Q3 2021 Douglas Emmett Inc Earnings Call

November 3, 2021

Okay.

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett quarterly earnings call. Today's call is being recorded. At this time all participants are in a listen to only mode.

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

I will now 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.

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.

Can also find our earnings package at the Investor Relations section of our website.

You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.

During the course of this call we will make forward-looking statements. These forward-looking statements are based on the beliefs of assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable.

They are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences maybe 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.

When 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.

Now I'll turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. In the third quarter, we increased FFO per share by 8 cents, compared to the prior year. Compared to last quarter, despite new loan costs and higher utilities FFO per share was up a penny due to stronger rent collections, greater tenant recoveries, increased parking revenues, higher office occupancy and better multifamily occupancy and rent.

In the third quarter, we increased <unk> per share by eight turns compared to the prior year compared to last quarter, Despite new loan costs and higher utilities <unk> per share was up a penny due to stronger rent collections greater tenant recoveries increased parking revenues higher office occupancy and better multifamily occupancy and rent.

It is worth noting that only 1.5% of our FFO is noncash. These results reflect our recovering submarkets, where average vaccination rates now exceed 85% for people travelling over and COVID rates are among the lowest in the nation.

Increased tenant confidence has raised our office utilization to approximately 70% in Los Angeles and to over 80% in Honolulu. We had another strong office leasing quarter, driving 30 basis points of positive absorption. Our residential portfolio is fully leased with rents rising in all of our submarkets.

We had another strong office leasing quarter, driving 30 basis points of positive absorption.

Residential portfolio is fully leased with rents rising in all of our sub markets.

Despite the recent California eviction moratorium extensions past due rent collection continues to accelerate without any meaningful rent forgiveness.

Office and residential rent collection for the quarter is affected by the pandemic improved to 97%, while retail rose to almost 70%.

We continue to deliver highly accretive development projects, while extending and lowering our cost of debt and we have the capital to pursue new acquisitions and development opportunities as they emerge. With that I will now turn the call over to Kevin.

With that I will now turn the call over to Kevin.

Thanks, Jordan and good morning, everyone. I'm really pleased with the progress that our two multifamily development projects, where we continue to lease units as quickly as they are built at rents above our pro formas.

We are already pre leasing units start at 376 unit Brentwood residential tower. What do we expect to begin delivering units before year end.

What do we expect to begin delivering units before year end.

At 11, 32, Bishop our downtown Honolulu office to residential conversion, we have completed and leased approximately 40% of our planned 493 units. And continue to convert floors of office tenants vacate.

On the debt side, we are lowering our average interest rate and extending our maturities having closed two new loans totaling $740 million in the third quarter with an average effective interest rate of 2.13% per annum.

This new non-recourse interest-only debt consisted of a $625 million loan due in August 2028, with interest effectively fixed at 2.12% until June 2025.

A $625 million loan due in August 2028, with interest effectively fixed at $2, one 2% until June 2025.

Which is secured by four properties owned by one of our consolidated joint ventures. And the $115 million loan due in September 2028, with interest effectively fixed at 2.19% until October 2026, which is secured by two properties owned by an unconsolidated fund.

And the $115 million loan due in September 2028, with interest effectively fixed at $2, one 9% until October 2026, which is secured by two properties owned by an unconsolidated fund.

After paying off the prior loans, we generated an additional $55 million in working capital. Our overall portfolio weighted average interest rate is fixed at only 2.94% and we have no term debt maturities before 2024.

Our overall portfolio weighted average interest rate is fixed at only 294% and we have no term debt maturities before 2024.

We also have significant financing capacity, that's 46% of our office properties are currently unencumbered. Office property sales in our markets remained slow.

Office property sales in our markets remained slow.

But we are starting to see some multifamily opportunities and we have ample liquidity for acquisitions as they become available. I will now turn the call over to Stuart.

I will now turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. We continue to see good leasing demand for both our smaller and larger tenants spaces. In Q3, we signed 242 office leases covering 819000 square feet consisting. Consisting of 262000 square feet of new leases and 557000 square feet of renewal leases.

In Q3, we signed 242 office leases covering 819000 square feet consisting.

Consisting of 262000 square feet of new leases.

557000 square feet of renewal leases.

Including approximately 50000 square feet of expansions. As Jordan mentioned, our lease rate improved 30 basis points to 87.6%.

As Jordan mentioned, our lease rate improved 30 basis points to 87, 6%.

Our occupancy increased 20 basis points to 85%. Due to our robust leasing activity during the last two quarters, the spread between our leased and occupied rate increased to 260 basis points.

Due to our robust leasing activity during the last two quarters the spread between our leased and occupied rate increased to 260 basis points.

Our leasing spreads during the third quarter were positive 3.9% for straight line. A negative 6.1% for cash.

A negative $6 one per cent for cash.

As a result of significant tenant improvement allowances for one large tenant, our leasing costs this quarter increased to $6.08 per square foot per year. Excluding that tenants are leasing costs remain below our pre-pandemic average at only $5.52 per annum.

Scooting that tenants are leasing costs remain below our pre pandemic average at only $5 52 per annum.

Our multifamily portfolio remains essentially fully leased at 99,3% leased with rents now back to pre-pandemic levels. 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 third quarter of 2020-FFFO increased 19% to 48 per share. AFFO increased 26.6% to $87.6 million.

Turning to our results compared to the third quarter of 2000 20-F.

<unk> increased 19% to 48 per share.

A S F O increased 26, 6% to $87 $6 million.

And same property cash NOI increased by 13.5%. Compared to the second quarter of 2021. FFO per share increased by 1 cent due to higher rent collections, more tenant recoveries, increased parking revenues and better multifamily occupancy and rents.

Compared to the second quarter of 2021.

<unk> per share increased by one seven due to higher rent collections more tenant recoveries increased parking revenues and better multifamily occupancy and rents.

Our expenses also increased as a result of fees and interest associated with our new loans and increased seasonal utilities. As Jordan mentioned. Only 1.5% of our FFO is noncash as we had minimal noncash rent from straight line and above and below market lease adjustments.

As Jordan mentioned.

Only one 5% of our F. O is noncash as we had minimal noncash rent from straight line and above and below market lease adjustments.

Our G&A also remains very low relative to our benchmark group at only 4.8% of revenues. Turning to guidance, we expect fourth-quarter FFO per share to be between 47 cents and 49 cents.

Turning to guidance, we expect fourth quarter <unk> per share to be between 47 and 49 cents.

As usual this guidance does not assume the impact of future acquisitions dispositions financings or property damage recoveries.

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

We will now begin the question and answer session. To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys. To withdraw your question. Please press star then two.

To ask a question you May press Star then one on your telephone keypad. If you were using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

Again in consideration of other participants, please limit your queries to one question and one follow up, thank you.

At this time, we will pause momentarily to assemble our roster. Our first question is from Steve Sakwa with Evercore ISI. Please go ahead.

Our first question is from Steve Sock, what with Evercore ISI. Please go ahead.

Hi. Thanks, a couple of questions. Jordan on past calls you sort of talked about the missing bucket of revenue that you know where due to tenants that were in place, but not paying and I think that number was somewhere in the $12 million range of money that was owed to you. Do you have an update on that figure just based on some of the comments you made about better collections and things improving on that front?

On past calls you sort of talked about.

Call. It the missing bucket of revenue that you know where where due to tenants that were in place, but not paying and I think that number was somewhere in the $12 million range of of money that was owed to you do you have an update on that figure just based on some of the comments you made about better collections and things improving on that front.

Well, I wish you are right that it was 12 million. It got as high as 70 million that never came off you know it came down I said we were sort of down at 60 for a few quarters in now and then it came down to 50 high 40s, 50, maybe a little over 50.

That's kind of a zone we're at. Although it's declining a little bit every quarter I mean, it's I would say the last few quarters. It's been on a very similar trajectory, we gain a little bit of ground, because more and more people kind of roll into paying. But I don't think we're going to gain big ground on that front.

But I don't think we're going to gain big ground on that front.

Last time I looked at it was like $47 million.

Right. Okay, but just to be clear that's an annual number so quarterly you're kind of in that. No. That's not an annual number, that's everything from the beginning of the pandemic.

So take anybody wait like we had basically no defaults in normal times I mean, it's less than 20 basis points. So go from the time of the moratorium all money that's owed to us from that time, that's what I'm telling you.

It's not a quarterly number, it's not an annual number. I guess at this point, it's a six quarters number.

What's the address.

Okay.

Understood. Maybe just switching gears on the sort of maybe potential debt refinancings, I know you sort of talked about this a little bit. You've got some loans coming due but not till '24, but some swap rates that burn off.

Maybe just switching gears on <unk>.

On the sort of maybe potential debt refinancings, I know you sort of talked about this a little bit.

You've got some loans coming due but not till 'twenty four but some swap rates that burn off.

Maybe at the beginning part of next year. I'm just curious how should we be thinking about that some of those look like they're above market today. And so I'm just curious in your ability to get it like that $300 million that comes due one 1124 with a swap maturity of one 1122.

To get it like that $300 million that comes due one 124 with a swap maturity of one 122.

So of course, we're. As I said I'm not trying to announce anything wrong or anything that we haven't already, we did announce like a 700 million to loans. And don't worry, we didn't just like do those loans and stopped working.

I said I'm not trying to announcement of bombs or anything that we haven't already we did announce I like a 700 million to loans and don't worry we didn't just like do those lungs and stopped working.

Hey, I'm on a tear to refi and bring our cost of debt down and we've been quoting it to you. So you should be very reasonable or assume that we're able to read our debt chart the same way as you are and we're working on it every day.

Right. Okay, but I guess, it's fair to assume that the benefits will accrue to you sort of when the swap data mature as opposed to the debt maturity dates.

You can even take swaps and extend them blend you should just assume I'm doing the best economic thing for us I can do for anything. That's at rates that I think we can improve on and extend out and locked in for longer periods of time and I mean like you know.

We have very little aside from swaps, we really don't have that loss costs associated with redoing it or whatever I mean, usually we have 18 months or something where you cant pay it off. So that means that everything is there you look at swaps do you look at where when that expires. I mean, you look at spreads on loans and you go you know. What's out there that we can work on it to keep improving and lengthening that latter at lower cost.

What's out there that we can work on it to keep improving and lengthening our.

That latter at lower at lower cost.

And we're definitely doing that I mean, we're super focused on it.

Like Super focused on it.

Okay. Thanks.

The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.

Hey, good morning up there. And congrats on I guess, two things. One, people come back to your offices also a little bit hopefully, they're paying a lot in parking. And two, the positive absorption. You're going into these, is it Jordan, what do you think is driving the office utilization? And don't say that you guys offer free coffee and concierge service when they come up to park.

To the positive absorption so.

You're going into these is it Jordan what do you think is driving the office utilization and don't say that you guys offer free coffee and concierge service when they come up to park.

Is it really just a small tenant profile that a lot of those tenants are now coming back or is there something specific to the west side of LA market and the Honolulu market that people in those markets are coming back to work in the office much quicker than we're seeing in the other CBDs?

I think there's probably three things that all kind of lean strongly our way. So the first one is our markets, whether it be downtown Honolulu, or obviously, the west L. A or a longtime turned the valley have really sort of embraced vaccination were up in the 85% range on vaccination. And we are seeing super minimal COVID like you know when you do your hospital checks and you see say merging rooms, or just how many COVID-19 patients or the hospital, we're talking about small small numbers or single-digit numbers in humongous hospitals right. So that's number one.

Lean strongly our way so the first one is.

Our markets, whether it be downtown Honolulu, or obviously, the west L. A or a longtime turned the valley have really sort of embraced vaccination were up in the 85% range on vaccination and and we are seeing soup.

Super minimal Covid like you know when you do your hospital checks and you see say merging rooms, or just how many COVID-19 patients or the hospital, we're talking about small small numbers or single digit numbers in humongous hospitals right. So that's number one.

Number two is. For better or worse. We haven't embraced mass transit so it's really easy to get in your car and drive into work.

For better or worse.

We haven't embraced mass transit so it's really easy to get in your car and drive into work at.

And you know we don't have all the checking and everything when you come into the lobby, I mean, you just drive and park of your space come up they'll have everything and go in your office. So because that is so easy and user friendly I think that's putting a lot of people on. Now, the third one which you brought up which is right which is whether it be our smaller tenants, the nature of our markets. The nature of our buildings in our building floor plates.

Go on your office, so so because that so easy and user friendly I think that's putting a lot of people are now the third one which you brought up which is right which is whether it be our smaller tenants the nature of our markets. The nature of our buildings in our building floor plates.

Most of our tenants are built out around 225 feet something in that range and so what happens is we don't have the dense packing here and without dense packing, you don't have, you know people are more comfortable more comfortable coming in. And then I guess, there's a fourth in the fourth is probably the biggest. I should've mentioned in her first, which is small tenants local tenants are not driven by national policies and so if you haven't if you have a tenant that has to set a national standard for all over the country have different things are going on whether in northern California, or in Ohio, or wherever they may be. They're running a lot more conservative than our local tenants says hey, everything's good, everybody get back in.

We don't have the dense packing here and without dense packing you don't have you know people are more comfortable more comfortable coming in and then I guess, there's a fourth in the fourth is probably the biggest I should've mentioned in her first which is small tenants local tenants are not driven by national policies and so if you haven't if you have.

Tenant that has to set a national standard for all over the country have different things are going on whether in northern California, or in Ohio, or wherever they may be there, they're running a lot more conservative than our local tenants says hey, Everything's got everybody get back in.

And so there are tenants are much more nimble. Even we are seeing in our largest tenants, which are driven by national you know national policy, It's mostly coming out of New York and then they leading to an extremely conservative side of things than we see them being slower to come in or many times told they can't come in.

Even we are seeing in our largest tenants, which are driven by national you know national policy, It's mostly coming out of New York and then they leading to an extremely conservative side of things than we see them being slower to come in or many times told they can't come in.

Whereas with smaller tenants very fast to come in and say everybody get back.

Okay, and then the second is on the absorption clearly great to see it in the quarter you guys mentioned previously that you're focused on occupancy build before you deal with rent. So is third quarter is this an anomaly in the fourth quarter is going to be negative again or is fourth quarter shaping up to be like third quarter? And if that's the case, how many quarters of positive absorption do you need before you push more on rate?

Obviously that you're focused on occupancy build before you deal with rent. So is third quarter is this an anomaly in the fourth quarter is going to be negative again or is fourth quarter shaping up to be like third quarter and if that's the case, how many quarters of positive absorption do you need before you.

Pushed more on on rate.

So.

Yeah.

I think the market's improving straight out, that's for sure the case sent people coming back and the pace of activity.

But I don't want that to take away from our leasing because they are running on one of those rats treadmill wheels at a hyper pace and they are scrambling to get us back into the 90% range. So there's sort of two things going on.

Super fast and aggressive leasing that just keeps getting better and better against a market that's also getting better and better.

And you know you can't let up on either one so there's really no coasting there's not going to be any kind of free ride, but certainly, all of that hard work and all the lead generation and all of the direct connect it's all coming through and it's all starting to pay and so I'm super happy to get that positive number and I'm hopeful going forward about it.

Super happy to get that positive number and I'm hopeful going forward about it.

If you ask me kind of the question of pushing rents. I hope that we get tenants during the pandemic and shorten up their leases. So that means we have a little more to lease each quarter, but of course, there's more people wanting to lease and to extend.

Asked me kind of a question of pushing rents.

I hope that we get.

Tenants during the pandemic and shorten up their leases. So that means we have a little more to lease each quarter, but of course, there's more people wanting the lesion and wanted to extend.

So I hope we soon get into a position where we're getting more and better positive absorption. And then but with that first of all direction matters right. The direction is positive absorption that matters, but equally important is you got to be up around 90% before you're going to push rents. So however time it takes to get to pick up. The next you know 300, or so basis points that'll give you the idea of trying to push rents. And. And you know that is. Depending on our hard work, but also include depending on. The markets continue to improve it is a big improvement to be at that 70 plus percent utilization rate that makes a big difference.

The direction is positive absorption that matters, but.

Equally important is you got to be up around 90% before youre going to push rents. So however time it takes to get to pick up. The next you know 300, or so basis points that'll give you the idea of trying to push rents.

And.

And you know that is.

Depending on our hard work, but also include depending on.

The markets continue to improve it is a big improvement to be at that 70 plus percent utilization rate that makes a big difference.

Okay. Thank you.

Thanks.

Next question is from Craig Mailman with Keybanc capital markets. Please go ahead, hey, guys.

MS Jordan, maybe follow up on the utilization and how that kind of relates to the rebound in parking revenue I know you guys had some improvement this quarter, but you're still probably thirtyish percent off of where you were a third quarter at 19 kind of pre pandemic.

Is there are you guys seeing any different patterns with hybrid work where people are buying monthly isn't are buying daily passes and that's impacting it or could you just kind of.

Walk us through how much more utilization you need to kind of get back to par pre COVID-19.

Yeah. So I saw you did that calculation that oh, so when we look back parking as cuts calculation not so on and if you really.

We have access to more data than you do but that but that number would have given you numbers of closer to a 75% okay.

But we have a lot of other ways that we can look at whether it be card count whether it be tenant survey and also just our managers at the building's going through and see who's in and occupancy. So what we do to try and figure out Utilizations, we take all of those numbers and try it.

But frankly that triangulation we lead.

To the lowest end of that.

So some of the numbers as I just told you about parking some of those numbers actually indicated an even higher number and even to the lowest number of triangulating in Hawaii at 80.

But I guess, what I was getting at is you guys in the buildings utilization is increasing but the revenues from parking are still off right. So how much more utilization do you need to get in.

In the buildings to get kind of back to where you were pre COVID-19 and is there anything in terms of the schedules of people coming in that's altering it you know if youre getting monthly versus daily or anything on that front.

Well I would say that the parking utilization the parking revenue is extremely well tied to utilization early on which you might be indicating it was not because your expense savings over the fact that not as many people using the garages.

Right now.

It's pretty closely tied.

So you know.

I think we need to get the utilization to get back to 100% announced that remember I'm not sure anyone's ever utilizing their space, 100%, but we need to get back to the point where people are.

You know they are expecting to use those patients up that the the economic calculation around daily and monthly passers shifts back to monthly passes now we're obviously getting there at a pretty good clip.

Cuz.

This is being driven by monthly not daily, but you need to get the rest of the way.

That's helpful. There just separately on on same store Peter I don't know if you could kind of walk through the components of what drove the 13% I know its revenue and so part of it is occupancy part of its rate I'm just kind of gets most curious about how much of that upside is driven by just better collections or the rig.

Covered some of that 60, that's now at $47 million.

Yeah.

So it's a combination of all the things that you know Jordan laid out.

The opening remarks.

Giving the overall.

Improvement so yes, there's some collections improvement in parking tenant recoveries all of those play into the you know the office numbers offset by.

Partly by slightly lower occupancy and then on the multifamily side you've got improve.

Improvement in occupancy versus last year, as well as rent improvements and some collection improvement.

But it's not one thing it's kind of there's no standout that drove the upside not one thing it's the combination of all those factors.

Great. Thank you.

The next question is from John Kim with BMO capital markets. Please go ahead.

Thank you.

So it looks like William Morrison endeavor has the option to terminate their lease next year do you get a sense that they will exercise that option and when will you know when they make a decision.

Well, we don't really discuss individual leases, but even if I would've loved to discuss at least some idea.

So I.

I don't know.

Yes.

So they're just the write off but they're not yet.

Yeah, they're not going to tip their hand before they need to yeah, it's gonna be a negotiation there yeah. There in one of our best properties in the heart of the triangle in Beverly Hills. They are an extremely below market lease.

So you heard imagine they would want to give that up but we'll have to wait and see what they decide.

Can you tell us which quarter the tenant option isn't.

Yeah. So it's in a well that they have to give us notice that by the end of this year.

Okay.

Kevin can you elaborate on your prepared remarks, you mentioned acquisition opportunities the multifamily I'm.

I'm, just wondering has pricing gotten better on a cap rate basis or versus replacement costs or are you just feeling being more sellers in the market today.

We're just sort of the multifamily market nationally is.

Hot and when do you have a hot market it drives out product and so we're seeing a lot more product in the L. A area of people that are.

Our offering properties for sale.

On the multifamily side than we are on the office side, which is still fairly slow.

Can you give an indication on cap rates.

When cap rates of opportunities Youre looking at.

Well, it's it's fairly low.

Well, let me put it this way.

I mean, I think for for some very good day I don't think it's out there.

It's really low.

Right.

Okay. Thank you very much.

The next question is from Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, Good morning, maybe to ask about occupancy a little differently you guys have a 2.6% spread between your leased rate and the actual occupancy within your portfolio.

Based on your historical numbers I think that's typically closer to about 1% on average.

See any major impediments to occupancy following that lease rate up in the next few quarters and do you think that 1% spread between leased and occupied as a fair target for us to think about longer term.

Okay.

Yeah, Blayne I think if you look at the long term average it's more like.

161, 7%.

Not not down at one one would be pretty tight for us I think that you know as we're coming out of this and gaining occupancy we're going to see choppiness quarter to quarter. So I don't know that it'll be a smooth line up but yeah. This is $2 60 years is historically pretty high for us as we've been doing you know we had a huge leasing quarter Q2, and then another really solid.

Leasing quarter Q3, so we got to move folks in over the next few quarters.

And as folks get moved in that.

That gap should tighten although we hope to continue doing a lot of a lot of leasing.

And into future quarters, because demand has stayed really good. So it's not a it's not a gap that's concerning in any way, but I.

I think we you know.

Long term average more like 170 160 basis points.

It's good but I'm happy when that's a very wide gap because that means we're doing a lot of leasing and those tons are going to move in and our overall occupancy number move up and that got states. When we get up to 93% I think we were maybe even a little higher than that going into this thing than it was very small because there's not a lot of room not a lot of free.

Actual activity happening, but when you have a lot of leasing you need to do you want that got to get big because it means we're doing a ton of leasing and those people move in all your numbers are about.

Right No. That's helpful. And then maybe sticking with you guys Jordan or Stuart can you talk about tenant concessions you're seeing at this point. We noticed you know leasing costs were up a bit this quarter and I know that that can bounce around a lot from quarter to quarter, but I think you know in the past couple of quarters, you guys highlighted the tenants we're willing to trade.

T is for competitive rent was there anything in the quarter that would suggest their mindset might have changed or was there something else in there that may be skewed the numbers.

Yeah, I mentioned it briefly in my opening remarks, but we did have one large tenant for us pretty large tenant that skewed those numbers up this quarter.

<unk> taken that one's hand, it out our leasing costs were actually below our pre pandemic average so it went down to like $5 50.

For the six O eight that we posted so that definitely skewed numbers.

We have cut concessions low free rent all that kind of stuff that has never been high for US has remained low throughout the pandemic. So that's been good to see.

So nothing else that really changed no trends to point you in the quarter other than that one very large lease.

Great. Thanks for the color.

The next question is from Manny Korchman with Citi. Please go ahead.

Hey, guys.

Jordan going back to the utilization for a second do you have any idea of how that compares to sort of neighboring buildings or your submarkets is everyone's seeing that and then you know what.

If people are looking at castle or or some of the other nationals fast are those stats just wrong.

Or is there something unique about your buildings your tenants your assets.

That's bringing it higher that number higher than people expected.

I don't I mean, obviously, we don't have the numbers, we don't have that kind of information on our neighboring buildings. All I have on those is kind of observation I mean, I live here and I will tell you. If you said traffic community people walk on the streets restaurants, paying full shops painful sports events and filling up.

Its all all of that.

See digitally is consistent with what we just told you about people coming back into the office, but I don't we don't have any data on that.

When youre looking at castle, the other there, including obviously like downtown Los Angeles, and Matt for L. A which is a totally different product type than what we have in house all of the national challenges that Jordan mentioned earlier, they've got corporate policy, they've got huge tenants that.

But we're not the only ones, yeah and by the way government, which as Brian said, mostly downtowns not in they're not in there still home.

So all the city.

State all of those guys downtown federal courts Theyre not in.

So downtown is still well, but if you came to the west side, you wouldn't know there was anything you would just go full tilt. There's traffic and road chance.

Still well me, but if you came to the west side.

You wouldn't know there was anything you would just going full tilt.

Traffic in.

Road chance.

Great and.

Maybe this is one for Stuart.

Just going back to lease to occupied spread is there anything in the commencement timing of the new leases, you're signing that would actually.

Has that number expands near term where.

People are.

Yeah, theyre signing leases, but they're not moving as quickly as you had in the past.

Could we see a number of expand without occupancy expanding the leasing continue to be good.

No no I don't think we've seen anything change in our typical kind of move in schedule typically our tenants moving pretty quickly it does take a few quarters.

To get everybody moved in from when we were signing leases, but we haven't seen any trends, where that's gapped out on us from from what were typical typically saying.

Hey, it's Michael Bilerman here with Manny. Maybe one of you just can you just explain what is the actual utilization calculation to come up with that 70%?

Maybe one of you just can you just explain what is the actual utilization calculation.

To come up with that 70%.

I don't know if thats unique visitors over the course of the quarter.

It just you don't have the same sort of card swipes and things like that so I'm just trying to understand what that 70% actually is based on.

Sure sure.

It's what I said.

That earlier, one there's four ways.

We get information.

One is parking revenue and parking parts coming in and then there are some buildings with card swipes going up that's the second way that that that data a third way is our.

Our.

Managers, and our day or day parts that whole crew through observation questioning I'm, saying where's it out how full or the Florida health, how many tenants are actually coming down in Houston or space.

In the fourth way is we actually sent out tenant questionnaires.

And asked them.

About their utilization of their space, but are you like putting all of these into a model and Triangulating what is it.

70%, what you believe was daily average occupancy over the quarter using these four techniques in some way shape or form.

The reason I'm, asking so 70% teams even for friends I speak to on the West coast like they don't say their buildings are 70% full every day and I Wouldnt imagine its Monday through Friday, and so I just wanted to really Peel down what the actual number represents in terms of human bodies, rather than a tenant.

Okay. So.

They're each you know they're each unique in what they give you we actually when you say triangulate I as I said, we gave you kind of the lowest possible number I know that contradicts what you're expecting but we did so when we do tenants surveys and say we are back in the office I don't know what I mean, I guess from when they answer that survey, that's what they're talking about okay.

As you are counting their back.

Like if the tenant rights back and we're back you're assuming that it's 100%.

Yeah like in that building has. Hundred tenants and 70 of them, saying, we're back in and working then we go that 70.

Hundred tenants and 70 of them, saying, we're back in and working then we go that 70.

Okay.

Actual people that are coming through each day, so like here at city right I mean, we're sitting.

I would say we're back in here I saw that.

But our density as you know.

35, 40%.

So if a week.

Even though there's more weight.

Yeah, I got it so theres four but I <unk>.

Four things right. So the second is parking.

So people are buying their parking passes and we see that they are coming into the building.

Okay. So when you say alright, we look at the revenue we're getting out of people that have come back in because we know the revenue tracked very closely to your utilization you remember how lower trough and we go Wow that revenue as I said, the revenue and people starting to pay again for parking is actually above the <unk>.

70%.

And then the third thing is in buildings, where we do have tracking of people doing the cars in the elevator like ours, you come and visit it means you got to your card in the elevator.

To get up to your space, There's a third method.

Alright, and so and which.

Which one did and I mentioned that.

I think you've covered it well talk about that.

Oh, Yeah, and therefore, yeah in the fourth is that managers going in and opening doors.

And saying our people in here working now, they're not going into guys suite and counting them, but if they are opening doors and now theyre, saying, yeah. We're at least at 70%. We opened it says receptionist, yes, we're operating we're back in the office we go okay that counts.

So I don't I don't I don't know that I can give you a you know a formula where all of those statistics go together, but I guess I.

I'm pretty confident in our numbers.

Does the parking effect sort of people that are not necessarily working that building, but going into restaurants or other things and you know if.

If people are not carpooling, so you'll have more.

People, just driving to work on their own.

Maybe they are not using any form of public transportation, I mean could that be driving it relative to the past as well and it certainly is a lot more traffic here in New York right because most people are taking public transport.

Yeah, I mean, all of those things that you're saying could be parking indicated an actually a higher utilization rate than 70%, but but.

Aye.

Don.

I think theyre, having the impact that you're indicating they're pretty minor I I.

Without those things really are our highly impacting things okay.

Okay, and then just thinking about 'twenty two 'twenty three right you've got about things like 30, 35% of the rent Rolling how far ahead of you of those can you get and can you just comment on sort of mark to market.

Because there's room for a little bit higher than where you've been signing rents recently and I know there may be a mix issue or a location issue.

Well, our mark to market historically has been like 10, 11% and now its dropped almost a flat maybe at that flat.

So my comment on Mark to market isn't till we get back to lease rates up closer to the 90%. I don't think we're gonna be able to do meaningful improvements to that mark to market number. So that's number one. And then number two, as you're asking sort of the timing question that for the entire pandemic I've been saying is that you know 100000 dollar question, which is how long is it going to take for us to recover our occupancy at least right now excusing, obviously separate from utilization I think utilization is coming back super fast. And probably gonna help drive higher occupancy but I don't have a good prediction around that. You know, we lost 600 basis points and essentially five quarters, right and now we've turned it and you know I know I'm not foolish to think five quarters to recover 600, but I don't know how many quarters.

And that for the entire pandemic I've been saying is that you know 100000 dollar question, which is how long is it going to take for us to recover our occupancy at least right now excusing, obviously separate from utilization I think utilization is coming back to the Super fast. Yeah. You know. Gonna help helped drive higher occupancy but. But and <unk>. I don't have a good prediction around that I you know, we lost 600 <unk>. <unk> points and essentially. Five quarters, right and now we've turned it and you know I know. I'm not foolish to think five quarters to recover 600, but I don't know how many quarters.

Yeah.

You know.

Gonna help helped drive higher occupancy but. But and <unk>. I don't have a good prediction around that I you know, we lost 600 <unk>. <unk> points and essentially. Five quarters, right and now we've turned it and you know I know. I'm not foolish to think five quarters to recover 600, but I don't know how many quarters.

But and <unk>.

I don't have a good prediction around that I you know, we lost 600 <unk>.

<unk> points and essentially.

Five quarters, right and now we've turned it and you know I know.

I'm not foolish to think five quarters to recover 600, but I don't know how many quarters.

Right because it was the 22 and 'twenty three rents we're gonna be comping. Some elevated as you've as you came out of the GSC and we're pushing rents pretty hard with higher escalators, you're expiring or.

You are coming up to the higher rent years, just given the lease term that you've had in your markets how well your markets.

Yeah, I don't think you know.

That that that one stat that you're pointing out has not worked as you might've instinctively think I mean actually it.

The higher rent markets, we tend to get like that roll up into lower rent markets tend to stay flat longer because that's why they were lower rent markets.

So if you're looking at kind of higher rents rolling usually that means that we're going to get better raw numbers than when you have lower rents rolling but I I don't need to.

I would caution against using that to predict something I think because I think markets like.

Those higher rent markets, whether it be Santa Monica or most of the west L. A at this point.

David David held up pretty well on rents.

Strongly on rent.

Okay, alright, thanks for the color appreciate it alright.

Alright.

The next question is from Jamie Feldman with Bank of America. Please go ahead.

Thanks.

Not to beat a dead horse, but just to confirm the 70% is that a percentage of pre pandemic levels or no thats just of all your tenants.

The percent or in the office.

That's of.

All our tenants of how many who's coming into the office.

Okay cool.

I guess just to you've obviously you had a big spike in leasing in the second quarter. It held up pretty well can you just talk more about who is actually signing leases.

How many of these are tenants that.

It took some time off and are now coming back how much is actually kind of incremental growth clearly there's a lot of sectors that are expanding right now maybe just some more color on that.

The current leasing pipeline and what we've seen in the last couple of quarters.

Yeah, Jamie I mentioned in my remarks, we did have a good expansion quarter. We did 50000 feet of expansion so great to see that our current tenants are growing and that's a net expansion you know our expansions have been outpacing contractions amongst our tenants.

For several quarters, so that's great to see and we're seeing.

The typical diverse set of tenants that we always see and we've got that great Pie chart in the supplemental for you guys that shows all the different industries that we lease to it's not dominated by any one industry or kind of tenants, we're seeing great demand from our smaller tenants that's been true throughout the pandemic they've really held us.

In 2020, when the when the larger guys seem to be sitting on the sidelines and that's remained true, but we've you know last quarter, we talked about and again through this quarter larger medium and larger tenants for us.

Hum started transacting again in a meaningful way so.

Positive kind of across the board.

We're seeing you know I haven't heard that we've seen a huge trend of tenants that were sitting on the sidelines that are coming back I haven't heard that but I've just been hearing that it's it's our kind of typical demand we always have tenants moving from other buildings new business has been created.

It's that same mix that we're used to seeing.

Yeah, I was going to ask about taking from other buildings. After all the after the money you put in years I mean is there a consistent trend there are certain assets that are losing tenants types.

Types of assets.

You know, we've always outperformed the markets that we're in even you know even being 40% on average of these submarkets. Our occupancy has typically outperformed the buildings in our markets you know sometimes it can be several hundred basis points of occupancy outperformance. So we all I think we run.

Great class a portfolio, we have been investing in some of our buildings and with these repositioning. So I think those have been great returns and we have had tenants moved from other buildings into our building. So you know we're going to continue that program. We think it's been successful.

But yeah, it's not it's not atypical for us to outperform.

The buildings around us in a meaningful way.

I agree with everything I, just said, but I'll also say those repositioning either doesn't this pandemic even in everything.

Oh great.

So if you said to me I think we underestimated the rent differentiation that we would be able to get from the money were spending. I mean I wish we had $1 billion of repositioning.

I think we underestimated the rent differentiation that we would be able to get from the money were spending I mean I wish we had.

Billions of dollars of repositioning.

But that's why you saw us even during the middle of a pandemic when we started them.

Okay.

Then our.

Our tenants looking for any more flexibility in their leases I know, you're relatively short term leases or smaller tenant leases.

Anyone asking for.

You know stuff that might look a little bit closer to what they can get from a co working space or flex office provider or maybe.

Certain days of the week or anything different coming out of the downturn.

I Havent heard that I think tenants are always looking for flexibility, where you know we're in the long term leasing business, we're not in the flex workspace business.

It's typical in a recession that tenants tend to go shorter on the leases and we've seen that we've seen that in every cycle.

When the economy is doing great tenants feel more comfortable signing longer term annual spend and vice versa. So that's been true, but you know we're not.

We're not offering anything that resembles flex workspace.

So.

Tenants.

Yeah like early cancer, none of that.

Okay, and then you said.

A lot of the parking is coming back at least from the from your kind of your utilization count I mean, where do you think you are versus pre pandemic parking levels.

In terms of revenue well I actually said the nuts.

Parking on its own would have totaled 75%.

By itself adjusted Yeah.

For those tenants that are in yeah.

Okay alright, thank you.

The next question is from Rich Anderson with F. N B C. Please go ahead.

So this a four pronged approach to calculating that 70% is this the first quarter you've done that.

Uh huh.

It's not the first quarter, but it's the first quarter I spent a lot of time really nailing down those four things knowing that it was indicating a much larger number.

Maybe if people are going to have a lot of that I didn't think different ads. This is much about it but I knew they were going to ask a lot about it.

So I was just weather or 70 is the right or wrong number I think the most important number is the trend and so you don't have a reading from the second quarter.

To throw out there yeah, yeah. We did yeah. Yeah, we did have a reading from the second quarter and we gave it to you but it wasn't you just didn't ask so many questions about it and therefore, maybe like came and went without a lot of discussion.

Okay remind me because I don't I don't remember.

What we came in for a second.

We thought we were in the 40 to 50, Yeah. We gave you yeah. I think we said 40 to 50 for second quarter utilization yeah.

Yeah.

So what do you think you know obviously tenant confidence and you know all that good stuff.

Got.

Is this like foreshadowing to better leasing activity, just because people just feel better than you might even expect us to play a role in how well you lease space going forward, just because people feel better about things.

The leasing activity is foreshadowing of leasing activity I mean, the fact that we've turned the thing that positive, Georgia, which is no no small fee but that.

That's our biggest foreshadowing thing I don't know that you know obviously quarter to quarter, you're going to have some ups and downs, but I.

I mean, assuming pandemic and government and everybody stays out of the way and we get to keep going yeah, I feel very good and then I would say one of the symptoms.

Or all of that is utilization.

You know like everything is recovering and as utilization.

Okay any.

Any anything about wage pressure or supply chain disruptions that.

That worries you at it for any reason I mean, I assume it does to some degree, but perhaps less so in your neck of the woods smaller tenants left kind of Capex bites and all that kind of stuff.

Well.

I don't think there's supply chain tastes horrible and and and you know you can kind of take the narrow view of our tenants. That's the wrong way to look at our markets I mean, where we have the largest port in the United States. The most containers chart passing through it this thing needs to get cleaned up I mean, I looked at my window I see container ships.

We never had container ships in Santa Monica Bay So.

Yeah, I mean it needs it.

It needs to get fixed and people need to get back to work.

Yeah, Okay, and then last Peter any reason why we shouldn't expect double digit type same store growth in the fourth quarter you provided guidance I'm wondering what the underpinnings are from a same store perspective.

Well I mean, we're not giving guidance on same store it but yeah, we did give guidance overall.

You saw the range, we think it's consistent with what we performed this quarter and you got to go back and look at it.

Last year fourth quarter for the for the comparison, but.

I think all of the same factors, we've talked about collections parking a tenant recoveries.

Probably also see.

See what expenses come in.

Okay.

Alright, good thanks.

The next question is from Dave Rodgers with Baird. Please go ahead.

Yeah, maybe for Jordan or Stewart can help out with some of the numbers, but I wanted to ask about the new leasing volume it was down 45% this quarter sequentially and I realize there's already been some catch up but can you guys give us some more color on kind of how the quarter trended because it looks like the quarter came out weaker then you left the second quarter, but that's not what you're saying so I'm wondering if there was an August <unk>.

Packed in there and then also can you give us some color on October leasing with October in the books, how that might have compared to a five year average or something comparable to that.

Yeah, I'll just say you know second quarter was an all time high for leasing for US. It was a record quarter rec like record new record renewal I mean, we did we did more leasing than we've ever done. So I wouldn't take a all time record and expected trend forward like that Q3 was a very good leasing quarter for us regardless of the.

Pandemic anything like that and I'll just say, we you know we had the whole delta surge that happened to us in the middle of the summer Summer August is typically a slow month for leasing anyway. So all things considered very strong leasing quarter, new and renewal.

I wouldn't compare it to Q2 and say it was a big deceleration because I think Q2 was just an anomaly.

The high side, we did some very large leases in Q2.

No it's not typical for us so we knew that wasn't going to be a repeat.

Yeah, and I got to say a few.

Skip the second quarter, it's the largest quarter we've had since.

Like all of 'twenty 'twenty all of 2021.

Only the second quarter was larger it's our largest quarter in the last seven or eight quarters.

Fair point I guess as you guys look at October and how are you maybe last August how you left a September and how you left October were those all sequential improvements in terms of what your underwriting in terms of new lease deals.

I'd say that the pipeline still is very healthy on the leasing front I think we're feeling good about leasing. So the pipeline is looking good I don't know about sequential monthly we're not you know we're not getting into that but we feel good about the leasing as Jordan said tenants seem to be feeling more confident or coming back we are doing.

We're doing a lot of transactions, we have 242 leases that's a lot of leases signed in a quarter.

The demand is still there are still looking good.

Maybe just one follow up for Peter and don't have a specific dollar amount, but what was the rent <unk> reimbursement that you collected in the quarter that you didn't bill.

The dollar amount.

Yeah, we're not breaking that out, but we gave you the overall.

Trend in collections that it's been gradually getting better each quarter.

You know I think Jordan said earlier in the call but.

Not going to see a meaningful.

Meaningful impact on the big past due balances until the moratoriums expire.

There are tenants who are.

Still have past due balances a lot of the improvement is existing tenants paying your current rent and having that number go up.

So that's an important point because.

We've been asked the question a few times now on this call. So.

One thing is collecting past due amounts just to be clear that that number of 60 down to $15 47, whatever another is.

Tenant just going I'm, just going to start paying now.

And so like more and more people are just saying I'm just going to start paying now and then of course. They also it might be also catching up on old rent. So that's one of the drivers of that number is getting better.

Alright, Thank you very much.

The next question is from Daniel Ismail with Green Street Advisors. Please go ahead.

Jordan you mentioned in the past.

<unk> development pipeline on building on existing land and I'm, just curious what the status of that plan and why not accelerate it given how healthy multifamily pricing is.

Yeah, I'd love to accelerate it but you need the city to cooperate in both cities and they haven't necessarily even have been in the office. So we can.

Yes.

Accelerating those projects.

Being that you know council members and staff and all of that has to be around and say, we're going to work on a I mean, he's getting their attention it's like.

Brutal.

So.

Frankly, we know.

Crushed or wherever we can but.

There's a lot of agendas in the sea Ray.

And us developing apartments isn't very high up on their agendas.

I mean, so I guess is it your sense that.

Regardless of the state of the city's budgets.

If any of these projects.

Entitlement process does not necessarily easier.

Since the bandwagon.

Thanks Daniel.

And you know, we're having a lot of trouble hearing you. There's a lot of static on your line Yeah, I didn't I couldn't make I couldn't understand the question Oh apologies. This is just better.

No.

Okay.

Can you guys hear me.

Yes.

Okay great.

My question just related to the <unk>.

Process of entitlement.

Given the state of Citi budget.

I assume it's not gotten any easier.

The pandemic and be.

The overall deterioration that city budgets.

You know, it's not really a budget. This is Kevin speaking, it's not really a budget issue in these cities because the federal government.

The Mt.

But it's a workforce issue in that you have a lot of people that are zoom in from home and they're not as efficient and then you've also got.

Some vaccination mandates that are hidden where some of this.

Some of that people don't want to vaccinate and so they're out of the office.

And the cities are definitely less sufficient than the private sector and adapting to the.

The way that we work right now and so that's kind of slowed down everything and then on the political front too it's just tougher to.

Arrange meetings with homeowners groups and meetings with the various constituents and stakeholders in the marketplace. So it's slowed down overall.

But you know we're still focused on the areas that we think we can move it forward we are definitely spending time.

Great. Thank you.

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

Okay, well just thank you all for joining us and we look forward to speaking with you again next quarter.

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

Yeah.

[music].

Yeah.

Yes.

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