in yeah.
It heats up again, you know I'm sure, there's going to be and impact, but it's kind of interesting and you go back to your credit and collections, but that people are just sort of adjusting even to the moratorium being extended and whether the mass mandates back on people wanted to get back so badly that as you've already heard I mean, they are making.
Deals.
I think we've now.
Now may deals on something and the range of June 25, plus percentage of what was owed to us and the past, which is all in the face of more try and fee extended though I think people are realizing that the and is coming in and they wanted to get back.
Got it and just last 1 for me can you guys talk about kind of the biggest pain points for tenants, who have been leaving the portfolio and other.
You guys are kind of thinking about the leverage you can pull between rents are occupancy and retention and lease term kind of how you guys are thinking about that and your leasing process moving forward.
Well.
The difference between leased and occupied is almost totally a function of.
How.
And how how much we do and the way and new deals just from a huge new deal quarter. So when you do a ton of new deals youre going to have a much bigger spread as compared to renewals between leased and occupied because they have to move in.
And.
And we got at least I'd like to leave some questions for some other people.
Let's keep moving and you've got a good list good run here.
Move on from here, but thank you for asking all these questions.
And our next question will come from Elvis Rodriguez with Bank of America. Please go ahead.
Hey, guys nice job on the leasing and thanks for taking the question.
Jordan and are you able to share what your portfolio cash mark to market is today relative to where it's been in recent months.
Yes, yes.
Today, it's slightly positive it's around 1% for the overall portfolio.
That's stronger and our Honolulu, and west side some market sales.
All for and the values as you might imagine so still slightly positive.
Great and then.
And your Brentwood apartment project are you able to share where market rents are today versus your underwriting and your expectation for the for the lease up of that project.
Well.
I wouldn't say I mean, we don't go into the individual buildings. So.
I wouldn't say that I would say in general the apartment portfolio is seeing real increases in rents and you see that and the numbers that we present you with the same store numbers and you can see it and all kinds of studies about what's happening the residential market rents and and all of our markets both in land and Honolulu.
Great I'll leave some more questions for the other things.
Thanks [laughter].
And our next question will come from Manny Korchman with Citi. Please go ahead.
Hey, everyone and this is a park and Ukrainian for many and thanks for taking the question. My first I wanted to just without the ne search lease that appeared on your guys' largest tenant schedule and.
I think that there is some space and the building that is currently out on sublease, that's a little bit lower than what matrix is currently paying I was just wondering if you guys could talk about potential rent roll down as well as just your thoughts on whether that space is comparable to make search it's just.
For all.
I don't even other sublease space Youre talking about and we don't talk about individual leaves us although of course.
And just.
Sort of the tide going out has caused the mace, which leads to show up on that schedule. It.
If you go back a ways and it was on the schedule and then as we leased up and fell off schedule and now it's come back on.
But.
And I don't have a lot of comments about the matrix release in particular.
Okay, Yeah, that's fine and I guess and then my second question is just about any differences that you guys saw from an industry perspective that came through and leasing activity. This quarter, just with it increasing so much.
No I think we still had great demand across our broad set of industries, which is what we love. So much about these markets. Since we do have such a diverse group here and we did see that show up in Q2 and no real trends to read through although the 1 trend that was notable with bill and I mentioned in my prepared remarks, which is we did see the average size increased.
So the for larger tenants and the median tenant for us for Baxter and backing of Q2, which was great to see.
Okay. Thanks, that's all from me.
Thanks.
And our next question will come from Steve <unk> with Evercore ISI. Please go ahead.
Hi, I guess still good morning out there Jordan.
Sure and I was just wondering if you could talk a little bit about the new leasing activity I'm. Just curious for these tenants that we're working from home and decided to take space now where these tenants that just had outgrown their old space and needed to move just trying to get a better sense for kind of the big surge and new activity and and maybe how that footprint.
Of the $4.50, compared to what they were and prior.
Yeah.
Well.
I can tell you that.
Big tenants are coming back and Theyre grabbing space and the size differentiation makes a difference I will say I myself.
What's done by how much new leasing we did.
Over 400, and it was 450000 feet. That's wild I I was so happy and impressed both debt we were able to do that much and.
And I and I'll say again, I credit debt platform for even be able to process 250 deals and a quarter and get them closed and.
And and reach out and getting all those tenants and including some larger deals, but I also credit debt. The market is moving back in terms of wanting to get back in the space and a very aggressive way now and will this continue and I know there was another question about that because we seem to be going and the wrong.
And he is to me that the pandemic right now but.
The fact that the market has got that sort of pent up growth or pent up demand.
And really beat me extremely happy and nature of the tenants was across all industries.
Certainly you saw more strength and the areas that we've always told you were strong and Hawaii. Since we made our change our Hawaii has stayed strong and it is still strong but of course west L. A and a lot of activity along Ventura Boulevard, and the valley, but but.
All the cuts all king came in very well.
Great. Thanks, and then maybe secondly, I just wanted to follow up a little bit on the apartment and question. We are seeing a pretty big rebound and many of the coastal markets, you're obviously at full occupancy at $99 for so I'm not going to fill that up much more but can you maybe just expand a little bit on it.
Types of rent increases that you're putting through to.
Existing tenants and in the current portfolio today are how our renewal discussions going with folks.
Yes, I think we were super pleased to see great activity and the resi portfolio. This quarter like you said occupancy has remained strong and it will get.
And good good Rollouts, you saw 4% increase and revenues are averaging in place rents are up so good news across the board and activity remains strong.
Thanks, that's it for me.
Thanks, Steve.
And our next question will come from Daniel Santos with Piper Sandler. Please go ahead.
Hey, Thanks for taking my question. My first 1 is on the eviction moratorium extension and whether or not you think that might impact deal flow going into the second half of the year I would say prior to this all signs pointed to a pretty busy second half. So I'm wondering if your view on that might have changed.
Well.
My first few and he was supposed to and June 30th So that changed my view and the extent that I can tell you that.
Debt.
I think what's happening is the eviction moratorium.
Is still certainly impacting us definitely impacting us from the perspective of collecting rent.
I think you know we have some people as I said before that arent paying and they'll move out I don't think there is enough for that then it will show up in any meaningful occupancy statistics, but it will give us that space to lease, which we've been waiting to get back.
But.
I think it's I don't think it's per se, what's gating the market as the eviction moratoriums I think what's gating the market is.
Just the whole COVID-19 and going back to mask, and then everyone aware and I'm asking it from vaccinated and side and all of that that that's more of the types of headwinds that debt debt.
Push against US the eviction moratorium just impacts us this V.
Rent collection.
As you may or may not realize if someone signed something now during the pandemic even during the March and that's enforceable and so all the new leases, they're not they don't have eviction moratoriums.
It's only from leases prior to that to the pandemic.
Got it that's helpful. And then I was wondering if you could comment on activity up and the valley.
And from our conversations with other management teams and it seems like the market is particularly strong.
Yeah, we had really good activity as Jordan mentioned on Ventura Boulevard and through the valley. So.
That's.
And while we've been a strong market for us Sherman Oaks.
Group that and what the core west side markets.
And so great to see.
And it's coming back there and some larger deals and that market.
Perfect. Thanks.
Okay.
And our next question will come from Rich Anderson with F. N. B C. Please go ahead.
Good morning.
So.
Do you guys.
I guess.
1 question 2 ways for.
First of all do you have a kind of a retention rate that youre working towards and the office space and.
And you know more abstractly, when youre, having conversations or are people changing their plans and in any meaningful way about how much space. They want to keep if their lease comes due I'm. Just curious if you can speak kind of quantitatively and qualitatively about the leasing experience when you're redoing.
And Elise.
Sure so in terms of the retention rate.
I think what we've discovered over the last 30 years or whatever as debt.
Even though we target higher retention and I've actually seen can we and the retention rate seems to be extremely stock at an average of 69%, 60% between 69 to 70 and I see can go all out and try and move that number even like 2%.
And it is just very hard now doesn't go down and I mean that just seems to be and a number and I don't know what all the forces hitting at our but that seems to be it is not in any particular quarter, but if you go over a series of quarters, you just keep landing and around that number.
So I think that thats.
Probably our target and we should expect all at the same time.
And what was your second question.
And when Youre, having doing a deal do you do you consider tennant retained if they go from <unk>.
5000 to 3000 square feet or is your retention rate based on square feet or based on the.
The actual just the tenants staying or leaving.
So it would be 3000 and photo retention and instead of 5000, okay. So okay. So it is on a square foot basis. So are you are you, saying then that people.
Are not readjusting downward and much there either there either making a decision.
Yeah.
I think that Wendy and I know, we've done a lot of questions trying to understand the psychology of the reasoning behind my tenants for leasing or not leasing or this or that.
And I don't know that we can ever give it like a summary of that I hear anecdotal stuff, but I'm really not anxious just give like 1 or 2 anecdotal stories and have everyone Runaway and go Oh. That's the reason people are now taking space again.
So I think there is all types of regions.
For the most part I just think that the economy here is coming back and people want to come back into work and rich.
And I talked I think a little bit about this on the last call, but as far as the way, we're planning our space and our spec suite program, which has been great for us and will continue to generate outsize business on the new leasing front, that's in our kind of 2000 square foot.
Sweet spot and that right and that range 25, other fee, where we do a ton of leasing and we have not changed the way we're laying out that states. It already provides.
Good to call it 225 feet of person, which we find store.
<unk> worked well for us for a long time continues to work really well.
And then real quickly on the $50 million to $60 million rents that are still kind of outstanding how much of that is in and the retail utilization or are you is that just office.
Theirs, and so compared to our company its over weighted in retail okay, well you have and now we're telling you 96% collection office, 96% question Ramsey and 65 retail so you know retailers representing too much of that number more than its fair share.
Sure.
I know.
Dumb question, because you said that but I guess my thought was when you said people might leave once a moratorium and.
And you kind of most worried about that and the retail part of the portfolio.
I'm not most worried about that and any other sections.
I would say I don't expect a lot of that actually the areas, where and I'll say this again anecdotally I'm hearing that is in residential non.
Not necessarily in retail or office when I read the list of everyone, while more often and residential all see something and it says.
And the more times over this time, Scott and just move out and this is unlikely to be collectible I see that on the list.
Got it thanks very much I appreciate it.
Okay.
And our next question will come from frankly with BMO. Please go ahead.
Hi, everyone.
And if we look at the average lease term on the leases signed in the quarter. It looks like the terms over 5 years now versus 3 and a half or so and that past couple of quarters do you get the sense that tenants are willing to commit to more term now that reopening plans are and motion or was there anything unusual in the quarter.
Frank I think mostly what that had to deal with it was the larger leases that we sign so larger and larger tenants tend to sign longer term deals and you saw that I mentioned the average lease size was way up this quarter and that was really the driving factor to increase the average term of the leases that you saw.
Okay. Thanks, and then you provided the remaining spend for the multifamily developments and this up this quarter.
Just wondering if there are any changes to the total cost or are the construction costs still tracking within the initial budget range.
I think that things are still tracking we've got a lot of questions from people about.
You know, what's our remaining spend I know that at the landmark project, we increased our spread spend but I don't think it's I mean within 10% for sure.
And because we're trying to move a little quicker I don't know nobody asked a question nobody noticed debt we had originally planned to.
Start leasing next year, we've accelerated things that hasnt been a cheap process, especially with the <unk>.
Kind of supply chain crush and.
And so we've been willing to spend money to get open and be leasing this year.
But beyond.
Beyond that I feel pretty good about where we're coming on and feel very good actually about where we're coming in on both projects.
Okay, great. Thank you.
Okay.
And our next question will come from Bill Crow with Raymond James. Please go ahead.
Thanks.
On the commercial leases signed during the quarter and have you seen any increase and the tenants relocating from downtown.
Maybe any sense of how many of those new move ins are coming from larger spaces.
Well I mean, we certainly saw a lot of large tenant activity this quarter, which we hadn't seen kind of throughout the pandemic.
We had been relying on very small tenants I think our average tenant size a couple of quarters go for only 3100 feet and it was up to 5100 feet.
And Q2, and so certainly larger tenant showed up.
Your first comment about relocations from downtown I don't know that we ever draw tenants from downtown and something I ever hear from our leasing guys I haven't I agree I haven't seen us trade with downtown much yes, that's not a typical move.
If you're if you're on the west side, if you live on the west side near our Submarkets.
He's got a long commute downtown.
So most folks tend to want to keep it short from you and they're somewhere in and around our Submarkets and maybe theyre moving between sub markets on the west side between buildings that we don't own and abilities, we do own but I don't it's almost like newsworthy.
Yeah going for.
And especially newsworthy for someone to go from the Westside to downtown.
But I don't think we trade often between those markets.
No, Okay, and we are seeing that and other markets works.
And as brokers are working part time from home and a little bit of.
The shift and the location of office space.
And Jordan.
Politically I think bill we might see that we may see that headed out to order center, we've got guys, but and you in from those areas into the west side.
And we've seen that and the paths where solid people open satellite offices out towards Warner Center, and the Validus to shorten their commute up that way. So that's something we're looking for and I think debt by the way I know I've been reading the same articles that you talked about and.
And frankly, I think the west side went through that some time and the eighties or something when when the traffic was so bad to get downtown that people just insisted on having their office space closer to their homes and that's what really created the west side.
Interest and Jordan.
Politically.
Difficult is it going to be to actually evict.
Residential tenants I mean, even though you have all the right to once this moratorium and how tough is that going to be from a PR perspective.
And I'll tell you we're going to have very many tenants are going to need to evict I mean first of all only 4% from a pan and I think most of them and we're going to pay.
I mean, so you're talking about numbers that could be as small as.
You know.
No single digits for 10, 20, I mean, it's not a lot.
And most of that line.
Most of that's and rent controls.
Is that fair.
No no no I don't think so.
I mean I think.
I mean, the ones I saw it wasn't ranked for all people with businesses and stuff not rent control actually running pretty nice places that then something out but their business or there are.
Or are they played games and the games turned and do they.
We don't even know if theres any more but we can't get the space back.
No.
Alright, I appreciate the insights.
Alright.
And this will conclude our 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 we will speak with you again next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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Yeah.