Q2 2022 Douglas Emmett Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Douglas and its quarterly earnings call. Today's call is being recorded at this time all participants are in a listen only mode. After management's prepared remarks, you will receive instructions for participating in the question and.
The answer session I will now turn the conference over to Stuart Mcelhinney, Vice President Investor Relations for Douglas.
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 in the earnings package during.
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.
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 thank.
Thank you.
I will now turn the call over to Jordan.
Good morning, everyone. Thank you for joining us.
As pandemic concerns subsided, we saw strong tenant demand and our local office markets.
During the second quarter, we leased over 1 million square feet.
<unk> 355000 square feet of new deals.
Based on parking income and feedback from our property managers, we estimate that our office utilization has meaningfully improved.
Now exceeds 80% of pre pandemic levels.
Despite leasing over 1 million square feet during the second quarter, our net absorption metric was slightly negative.
With the exploration of commercial eviction moratoriums in our markets. We are finally able to replace non paying tenants, while still pursuing collection of their outstanding balances.
So during the second quarter, we recovered approximately 100000 square feet from such tenants and that turned our net absorption metrics slightly negative.
We still have about 100000 square feet occupied by not paying tenants, which we expect to address by year end.
Although these efforts impact our nominal occupancy they will actually have a positive impact on our financial results as we have not been recognizing revenue from those tenants.
Our growing residential portfolio is performing well.
It remains fully leased and rents on new leases are increasing at a very strong pace. We added 162 units to our apartment portfolio during the second quarter due to the acquisition of one two to one Ocean Avenue and our ongoing conversion project at 11 30 to Vishal.
Our portfolio now includes over 4500 apartment units.
While tenant demand remained strong in Q2, we're closely monitoring the macro environment for recessionary impacts and we are already adapting to the impacts of inflation.
With that I'll turn the call over to Kevin.
Thanks, Jordan and good morning, everyone.
During the second quarter, we acquired 12, 21 Ocean Avenue and iconic 120 unit apartment property overlooking the ocean in Santa Monica.
Property is essentially fully leased.
Upgrading the common areas and the individual units as they roll and we are achieving significantly higher rents and our upgraded units.
Our development projects at 11, 32, Bishop in downtown Honolulu, and a landmark Los Angeles in Brentwood continue to progress nicely.
With the recent spike in interest rates, we are fortunate that our program to refinance $1 $3 billion last year extended our maturities and locked in very favorable 2021 rates.
We now have more than two years before any significant maturities.
With that I'll turn the call over to Stuart.
Thanks, Kevin and good morning, everyone. We had an extremely successful leasing quarter, signing 261 leases covering over 1 million square feet.
<unk> 355000 square feet of new leases.
For the reasons described by Jordan, our nominal net absorption was slightly negative, bringing our lease rate down to 87, 5%.
As Jordan mentioned, our leased to occupied spread widened to three 7% as a result of the large amount of new leasing you did during the quarter.
That number was also impacted by the permitting delays and onsite inspection delays that we have been experiencing during the pandemic.
Nearly half of our current occupancy backlog is scheduled to move in during Q3.
As we've been saying these past several quarters, we expect rent spreads to be choppy as our primary focus remains on recovering paying occupancy at this point in the cycle.
Our leasing spreads this quarter were positive three 5% for straight line and negative seven 4% for cash.
Our multifamily portfolio remains full at 99, 6% leased and we continue to achieve very strong rent roll ups on new leases across our various residential submarkets.
With that I'll turn the call over to Peter to discuss our results.
Thanks Stuart.
Everyone.
Turning to our results compared to the second quarter of 2021.
Revenues increased by nine 8%.
Same property cash NOI increased by five 1%.
<unk> increased by 9% to <unk> 51 per share.
Driven by increases in both office and residential revenue, including improved office parking income.
We offset by higher expenses, primarily utilities.
<unk> increased 15% to $89 $6 million.
Our G&A at only four 7% of revenues remains very low relative to our benchmark group.
Turning to guidance we are now.
Growing the range of our full year <unk> guidance to now be between $2 <unk> and $2 seven per share.
For information on assumptions underlying our guidance.
Please refer to the schedule in the earnings package as usual our guidance does not assume the impact of future acquisitions dispositions or financings.
I will now turn the call over to the operator, so we can take your questions.
In consideration of other participants please limit your query to one question and one.
If you would like to ask a question. Please press star followed by one on telecom.
If for any reason you would.
That question Sprint staff on site team again to ask a question Chris Darwin.
As a reminder, if you are using it.
Please turn with me to disappear.
Quick question.
The first question comes from the line.
Steve.
Evercore ISI you May proceed.
Thanks, Jordan I was wondering if you could just provide a little bit more color on the leasing environment I certainly can understand the.
Desire to want to take back the space, but can you give us some sense as to what maybe the pipeline looks like I know you've got a lot of space coming due both in the second half of next year.
Just trying to sort of figure out the cadence of occupancy improvement you know over the next say 12 to 18 months.
Okay.
<unk>.
I think so I focus more on making that occupancy because leasing is sort of the lead that tells you where youre going to what are you going to end up with occupancy because of the market calms down that spread just keeps shrinking and shrinking so I'm always looking forward to leasing but.
It.
I can tell you obviously, we had a great quarter last quarter I know there you know there was a slight loss in the occupancy number but it really was driven by the fact that we started now.
Moving people out taking space back to more commercial more times over and so it's really just impacting the stat. It did impact revenue, but the great News is we did 350000 feet of leasing so a lot of one on telling you. It's driven by the experience I saw I mean, we have we've had a little bit of July right.
Happened.
And we're on.
On track, but.
I'm definitely hearing a lot of the same things all of you are hearing about a potential slowdown in economy I can't say, we're seeing that yet obviously, but.
You know, we're watching carefully for that to happen. So it's hard to make go forward predictions.
Other than to say, assuming we don't have a recession that assuming everything is goes along good I would look at the last quarter and actually the last few quarters and the amount of leasing we have been doing going we're really.
Starting to come back strong and so strong we have the confidence in getting people out and saying, okay, let's let's start putting people in and if these people don't want to pay we're going to sort of have it out with them, but get them out of the space.
Yeah.
Okay and as a follow up you sort of mentioned dish up in the landmark can you just kind of provide any more financial commentary around the pace of leasing at our state of landmark where our rents are coming in versus pro for them and sort of where bishop is in the kind of evolution of that lease up.
Sure.
So this ship is is.
Both of them are moving quite well bishop.
Is when it's done it's going to be a little under $500 493, 493 units are I think we've done about 300 units were now gotten some floors back we're working on some more floors.
You know you have to wait for tenants to move out the finished we've done all the common areas.
Beautiful project I encourage anyone of our investors when you're in Hawaii to go by and check it out.
And we're still working through it it didn't say it was it is definitely a soda sort of a poster child, both in Hawaii and here for an extremely successful conversion for office to residential including maintaining a reasonable level of income because we still have tenants office tenants paying and as they move out we convert the Florida and it shifts over so that was.
A engineering feat and very successful and as I said, we're over 300 units down there and still building out floors.
Hello, Matt Landmark Los Angeles, since we've been calling out on L. A.
It really opened for tenants in April .
The leasing has gone extremely extremely well.
Had a little bit of a lag in terms that we've leased a lot you can't move that many people in so there's a lag between the amount of people that have moved in and the amount of leasing we've done. So I think we've done over 150 units of leasing that project 376 units.
But we're kind of just now catching up on getting them into the project because you know there's one freight elevator you can only move so many people at a time et cetera et cetera. So that project has also been very successful the rents are so far above.
All of our initial pro forma is about the project and even some later pro forma is that.
Thinking sort of abandoned the original pro forma at this point.
Yeah.
Did that answer your question favor.
Yeah, I mean, well, yes, I mean, I think you were tracking around $9 a foot maybe I just didn't know if that was still sort of holding or yeah, there's sort of pull back yet.
Yeah, Alright, great we hold onto the night, if we hold on to the $9 number which so far so good.
Credible.
Result for that project that's correct.
Great. Thanks, that's it for me.
Okay.
Thank you Mr stock, what's the net.
Question comes from the line of Michael Griffin with Citi. You May proceed.
Hey, Thanks for taking the question maybe to get back on the leasing I noticed the lease terms at least relative to last quarter were up this quarter, both on new and renewals can you sort of comment on that and kind of seeing how you are expecting you know lease terms for leases signed to be trending throughout the rest of the year.
You know frankly, I think our lease terms have bounced around a little bit and well, yes, I'd like to say the longer term, particularly in the Ah <unk>.
New deals.
I don't.
I don't take a lot out of that.
You know it depends on some larger ones that can be longer.
So.
Hi, Yes lease terms, you look longer but I'm not sure that I would read a lot into that and.
Though I will say that the number that I would read a lot into is the volume of activity that we had because that that's the number that I'm looking at it trying.
Quantify qualify the market and the demand and what's out there for us to get to our number one goal, which is our number one goal is to get all these trade back up over 90% remember we went into this around 93% and so that's what we're primarily focused on it and the only thing they can get on our way there.
If we get hit with a real recession and end up.
Without the volume being out there that we can get people into the space and that volume number which you saw this time in primarily the million peak fantastic 90, plus feet, but the 355000 feet and it was just.
Really wonderful number I mean, it's telling you that people are really coming back coming back in and as you heard in our prepared remarks.
The other thing that's very gratifying is that where we are now.
Soundly up over 80% utilization, so we're getting up into really good territory. There too all of which are very positive signs, although I've been reading a lot of articles about the other markets and thinking that we might be looking a little bit like an outlier.
Okay. Now that's helpful. Maybe maybe for my second question, just touching on a recession and I think we've seen some of your office peers come out and said potentially at a recession could be good for the office space I think we've seen kind of how historically that may not necessarily be the case, but curious to get your thoughts of what we could expect from an impact on the portfolio.
Just given the central recessionary environment on the horizon.
Well.
They take the recession could be good for the office space or inflation could be good for the office space.
They've been though.
It's the only way I would call a recession to be good is if it comes with a level of unemployment that puts employers back in the driver's seat and allows them to get all their employees back into the office.
Don't think it's something our markets necessarily need as you just heard people are coming back and beyond that you know reset recessions are a revenue hitting activity.
And if my tenants are feeling the impacts of a recession that I can't I can't imagine how I would think that's good now.
You could take the position that inflation.
Because you know fixed assets rise in value during times of inflation deflation has a long term effect, that's very positive for real estate. It has a short term effect of the.
The cost of running the buildings and our interest costs going up and we're in an industry that runs at some level of leverage so the interest rates have an impact on us I do think over the long haul inflation has generally left real estate in better shape than when it arrived.
But a recession.
I could only imagine maybe the thought would be a debt.
Unemployment would be up and therefore.
Employers would be in the driver's seat to bring people back in the office, which is where they want them other than that I would not be pleased to have us go into a recession.
Okay. That's it for me I appreciate the time.
Alright. Thanks.
Thank you Mr Gerson.
The next question comes from the line of Alexandria, Goldfarb with Piper Sandler you May proceed.
Good morning, good morning out there.
Jordan, you must have been pretty psyched to get.
That 100000 square feet back and Im guessing the same will be when you get the remainder.
Maybe a two part on that on that space.
One what are the steps that you need to go through to get back the remaining 100000 square feet and then Stuart if we just do simple math on the space.
Should we just take like 40 bucks it but Todd.
I missed the 200000 square feet and spread it out over two years and then assume that that's the income pick up over the next two years or is it something.
More to the math on that.
Well each the process for getting each space back varies.
Certainly you start with that.
Payer quits and DS and a lot of times at the end of it and then you're in a position the calculation about what the pickup I mean.
So we just said it wasn't going to be net it wasn't going to be negative because were not recognized any income from those people.
I've always said.
That included that we will collect a lot of money from the people that haven't paid us and we have collected a lot of money from the people that have paid us and I've said, we won't have more than 2% default and we won't have more than 2% default, including collecting money from these people.
But in the end once you make decision to get them out and make sure things happen, including that they kind of Oh use a whole lease but you have the obligation to mitigate and re leased the space to figure out what they owe you and then you end up making some kind of deal about that.
So that's a pretty complicated process it would be hard to make a prediction certainly it would be hard to say you take a number and you spread it out over the next couple of years, because you know they're going to they're obviously people that have resisted paying we decided it was time to just get them out and we also believe they have money.
So they can pay and so where we're now.
We need to do or will do some mitigation, we will try and collect from them and it'll play out just like it's been happening under California law for 50 years.
But Jordan I guess, let me maybe I made too complicated just simply 200000 square feet 40 Bucks a foot thats like $8 million should we assume 8 million of NOI pick up you know over the next two years, so adding 4 million next year and added an incremental $4 million like I'm just trying to think of earnings we should think about earnings.
Uh huh.
Or is it that simple.
I think that well that the.
Fact that we have another couple of hundred.
100, now and probably 200000 feet that we'll have available for lease is obviously has value which can be calculated that way, but the reality is we've been saying for a while we have.
We had a 600 basis points or maybe not 500, and some basis points pick up that I think we will pick up as the economy recovers and that's a lot more money than you just mentioned.
But I would just make sense based on what the rest of it.
Okay, and then moving to the balance sheet you guys. Finally have some floating rate debt I think there's about $550 million that just had swaps burn off and I think it's due in 2027 can you just talk about your thoughts on floating rate debt in the current environment are you thinking about implementing some near term swaps or you know what.
Your thoughts around because you haven't had any floating rate for a while so now that you have it in rates are rising just trying to.
See what youre thinking about it.
Hey, Alex it's Kevin I'll answer that.
Our program is to borrow for seven years and swap for fives, which gives us a lot of flexibility with that.
24 month runway to refi.
And.
That strategy provides flexibility, which is exactly what you need in the current market.
As you're well aware, there's a lot of turmoil rates have gone up and.
Just as importantly spreads have gapped out.
So it's really not an ideal time to do anything until things calm down.
And you know we're monitoring the market and.
We're gonna take advantage of it when it makes sense, but right now it's just not an ideal time to do anything.
So we don't let that.
So we let that go to floating because it's just not a good time, a lot of things and right now there's too much turmoil in the market.
Okay. Thank you.
Thanks.
Thank you Mr Goldfarb.
The next question comes from the line of Nick <unk> with Scotiabank you May proceed.
Thanks, Hi, everyone. My first question is just going back to the you know the occupant occupied versus lease number that gap you talked about this three 7%.
And then in the release you talked about a half of that.
Is oh or half of the current occupancy backlog scheduled to move in the third quarter I just wanted to be clear are you, suggesting that we take the three 7% take half of that so you're right. Yeah, just under 2% of occupancy pick up next quarter. Just from is that the right way to think about that.
Well the changes the occupancy you have a lot more to do with just absorbing that yes, some outs and you have that going in and actually even though I think will pick up.
Saying that half, saying that half of that people have with a three 7% will move in is simply giving you pacing for what's happening in a matter of fact, we could end up with that number again next quarter. If we do a lot of leasing this quarter, we could do a lot of leasing and that number could stay there, but what we're trying to give you a feel for us and.
And I think it was in the I guess that wasn't.
Amendment store et cetera.
Is there is a couple it's a very wide gap.
And we were just trying to give you a feel for the pacing and the cause of that gap because when you look at you go what the heck I mean, all the all of these people 12 months to move in or what which is why we said about half of them are actually moving in next quarter. But then we also said, but here's what's driving this number one we're doing a lot of leasing, particularly a lot of new leasing which was off.
Susan.
What drives that number but numbers two and three both relate to just the <unk>.
The pace at which you can get to city out to do inspections, the pace at which you can get.
<unk> approved I mean, the world has just slowed down and we're very good at speeding things up during tough times, but it's just the world is slower and by the world being slower, especially in terms of getting People's T I's dotted and getting the final sign off that by itself when you're leasing a lot even exacerbates the.
Gapping out.
And you can tell that that's what's going on because it's not even a ton of work we're having to do in these situations, they're just slowing us down so much debt as we pointed out to you how does that three 7% has been moving in this quarter that we're now in.
I'm, sorry, I know that wasn't exactly the question you asked but I don't want you to take half of that $3 seven and say now you know one you know what.
1.8 now.
Now that number will be 185 next quarter or or some or now I know I can just change occupancy by 1.85, because that's not what's going to happen.
Yeah, No. That's helpful. I'm, just trying to think about the components of how you guys get to your full year occupancy guidance, which as you know the midpoint is roughly 100 basis points higher than where you're at right. Now. So you have some of that occupancy pick up as a benefit and then there's still the explorations to deal with in the back half of the year, which I guess you know.
Any any insight on visibility.
Visibility into those explorations right now I think that's still about 6% of your square footage for the rest of the year. You know was any of that spoken for because as we think about you know.
The big benefit from releasing some of those explorations as well.
Yeah.
Well, where we're going to have.
To my recollection.
We have a little bit lighter explorations in the second half of the year than we do in the first half of the year, but you know what is it.
It's a calculation that has you know.
Four or five points to it.
As we look at all of those numbers when we provide guidance and we still think we're gonna be within that range that we gave guidance on.
So we said don't change that range.
But youre right to say Hey, right now we're only halfway through the year. So we'll see how the rest of the year plays out.
Okay, I guess, because you didn't change your occupancy guidance. So I wasn't sure. If you were suggesting you're more likely to be at the lower end of the range because of the extra space.
Got back or or if you still feel like you know the middle of the range as possible, which assumes some occupancy growth through the back half of the year that was kind of the point of the question.
I mean, it's really small changes I don't know that.
I noted in the meeting I sat and we thought that range is still a valid range or anything like.
It had a you know.
The main bell curve standardization.
So I think it is.
Will it hit the Dead Center, I don't know probably not but it will be somewhere in there.
Alright, thanks to them.
Alrighty.
Thank you Mr <unk>.
The next question comes from the line of Jamie Feldman with Bank of America. You May proceed.
Great. Thank you can you talk more about the 355000 square feet of new leases you.
What kind of tenants today are there certain building certain sub markets I'm just curious what the you know the incremental demand is looking like.
And then as you think about the pipeline I think it's more of the same.
Yeah, I think it's you know.
The great thing about our markets is the diversity of the tenants that are driving it I think we're still seeing that in our demand we're getting good demand kind of across the board of industry. So nothing noteworthy to point to that one industry is driving anything more than usual. We had we had several submarkets go up in the lease rate and some go down and so it was kind of a mixed bag.
I wouldn't point to anything Submarket wise or industry wise that was noteworthy or new a new trend that we're you know that we felt like was worth pointing out just good healthy demand across the board I think the same is true for the pipeline, we havent seen anything in the pipeline.
A noteworthy change to kind of the typical diverse demand that we get.
And would you say, the new or more tenants, who didn't have space at all or Youre winning deals from other building other landlords.
It's always a mix of that we have we have tenants moving from other buildings in the markets, we have new business creation.
So it's always a combination of all those factors I mean like you saw we had over 261 leases. So it's a very.
Group.
Alright, so it sounds like no real perceivable trend or change in trend.
Yeah, I think it's normal.
Yeah, Okay, and then shifting gears to 12 21 Ocean can you talk about the expected yield on that are stabilized yield on that I know it sounds like you are having great success with the <unk>.
The upgraded units and then I guess, just bigger picture I mean, how big do you think you'd want apartments to be in terms of your total NOI stream.
Well.
I mean, but.
Have a parent's b how are big.
The amount of projects, we find that we like so it's not a <unk>.
Calculate I think right now it's at 15% I mean, if it was 20 or 25 or so it would be fine with me.
It's very hard.
At least the markets, we're focused and define large high quality institutional apartment projects and most of where we're getting a mouse by building them.
I mean, we aren't really doing much in the way of building office, we're primarily focused on building apartments or maybe from that perspective things will go up but.
The office market goes up a little bit.
Or if the office market.
Transactions start coming around again, then office will catch up and then we'll go back to that you know.
15 85 number.
In terms of and your question was are we still having success on the remodeled units at.
12 21.
Well not yet in Europe .
I know you are having success, what's the what's the targeted yields are expected yield.
And that project or that investment I mean like kit Kat you mean like cap rates are.
I mean I think.
In general on that project.
You know I would call it.
Sort of down down the center line job pretty well done would be an all cash IRR on 10 years around a seven maybe a hair under seven because it's such a high quality apartment project and I think the leverage number it doesn't have a lot of leverage I think the leverage number will be.
Because we remember we've got a good loan on that project and we have a partner in it I think it will be somewhere in the nines.
Okay is that where you're at and what are you assuming.
I mean, just even just the yield.
And I think if you're modeling I mean, what am I, assuming in the cashless right.
Correct, you can I'm, sorry, where you're earning deal.
Well it just gave the Irr's. So you mean, what's like what was the going in cap rate or.
Sure.
If you can give that.
I think going in we were around three.
Okay.
Okay.
Ohio, we were a little higher than the three.
So I guess if you like for every incremental dollar you have to put to work I mean do you prefer apartments here or do you prefer office, how do you think about that decision.
Got it.
If it was to equally very high quality projects.
I would be willing to do both I've never had to make the decision to choose one or the other we usually we've done a pretty good job of having capital available side and enforced and that decision, but if the projects arent a vehicle quality, we always go up towards the higher quality ones. So if I only had a fixed amount of money in the same market and whether it was apartment.
Our office I would do the higher quality product.
Okay.
Okay.
Alright sounds good thank you.
Thanks.
Thank you Mr Feldman.
The next question comes from the line of Rich Anderson.
You May proceed.
Thanks, Good morning out there.
So on the the the estimate of 80% plus utilization.
Obviously, a good number in your rate compares well to to the.
<unk> national industry, I would I would guess, but.
And logically it makes you would rather see more utilization than less of course, but from the standpoint of future leasing you've got you know nearly 3 million square feet expiring next year.
Does utilization.
Hey, a role in your ability to lease vacating space or expiring space is it more just optics and a good kind of coincident indicator of interest in using your space or is there something material that you can use in the leasing process.
Im not seeing and if it's a dumb question.
Sorry no.
That's not a dumb question.
And part of what Youre, what part of what you're saying is I think it's always better to show a building with activity and people in it and things happening because people don't want to be around that same thing.
I will say the utilization stat is probably more used than not not as much for marketing. Although I think it's useful to have a building with activity, but it's more used as a predictor for the level of activity and demand we should expect going forward.
So you know when utilization was very low we had low demand now utilizations higher now you only have a few things we did a lot of leasing last quarter. You go. Okay. That's good alright, and you know what are the other things I can link my kind of analytics around to say, what I should expect for the future Here's another thing the other thing would be well utilization.
It's just keeps running out which means more and more people are getting back in and therefore, theyre going to be needing space and maybe that maybe reevaluating, saying to you a little more space or it just means space because I thought my space go and now I'm coming back in so utilization is another sign of positive sign whats a negative sign the negative side to be too much discussion around.
Recession is going to scare tenants and you go well, we're just hearing a lot about recession. So therefore, you take that and go maybe I didn't need to be a little more on guard because.
Maybe it isn't just clear sailing with a straight arrow up so utilization is just one of those stats that helps us predict where we're headed.
Okay.
Fair enough.
And the second question is.
The 200000 square feet is that everything that you can get back or is there some amount that's out there that's.
Particularly stingy and and for one reason or another politically or otherwise you can't get to at least in the in.
In the in the short term.
I I so.
The way, you're saying it that can we get back so we don't want to get space back we want to make a deal to guide how much part of the space just just to be clear.
So when you say that it's when we go there.
Having a guy there is making no use we're just gonna go legal around clinical we can or or actually I have to settle out and get them out of the space, we're better off that way and that is that not a space. We think we have left maybe maybe that maybe little less.
That's kind of what we think we have left at this point of people will call. This fall in that bucket.
Okay and is there anything about that space, that's kind of particularly different than everything else. That's expiring maybe you know non paying rent.
Get space gets a little more beaten up or is it well located I mean, how competitive is it relative to what you would normally see in the leasing process in terms of quality.
I think it's just like the stuff we've been leasing I don't think there's any.
Special thing about the space that better or worse space has tenants.
But are you now so.
Resistance.
Just like the same as the rest of the space in our portfolio.
Fair enough thanks very much.
Thanks.
Thank you Mr. Anderson.
Your next question comes from the line of Dave Rodgers with Baird. You May proceed.
Yeah, I wanted to ask about the uncollected rent balance I don't have a favorite topic, but I guess I'm curious about the 200000 square feet of kind of the eviction tenants you're talking about this year, how much of that balance comes from them and then maybe a second question just to kind of layer on top of that as the tenants that arent being evicted thats still owe you money how was there.
I'm going to start coming in now that the evictions over do we see that in the fourth quarter are you going to start kind of aggressively renegotiating leases with those guys early what how does that work. So maybe those two questions separately if I could please.
So there is a number that's been decreasing anyway, but they are in the numbers that we've been saying is outstanding that's owed to us. Although they are their numbers their numbers going to be hard to calculate now right. So if you're in space and you haven't paid us up to now.
We go well you owe some money up to now now once you get evicted from the space you all saw the money from the whole lease but of course, we're also obliged.
Mitigate right now.
Obviously, you feel that we can get someone else said they'll get them out and get someone else that never get that money in and then we can kind of figure out what your office and then we're going to go out here and go you owe it.
So it's hard to.
To say these guys pull money out or or expand it or do whatever.
But that number's jetlag as I've said, many times I think last time I looked at it was under $30 million. So.
That number is coming down that 200000 feet its not a very big number all these numbers are coming down to smaller and smaller numbers I would not because it's complicated to collect from those people in particular because of all of our obligation to mitigate and there might be a legal process attached to it.
I think it would be very hard to predict.
Timing for that money, particularly coming in although I will say.
And many many many most of those cases.
I think they have the money and they will end up paying they're just.
It just put them in a bad habit of not being attached and so it's just a bigger battle to get the money out of them.
On the flip side of that the other part of that the tenants that are still in they didn't pay for a while they owed you another paying so youre not addicting them, but they have some time to catch up can you talk about what percentage of that remaining balance that is and how that comes in.
Well I don't know the split between the two groups of tenants I can tell you that the people are still in our opinion southern now probably paying current probably playing current plus something and it's slowly, causing the balances declined and this group that we're talking about are the ones that were causing the balance too great.
Yeah, Yeah. The way you characterize that now we can start aggressively pursuing is not right. We've been aggressively pursuing collection the entire pandemic. So the folks that are still in most of them. We've made deals with some past due balance and they are starting to pay that they're paying current rent and.
Some of them are hanging out and paying according to what the moratorium allowed but we prefer to sign a new lease with animal and send out their leads and let them pay us back what they always over time. So we've been doing that for two years now we haven't been waiting until now to start aggressively pursuing those analysis.
Yes, sorry for the Miss characterization I think I was thinking about the evictions, where you could pursue those now more aggressively flat last just for me I wanted to clarify on the occupancy guidance. Both your leased and your occupied number for the end of the year.
Before or after these eviction those numbers don't change is that correct I mean, you've already taken them out of occupancy they are not in the least number. So there is no change regardless of whether they leave or not.
Occupants.
We leased.
And I'll keep it tied stats are impacted now by 100000 feet. That's left when they move out but none of the account theres been no income Monday accounting stats are impacted by them because we didn't accrue for rented so doing them, we didnt take anything into revenue we didn't do any of that.
But they were in the stats for the fact that that space was leased it wasn't available for us to at least to someone else and and occupied the spread between leased and occupied is driven by you've signed the lease but the person hasn't moved yet.
That's the difference between leased and occupied there is no calculation about what we've been giving you. This third number that just got created by the pandemic called the utilization.
And in that that.
Some of these people could actually be in this space utilizing it and its leased and it's occupied but they haven't paid us maybe many of them have I don't know.
Alright, Thank you very much.
Thanks.
Thank you Mr Rogers.
The next question comes from the line of John Kim with BMO Capital markets. You May proceed.
Good morning, I had a couple of questions on leasing activity.
You did over 1 million square feet during the quarter and it was great.
440000 square feet expiring in the second quarter. According to your last supplemental.
And then you've captured another 100000 square feet.
This remaining 500000 square feet or so that I thought would have.
Improved your leasing number.
And then set it went down during the quarter. So I was just wondering if there was some other unknown vacate or termination that offsets the leased rate.
Yeah, John It's Stuart So if you just go back one quarter before this quarter and look what we have expiring it does not capture nearly the population of expirations that we had in that quarter because of course, nobody waits for most folks totally for the last day there leads to renew so we're renewing tenants a year and a half in advance of their expirations.
We're in about six months into that all along the way and that expiring number that we're telling you that we're putting the supplemental is whats left to address that so if we've addressed it if we renewed it it comes out of desperation. So you can't do the math the way that you laid it out and say Hey, you guys.
They'll go back quarter and look at what you have expiring and then add the leasing we did in tie it out and you can't do it that way.
And in fact.
I was just kind of sound.
Many tenants renew after exploration.
So the lease theoretically expired, they're on hold over Youre still negotiating a deal you make a deal. Some months later they go okay get put us that give us a refund for our holdover portion and now you have another new deal with them, but that happens with small tenants that just they're not.
They're not as focused on the exact the exact date.
I see so you have this additional 608000 square feet of signed leases not commenced.
That's not in your exploration spend.
<unk>.
And that made.
Somewhere in that somewhere in the exploration it just isn't necessarily in that quarter and as you as you I don't know if you can kind of watched it for a while but every year as you approach the new year, you know the year.
Especially the year before that next year start shrinking in terms of its expirations because youre doing those deals and then when you get to there like you might think the next year I'm, making this up a little but I'm not it's around 14%, but usually by the time, we get to the year, it's usually less than 10% at eight seven because we've done a ton of deals, but John you. It's Peter you were asked.
Thinking about the signed leases not commenced of 680000, what was the question about it.
Those are not in years or the leases were.
Go ahead.
If we have a signed lease.
Yeah.
Yeah. So so those are you know they are essentially at least as we've done recently right. So they're considered least they just haven't moved into occupancy yet they will be in an exploration schedule, but you know if it's a five year lease it'll be expiring five years from now right. So those are new releases the signed leases not commenced of 680000 square feet that's part.
Of that gap.
The gap between leased and occupied as those leases.
Okay I'll follow up offline, but my second question was on.
Seasonality. So you can see at a million square feet of leases signed this quarter of 900000 last quarter is there typically any seasonality in leasing or can this be replicable.
Yes.
Yeah, there's seasonality summer slow so much tends to be slower.
And what about the fourth quarter.
Yes.
Yeah I mean.
There's a lot of leases it and the last day of the fourth quarter. So a lot of times. The first quarter is one of our toughest quarters because leases ended at the end of the year right on that day. So it looks like it was in that day, but its out made it later than next quarter.
But if you say beyond that if you're talking about seasonality the only seasonality that people signing leases I know all of us at summer slow.
For all the reasons you know.
Right, Alright, I'm not sure that the seasonality is held.
Has had a lot of validity during the extra week Frank.
I mean, I think the pandemic has a reorder the seasonality to move in accordance with People's views on the economy and whether they think there's ticks up that tick up in COVID-19 or Covid relaxing I mean, that's had more to do with shifting the pace of leasing than than the seasonality that lets.
They would have been more recognizable from 2019 and prior.
I.
Got it thank you.
Alrighty.
Thank you Mr. Kim.
Next question comes from the line of Jon Nicodemus with <unk> you May proceed.
Hi, good morning out there.
So in this past quarter was robust for multifamily rent growth across the country. Obviously your markets were no exception.
It had an average rent roll up over 8% across your portfolio during that time, well just curious if you had any further detail about the rent roll up sort of that number that came from your market rate apartments, and how much of a drag there was from any sort of rent controlled units you have thanks.
Yeah. The number we're giving you is on new leases. So there is no theres no rent control components of that that's all new leases signed which when we get it back when it's vacant that's not subject to rent control on the new side, we can sign a market rate deal. So we're giving you the stat on the blemished by rent control.
Got it Stewart. Thank you very helpful and we'll definitely keep that in mind going forward.
Then my other question was just on the 12 21 Ocean App acquisition I noticed that you now have an entire block of frontage between that property 12, 99 Ocean in 100 Wilshire.
With that entire block of frontage on Ocean Avenue are there any opportunities youre looking at for operating synergies or any other revenue enhancing upgrades crosses contiguous sites. Thanks.
Yeah. So one of the things that's good question because one of the things that made that acquisition special for Us is.
And day, 100, Wilshire and that building, while all three buildings.
Were built by.
Yeah Laurence Welk.
The 100, a wheelchair and 12 99 have a common parking garage.
And when we bought 100 wheelchair.
I actually negotiated that agreement, which was somewhat good for one on a wheelchair not fantastic for water and oil sure. The garage is actually controlled by 12, 99 Ocean and Ann I mean 12 21.
And.
And so they had these upper floors for valley. There was a lot of things going on there. Let me just say it that way. This has totally opened up that situation and by the way. These buildings also.
One a lot of other parking we have another parking garage. So in parking in management, it's making a big difference and we are redoing. The buildings I think they're all going to look to have a more consistent fraud, I think they're going to have a very nice lift to them and I think when we're done they I think they're pretty undisputed as the premium.
Properties in L. A now, but they'll be even less.
Less disputes out there because it'll be that nice.
It's really going to be a beautiful lineup of properties with incredible views incredibly well located.
Top class all the way down the line and that's what we're shooting for.
Great. Thanks, so much Jordan really appreciate the color.
Thanks.
Thank you Mr Nicodemus.
Next is.
Question from the line of Michael <unk> with Citigroup you May proceed.
Yes.
Greg It's Michael Bilerman here with Christy.
Jordan I wanted to come back and sort of look at sort of stock price valuation and sort of firm valuation.
And just how you're sort of thinking about where the shares are today and I know you're not alone in the office World trading where you are but I suspect you're as frustrated as other office skills are.
And I know you've been reluctant to want to do stock buybacks.
Picking off capacity, raising leverage and not having that for acquisition development that you've done obviously personal purchases as long side. Other members of management, you've also been reluctant to sell assets to joint venture partners, because I think you've always preferred going arm in arm on a new deal where you're both going in at the same basis.
Does where the stock trade everything you do.
That's exactly right.
I know.
The question is like no no. It's okay, it's totally fine.
Listen we don't have to answer it but you know the question is that at this point is your mind shift that you were just added three new board members are last year right. So I don't know if it's surely in sugar Ray.
And Doreen have different views, but you also have new views in the boardroom, where you're in the board and you know can in Dan's view today.
Given the shares in the low twenties I'm sure you've never.
And that the stock could be trading at a seven implied cap but.
It almost a double digit yield.
So help me sort of understand where this is how it is taking importance within the organization and are there. Other steps you can take to drive shareholder value.
So.
That's it so.
So that's a great question so what it is.
Got it.
I don't take this share price to be a threat for the company.
But.
I will say, we had a long conversation about what kind of opportunity does what's going on for that.
And we've had that conversation with the board.
And it should.
It's a very mixed opportunity, but it does.
Some sense, maybe that's what you're willing to present an opportunity and.
I know that's a down the center line conversation about that opportunity to buy your stock.
You've heard all my opinions about buying the stock and I'm, not saying that never should be done and by the way we bought back our stock, but that's one of the option. The other option is that it allows us maybe to pick up some buildings like we did just get 12 21 in building I've wanted to since the nineties.
Are there building so we can buy that.
You know that this type of condition, especially around office, which we're still very positive on office and we have a platform that absorbs an extremely well is there an opportunity to kind of finish finish are kind of.
You know.
Office portfolio synergy whatever you Wanna.
Global enhancement of our position.
So it because office is very negative right now so of course, you want it when people are very negative about something it's good to look at it because that maybe they're right and then maybe it's an opportunity.
And then as I've said in the past on residential has and.
And the opportunity that might come from that is number one we're building we're still building but it.
My comments that I think a lot of people had residential deals that leaned more heavily than usual on interest rates and cheap debt and does that kind of flush out some essential projects that we wanted so there there is sort of an opportunity set that's out there and you have to think about.
What to do with it and if so obviously, you're always risks associated with recession, especially.
Or or inflation or whatever the whatever we're in right now kind of a negative bias on office, certainly and we're looking at all those things and I'm, hoping that we can.
Can walk the line properly between taken advantage of opportunities to build the company has a very strong balance sheet and it's very well run we have a lot of cash flow every year.
Even now in the middle of evidence going office company produces a lot of cash flow beyond its dividend and so I don't you know you don't want a week in your company during a time like this but you also want to take advantage of opportunities because.
Opportunities like this don't come around that often.
Talking that through that's been the biggest subject in our boardroom.
In.
Does the opportunity to sell existing assets either outright or two.
Or have your long standing institutional partners has that changed at all like you know obviously your partners have appetite as evidenced by some of the deals you've done over the last 36 months and Sue.
I know you haven't liked to do that but why not lift.
Liquidate a couple assets and use that capital to either reinvest in the stock or create any value that way.
Or just continue to reap proceeds and reinvest in a lot of those redevelopment and development activities or future acquisitions, where you can earn a higher return.
Well.
I mean, I guess, one thing I'd say is if I think there's.
Theres an opportunity to buy this is getting and it'll be a long conversation website, I think theres an opportunity to buy office buildings and apartment buildings, then that kind of contradicts saying is this an opportunity to sell my partners. So the only the only reason you would say there's two ways to buy back your stock and you're highlighting one of them which is huge.
Can sell assets, which if your stock's way down probably the asset values are down. So you can sell assets and buy back stock that doesn't change at least your debt structure and the other ways for us to borrow money and buy back stock because there are really the only two ways you can do it.
Yes, I think there is a buying opportunity and right now I'm not very inclined to sell I mean, that's you know I don't want to be the seller in a situation where I think it's a good time to buy and I do think it's a good time to buy.
Right, but then you still have to come up with the money and $22. I think you have zero probably negative interest in issuing equity in.
Any of your private partners, who you'd say, okay, well take my take units because they're valued in the thirties, you know someone will say.
Well I can buy it on the screen at 23 and as much as I care about taxes, I'll I'll take the half discount.
It's not like I, just don't know how you get out of this or whether there is.
Or maybe it's just time like I, just didn't know how by having the new board members by where the stock is whether things had changed at all in the mindset around some of these items.
Well.
I can't say they have a new board members has changed the mindset around this I think it would change the mindset is.
This is a powerful opportunity to get something from the opportunities that happened in 2000 and a different than the other recessions. When we were private that created opportunities then we got to look at this one and do this one right.
But.
You know.
In the end.
It means there's two real simple things number one when the economy's way off it usually presents a supplement opportunity and number two make sure that you can protect the company and don't put them at risk and those little kink pommer of things I'm looking at.
I appreciate the conversation Jordan on that just one follow up just on occupancy and lease rates or so.
We're perfectly clear Sue as you mentioned today 87, 5% leased 83, 8% occupied that's 370 basis point Delta call. It about 680000 square feet. It sounded like half of that takes occupancy potentially in the third or fourth quarter.
And then the only question is what happens with the rule.
About $1 4 million in the back half so about 800 basis points, how should we just think about the retention on that to really understand how odd.
Occupancy and lease rate move in the back half of the year and then obviously 2023 is a whole different area I'm, just just want to understand.
That aspect of where these two numbers go in tandem over the back half.
So.
Our hope is to gain on both fronts.
I think those are obviously, they're not insurmountable numbers for the next two to three.
Third and fourth quarter.
I'm not sure.
Yeah, Matt what I can say I mean.
That debt.
You have our guidance for the numbers and where we think we end up.
You have the guidance for office with occupancy of 84 to 86 could you also give a office leased rate.
Because I don't see it on the page 20 residential.
We don't give guidance on LIFO.
Yeah, we havent been giving guidance on leased.
Other than we reported obviously every quarter.
And Michael you asked about returns right, so that's where I'm going with it right.
Historically, our stores and sentiment.
Historically, our retention has been in the mid to high 60 percents.
That's typically what we've retained no reason to think that that would continue to be the case going forward.
Right, but then there's also the new leasing for them that vacate and I'm just trying to understand what's effectively.
What were you expecting.
To happen in the back half given the one 4 million square feet.
Explorations in the 700000 square feet of signed but not occupied just how those two pieces move.
You know, whether we expect to end the year at the same sort of spread but occupancy and lease rate just in the drop or if that spread narrows with occupancy staying relatively flat, which is the bottom end of the guidance I'm just trying to understand at least a portion to of the equation.
Yeah, well I think.
We've laid out all the components, but we have to now we'd have to do the work and you have to see how the rest of the year plays out so there's new leasing to be done there's retention to be done and we got we got a lot of folks moving into Q3. So we know that we've got those moving schedule, but there was a lot of unknowns and the components that we just laid out we got to continue doing the leasing and see how this how the road.
Pension plays out for the remainder of the year, so, but as I said in answer to an earlier call.
I'm not sure that all of those factors also go along with shrinking the gap between occupancy and leased.
GAAP, Oklahoma contract maintenance wide open.
Right, because youre going to be the next six months, you're leasing for 'twenty, three and 'twenty four explorations of people coming to you and you're getting.
And that's part of the activity.
Yeah Yeah.
Alright, well if he didn't get knocked out by sugar Ray when you are.
Told them the answers to all your questions.
No.
Joyce the meetings.
Alright, thank you.
Yeah.
Okay.
Sure thing.
That concludes the question answer session I will now pass the conference back to the management teams were closing.
Or additional remarks.
Well. Thank you all for joining us and we look forward to speaking with you again next quarter.
That concludes the Douglas Emmett Q2, 2022 earnings conference call. Thank you for your participation you may now disconnect your lines.
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