Q4 2022 Douglas Emmett Inc Earnings Call

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[music].

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

I will now turn the conference over to Stuart Mcelhinney, Vice President of Investor Relations for Douglas Emmett.

Thank you joining us today on the call are Jordan Kaplan, our president and CEO , Kevin Crummy, our CIO and Peter Seymour our CFO .

Call is being webcast live from our website and will be available for replay during the next 90 days.

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

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

During the course of this call we will make forward looking statements. These forward looking statements are based on the beliefs 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.

Now I'll turn the call over to Jordan.

Good morning, everyone. Thank you for joining us for Douglas Emmett 2022 was a year of real accomplishment in the face of notable challenges.

In our markets during the first three quarters the impacts of Covid dissipated, we leased 3 million square feet in office utilization rates rebounded to over 80%.

During the fourth quarter as economic concerns grew we saw a slowdown in new and renewal demand from large tenants. Fortunately, we continued to see good activity from the small tenants, who dominate our markets at least 770000 square feet during the quarter.

Overall, our absorption was slightly negative for the year given the macroeconomic climate. We believe it is prudent for our guidance to assume no meaningful recovery in office occupancy during this year.

During 2022, the value of both our residential and commercial leases increased our straight line office rates were up five 8% and our residential rents increased an average of seven 8%.

In addition, our two multifamily development projects added 505 units to our portfolio.

The current state of the National economy is challenging for all of us.

But remote work oversupply of reliance on large tenants and concerns about reduced urban appeal seem to pose additional obstacles for some office C. B DS.

Fortunately.

Our markets supply constraints smaller tenants short commutes and low reliance on public transit have supported relatively high leasing volume and utilization during the pandemic.

This recent experience combined with our industry diversification and strong operating platform gives us confidence in the long term.

Term prospects for our markets.

With that I'll turn the call over to Kevin.

Thanks, Jordan and good morning, everyone, our multifamily development projects continue to exceed pro forma.

In April we delivered landmark Los Angeles, a new 376 unit residential high rise in Brentwood.

And we've already leased over 60% of the units.

In addition, we have now delivered and leased over 350 of our eventual of 493 units. They should place in Honolulu, and we expect to substantially complete the conversion by year end.

Asset sales in that market remains slow and we continue to search for opportunities rigor.

Regarding our balance sheet, we had no outstanding debt maturing until December of 'twenty, 'twenty, four and almost half of our office portfolio remains unencumbered.

With that I'll turn the call over to Stuart.

Thanks, Kevin Good morning, everyone. We did a substantial amount of leasing this quarter, primarily driven by the small tenants that support our markets we.

We signed 218 office leases covering 772000 square feet, consisting of 244000 square feet of new leases and 528000 square feet of renewal leases.

For all of 2022, we signed 924 office leases covering $3 7 million square feet, including one 3 million square feet of new leases and $2 4 million square feet of renewals Nonetheless.

Nonetheless during 2022 are leased rate declined by 53 basis points to 87% and our occupied rate declined to 83, 7%.

Driven mostly by the slowdown in activity during the fourth quarter and recapturing space from Nonpaying commercial tenants as local moratoriums expired.

Our leasing spreads during the fourth quarter were positive one 8% for straight line.

And negative nine 9% for cash.

As I've been saying in recent quarters, we remain focused on occupancy at this point in the cycle expect rent spreads to remain choppy until our lease rate climbs back near 90%.

Our leasing costs this quarter of $5 80 per square foot per year.

In line with our recent trends and well below average for other Reits and our benchmark group.

Our multifamily portfolio remains essentially full at 99, 4% leased.

We saw continued strength in rent growth during Q4 with average rent roll up for new tenants over 5%.

We assume extraordinary seven 8% increase in multifamily rents during 2022 will moderate somewhat in 2023.

We are pleased that the residential rent moratoriums and our markets are ending although the payback periods have been extended into 2024 for some of our residential tenants.

That I will turn the call over to Peter to discuss our results.

Thanks, Stuart and good morning, everyone.

Turning to our results compared to the fourth quarter of 2021.

Revenues increased by six 4%.

<unk> increased by seven 2% to 51 per share.

<unk> decreased to 11, 1%.

The $81 $2 million, reflecting more tenant improvement expenditures as a result of our robust leasing in Q2 and Q3.

And same property cash NOI increased by one 4% primarily as a result of higher rental revenue and parking partly offset by inflationary impact on expenses and lower office occupancy.

For all of 2022, <unk> increased by nine 4% over the previous year.

Our G&A remains very low relative to our benchmark group had only four 4% of revenues.

Turning to guidance as Jordan said, our guidance assumes that office occupancy growth may not start in 2023.

We elected to allow interest on one loan to float and the related interest rate swap expired on January 1st.

Our guidance also assumes we will do the same when two other swaps expire in March.

Due to increasing interest rates expiring swaps and the new residential acquisition loan we expect interest expense in 2023 to be between 192 and $196 million.

Overall, we expect episode to be between $1 87, and $1 93 per share with higher NOI more than offset by approximately <unk> 16 per share of additional interest expense in 2023.

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.

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.

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 Blaine Heck with Wells Fargo. Please go ahead.

Great. Thanks, Good morning out there just starting with guidance can you guys provide the assumptions for retention in 2023 and rent spreads on executed leases during the year if possible.

Hey, Brian No. We you know we have never given guidance on those particular items I think for retention our retention rates at historically stayed in a pretty tight band into kind of mid sixties. So I think you could assume that this year would probably be like most years before it and trying to predict rent spreads has been a pause.

We tried that in the past we've got very good at predicting them ourselves and it's nothing we've ever provided guidance on.

Yeah.

Right.

We're not we're focused on retaining occupancy and growing occupancy. So I think you should expect spreads to be kind of how they've been but you know it's hard for us to make predictions quarter to quarter on how they're going to play out.

Okay Fair enough second question, Jordan, I think you've been pretty focused on getting your development team working on some new projects now that landmark is done in Bishop is wrapping up is there anything you can talk about on that that side of your initiatives have you identified the next project or projects you know does the.

The increase in cost of capital and make you any less likely to move forward with development projects at this point.

So the next big thing I think we're going to be focused on is.

Construction at Barrington Plaza, where.

Some years ago, we had a fire we've gone through a lot with the city trying to get it worked both that we have a lot we're going through and have gone through with the city on insurance and with insurance companies and with the with the city to get positioned us to be able to start work there and do all the work that we need to do including putting on fire sprinklers.

And so that's probably the next big step, though although.

I will say.

This may not be the exact right time to do this but some changes in state law have made it much easier for many of our sites very good sites that we have.

Well sure weather Wilshire Beverly Hills out in the valley to made it more cost effective and less time consuming in terms of entitlements I mean, it's just fixed a lot of stuff, but that does changes to make sure. We really understand their impact. We're waiting we were where we thought we were actually going to get to some guy.

<unk> like this month or next in terms of how it's actually going to be executed, but definitely heard we weren't going to get any guidance until June or July . So we're waiting to hear that but yeah. There's no version of guidance isn't going to come out pretty positive for us on some of those sites.

Okay, great. Thank you.

The next question is from Michael Griffin with Citi. Please go ahead.

Great. Thanks, I wanted to ask on the Warner Bros. Discovery leases expiring over here in 'twenty three 'twenty four just curious the demand that you're tracking on that space and I know the lion's share expires in 'twenty 'twenty four is there a sense that that's weighted toward the first or the second half of the 24 for that and any other color.

You can provide would be would be helpful.

So there's I think there's only two leases and one of them is a whole building, which is which is a third was at 3400 Riverside drive.

That building is about 450000 gene.

The lease expires in the second half of 'twenty four.

You know as I know everybody is anxious to know what they're going to do I'm anxious to know what they're going to do.

I mean, I'm not I'll tell you I'm not optimistic considering what's gone off the economy today, while you're talking about the economy two years from now.

And I don't know what they will do they or will want to do they don't have any more options.

But of course, I don't think they even know what they want to do at this point I mean there.

Our real estate group.

We made the original deals with which I think did have an expectation of keeping the building all of them are gone.

So we don't even have a good way to get US I mean, we're reading the same stuff you're meaning they are cutting expenses and I know that but I don't know whether they'll be in two years.

Gotcha. That's helpful. Then.

Wanted to turn to your thoughts just on capital allocation for 'twenty, three obviously with the announced dividend reduction in share reauthorization program at the end of last quarter, I mean could we potentially see you being more acquisitive as if the right opportunities came about P day for either office or multifamily or do you think a more pragmatic stick the potential.

<unk> share buybacks.

Well.

Just a general answer because share buybacks multifamily office fines are all being acquisitive I guess acquiring at.

And I think it's a good time to acquire I think we're where we are well organized to acquire.

Certainly the dividend cut gave us even more firepower to do that we have on leverage buildings cash I mean, we have a whole list of things.

And.

You know my goal is not to allow it.

Yup 10 days than any particular recession, particularly wanted us this extreme to pass without us taking advantage of it and I want to do that.

Alright, that's it for me extra time.

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

Hey, good morning, good morning out there.

Good question.

Hi, two questions first.

Just going back to the Barrington fire.

Yeah. The project Jordan, you and I discussed this on the last call, but just so I understand how it impacts the assets out.

Any of that project in the guidance that you laid out for this year or just based on timing, it's probably not something that would really impact until next year.

No there there there's some in the <unk> guidance for this year.

But it's hard to do.

Pending on the pace at which you know we work things out with the city and with insurance, it's hard to know how much will unpack this year.

First the largest ship pack will be next year.

He he even if everyone says like open they'll do whatever you want everyone do whatever you want and you have a lot of groundwork for Joe in terms of installing you know.

Core equipment that that that you know it may not impact you and that's just much before we can go in and start impacting the buildings.

Oh, Okay. So it's in guidance, but the bulk of the impact is really at 2024, then that's the way to understand it yeah, I mean, and even that you you, yes that that should be true, but this all relies on like what kind of deals would make also with insurance and the pace at which we move people out and those are.

And then of course, the speed at which we move people outside.

If I'm guessing no yes 24.

Maybe it makes it makes sense second question is I appreciate your comments on the train.

From the state level always good to hear positive things for landlord.

But obviously L. A pass there good cause eviction.

Yeah recently, so as you see the groundwork for your potential apartment pipeline in which I think is mostly L. A and Santa Monica net net between the the advantage that the state gave you versus you know the.

The negative from L. A is recent.

You know regulation change overall does it change any of your underwriting one way or the other does that make it a little tougher and make it a little better or is it sort of a wash when you figure the two those two policy changes.

I I mean, I don't like any limits on rent or any of the rest of it but quite frankly, the good cause eviction stuff I don't think runs a fallow for any of our habits.

I mean someone's less than a month to language, we collect the money for I mean, we don't care.

Or if you're telling me raising ran on someone that's in there you're at more than 10% I mean, anybody and certainly anybody institutional and spend an apartment business for a long time, the smart enough not to do that anyway, and and and and and and I don't think I am getting ready that pro forma more than 10% of your rent growth and I'm trying to finish up within a box.

So.

I mean, I I don't think you can.

Yeah, Hi.

Like what the city passed not sure it's going to have a big impact on us.

Any impact quite frankly.

But I I I mentioned the stuff at the state level because.

It's like a giant impact.

I think it's.

I went from telling you guys each year's to get anything entitled to potentially assisting goes right that we could just kind of go with our own pace I mean, it's a crazy change.

Price and even past.

Maybe maybe they don't know what that they gave you guys a gift.

Well, if they had known that they wouldn't have passed it because there's no loved our developers in Sacramento.

That's done.

Okay well.

And God bless enjoy it. Thank you. Thank you Jordan.

Thanks.

The next question is from Steve <unk> with Evercore ISI. Please go ahead.

Yeah. Thanks, good morning out there.

Jordan I know that you guys. Your guidance is sort of average office occupancy, but within that range.

<unk> got 82 to 84 could you maybe just give us a little color on what you expect for new leasing volumes in 'twenty three I know the fourth quarter.

It was probably the lowest quarterly volume of new leasing in about two years. So just any thoughts on the pace of new leasing in the pipeline that youre seeing today.

Well.

We've really been whipsawed by the changes in People's sort of economic outlook, I mean, I was really surprised going into the fourth quarter that things shifted so quickly as kind of attitudes went towards towards it I think you saw that in a lot of people attitudes one.

George we're going to go into a recession.

You know one side of absorption and placing us obviously roll anything.

Yeah, We gave you that for every quarter with the robotics slide.

The other side has been so sensitive to people's kind of point of view on the economy, I mean, three incredible quarters and all of a sudden the news turns negative then we drop off 25% I mean, that's that's while right and so.

Guessing about what next year is going to be we I mean, I'm feeling a little burn. So we didn't try and decide we didn't try and setting up people are going to regain confidence in the economy and Alicia I'm going to pick up again, and we also said to ourselves, we're probably kind of where we're going to be and got over in the.

Fourth quarters kind of given US an example of where we're gonna be or an idea of the pet, but but I think there will be changes next year and so it was a very hard number to put out quite frankly.

Because you said, you're still you're talking about something where there still is.

I mean, even that rough fourth quarter still a lot of activity over 700000 feet.

Right, Okay, and Stuart I know you sort of guided broadly to interest expense I know you have a couple of swaps that are coming up the debt not do but the swaps are burning off.

At relatively low rates and I think they're burning off relatively soon one of March and one in April . So do you have a sense given where the market is today on kind of where that debt would reprice today.

Well I don't know if I was running the debt's not repricing only the swaps burning off.

Yes, so Steve.

No we're not super excited about swap in the current environment.

And we think that.

You know when you look at the forward curves at things Youre going to start coming down and so.

We're monitoring the market every day and when we find the right opportunity we'll spot them.

We set up our debt.

Pacifically for this where we have a two year runway.

Refinancing an asset and as.

We were entering that would be is where we've got 24 months to figure out.

And replace the list.

And so we just.

Okay.

Right.

Go ahead Peter.

Just to be clear, though we are assuming this is peter.

Those loans flow and that's it.

Included in our guidance the same law. So it's not replacing let's just go where we're just doing the same thing you can do which if you just look at the forward curve on floating rate and we just put that in our model.

Yeah. Okay. Thanks, I just wanted to clarify you just kind of let them float for the time being and so they'll just go to the sofa Kerr plus their spread.

Yeah, I mean, it's not.

There's a lot of.

In security right now around where rates are going and so we're just.

It's just too big of a margin.

To be paid in terms of swapping to cover people kind of conservative in this and so I think even though it's painful and expensive for a little bit to be on.

On swaps.

I think this is the right thing at least to what to watch for another.

A little bit of time.

Got it thanks guys.

Alright.

The next question is from Camille Deville with Bank of America. Please go ahead.

Hi, Good morning, following up on your occupancy outlooks from another angle relative to the amount of Expiries you have coming due this year. The mid point of your occupancy guidance isn't really inspiring a steep drop off which I assume is partially supported by the leases that have not yet come in.

So just curious like what are you seeing on the demand side that gives you comfort care and occupancy doesn't trend below these levels.

So.

The demand side is driven by the.

You know, our it's our quarterly leasing.

And I think it's I mean, we're always I'm always guessing a little bit about the math, but I think as as we warned you guys going into the fourth quarter during that call. We said hey, while we're seeing a real change in the pipeline in terms of leasing you know it's never nothing I mean, it's there's always a lot of activity but.

We're not a company that tracks individual Alicia its just everything we do around this fishy was it has to do with flow more than they do with an individual deal and so as we saw the flow slow down now.

You saw a moderate at about.

25% that was noticeable to US now we're looking at the activity and we're going okay, well, we seem to be at that level at the moment and we're looking at that and that's the information we're getting it in this guidance.

Okay.

And more specifically thank you for the update on Warner Brothers are you able to provide any comment or indication on the UCLA lease that's coming to you and their likelihood children you there.

Hey, good meal. So I think UCLA is like 25 or 26 leases with us they're all different departments at the University of different functions. They don't act in a coordinated manner. So we'll literally have quarters, where they'll sign a new lease with us and then give back some other space. So those are a bunch of smaller leases.

Don't have specific guidance on any of them, but they're not it's not it doesn't act like large tenant.

Okay. Thank you.

Yeah.

The next question is from Nick <unk> with Scotiabank. Please go ahead.

Thanks first question is just in terms of you know.

Various supports everything we hear about the downtown L. A office market being very weak.

And you know firms considering moving out of that area I guess I'm, just wondering if you're seeing any impact to.

To your portfolio, realizing that's maybe more of a larger tenant issue, but you know law firms or others looking to let's say move back to century City Beverly Hills, or you know any any benefit youre seeing from a leasing demand standpoint from that.

Wow, Nick I mean, you know the issue incredibly well for a good guy in New York. So, yes people seem to be kind of finishing moving out that's larger tenants and theyre, finishing moving out there or they're moving out of downtown.

The primary beneficiary of that move today has been century city.

There might be a little bit of activity in Beverly Hills, but the hope would be that we can take some of that also up in our west Westwood in century City had been the two markets that have like cater to those larger institutional type.

Tenants, but century city I mean has been overwhelmingly.

Happy beneficiary of that move I can't you know, we don't I mean, I don't even know that we have space in the portfolio out of credit Comdata at some of those more high profile moves had been in the press recently.

That's helpful. Thanks, and then I guess, it's just the second question is going back to the buyback I'm sure and maybe just talk a little bit about how the board is thinking about deploying that I mean, it doesn't look like there's anything assumed in the guidance or really anything that was done so far unless I'm missing something but you know how you're thinking about that.

Are you waiting to find a you know a JV sale or or some source of funds that would go towards that buyback.

Presumably you think the stock is cheap because you put the buyback in place so any thoughts on that would be helpful.

Well.

The buyback is one of a number of options. They all use some type of capital you have access.

Access to capital so that's probably not really that much of an issue, but but.

We just have to look at a variety of things that then you know.

It's on the list I think.

Well.

It's compelling I mean, we are we obviously would rather lean towards.

Making some great real estate deals because that that you know that sticks with the company know that adds great piece of real estate forever, which is always very valuable, but but oh, yeah. You know it's hard to ignore the stockpile. So everything pharma last night, and that's where we're at.

Alright, Thanks I appreciate it.

Right.

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

Thank you I wanted to get your updated views on resin conversion opportunity.

If there are any assets or maybe some markets places like incentives that would make it more economically viable for you to pursue the change that piece of the building.

Yeah, it's funny, because you know a residential conversion.

It is Uh huh.

Basically a matter of looking at the spread between office and royalty lands and then you can get down to the particulars on a single building.

Our way up and office rents are suffering, but we're not in markets, where they're suffering extraordinarily so.

Maybe there could be something but it's not very obvious and it's not something where you can walk into a market. The way. We did when we were looking in Hawaii and just say this obviously, we should do this with one of the field.

Gonna be a little more it's got a it's it's much more nuanced than that.

No.

We it's great that we had that experience.

Great job was done huge Pat on the back of that.

That changed both the construction and the lease up on everything else.

I'm thinking about shipbuilding, so that game that gives us a lot of confidence around that area.

But you know you need to.

Convinced yourself or be convinced that the economics are right and the buildings right, it's not quite simple like the Hawaii deal.

I was thinking more like.

A market like Warner Center, which you've mentioned in the past was.

Perhaps a non core market for you and it sits today at eight yeah, yeah, and and although Warner Center.

The rents are.

The market there has not.

Then destroyed a matter of fact, there's so much new development in that area.

It's I'd probably put on my list of.

No.

Yeah.

It's starting to show.

Another round of great promise remember there there are buildings being pulled out of that market right now for other reasons right I mean.

One guy for rounds, just bought a site that had 500000 foot building, that's not gonna be on Australia Marty's building. He's building practice fields right. So that's out of the mix I think there are some buildings that they're gonna be out of the mix and frankly, you might end up in a market that's back to where it was before they'll all LNR project was built.

In any normal economy that was one of the best markets in L. A.

It was only until LNR added 25, 30% to the to the size of the market that you know that market started suffering.

So if we do this reversal everything else about that market. If you were just sort of evaluating it for office or residential investment would be a big plus it's got some.

Most residential is being built there and and rents held extremely well in all those projects are leased up.

And then in terms of the amenity base they've seen one of the more dramatic conversions. There are big mall has been broken up with two pieces of the mall that was there having been sold too cranky as well as just other side that I was talking about one mall that piece I think he's going to run two pieces to other fault.

Sidewalks that he is building this ramps practice field in and.

And kind of sports center right for visitors and stuff. So there's like a lot of them that it needs a lot of housing all going in at once.

So it's a pretty good bet.

Yeah.

My second question is a follow up to Michael's question on <unk>.

<unk> cash flow from your dividend cut and the use of proceeds.

Talked about buybacks as an opportunity in multifamily, but you Didnt mentioned office.

And I was wondering if you know.

I didn't.

Not mention office.

Whether it be office residential start I mean, all of those are up our opportunities are.

I think that Penny and I think it's actually a reasonable chance opportunity could be better than office and residential.

I just can't.

Just acquiring I'd, probably definitely put us on the list and I definitely Navy residential definitely office.

But remember residential has held up better.

And.

Our in stock on everything is almost.

Got it thanks for clarifying.

Alrighty.

The next question is from Dillenburg, Vince <unk> with Green Street. Please go ahead.

Thanks for taking the question I guess, just sort of on the acquisitions piece you know when you look at it or in your discussions with JV partners are they interested in deploying capital in today's environment.

Yes, they are and we've been in contact with all of our partners.

And explained the situation in the end.

But explain to them, what's going on in our leasing pipeline and why we're bullish on in L. A and.

We consistently get a positive response to its great. If you find an interesting opportunity. Please show it to us.

I think they get confidence in the fact that.

We've put a lot of money in the deals until they go well if you like it we like it basically.

That's helpful. Thanks, that's it for me.

Alrighty.

The next question is from Tayo Okusanya with credit Suisse. Please go ahead.

Yes.

Good afternoon.

Thank you for the earlier comments about about Warner Brothers, just curious with some of the larger the larger leases expiring starting in 2020 two into 'twenty for like UCLA.

And also William Morris kind of some initial thoughts on those.

Yes, that's right.

We really only have two big leases in the portfolio. It's Warner Brothers and then William Morris You mentioned you know the act like large tenants. The rest of that list is multiple leases I already spoke about UCLA I think they have they have over 20 leases with us They don't act as a single entity or unit.

But it's Warner brothers, Jordan already kind of give your thoughts on on prospects for that William Morris has a bunch of years left so I don't think you know there was anything to talk about with them for a while.

And then everything else like I said, all the other tenants on our list act like smaller tenants. They arent they are super material, it's a bunch of leases.

Gotcha. Okay. So that's helpful. And then also from a leasing perspective again with your tenants anything changing in terms of you know type of terms. They are looking for is it taking longer for them to make decisions. I mean could you just kind of talk a little bit about just kind of some of what you're seeing in that respect.

I think the notable change that we already talked about was that the average lease size for the Q4 results that we just published was down it was smaller tenants that really held up our activity in Q4, we saw larger tenants are not as active not surprising given kind of what's going on with the economy.

Our tenants tend to generally zero in on a five year lease because they're smaller and most of them are personally guaranteeing the leases they don't tend to feel comfortable going longer than that.

Usually what happens in a cycle is when the economy down there nervous when they tend to go a little shorter term.

And then when the economy is doing well and they're feeling good about their prospects they they're a little comfortable going a little longer but we're almost always still zeroing in around that five year average and thats still what we saw last quarter.

I mean do you mean since it's smaller tenants. They are using more of your prebuilt product or are they actually building out space on their own.

We are you know, we we always prefer to build space for them. We're very good at it we do a lot of prebuilt suites are we call. It our spec suite program. So we'll go in and make a sweet totally move in ready we've had a lot of success with that product. So that's something we continue to ramp up on but yeah. These are these are small tenants they don't.

Have real estate department so.

As much as we can help them with the process to make it easy for them.

And get the space built for them, that's a much better turn out so we do that as much as possible and the tenants appreciate it and they also don't have large ti demands. So our ti costs were substantially lower than when you're leasing Georgetown.

Got it thank.

Thank you very much.

Okay.

Again, if you have a question. Please press Star then one the next question is from Dave Rodgers with Baird. Please go ahead.

Yeah, good morning out there.

Maybe one question for me just in terms of the evictions the tenants that haven't been paying I know last quarter, you were down to the last handful, maybe 100000 square feet or so of tenants that you were still working through can you just give us an update on where you are there how much of an impact you're anticipating maybe the occupancy and where most of those blend and extend is kind of done by the end.

For the year as we kind of think about the run rate for that group of tenants things.

Yeah.

That group has done it's in the numbers start with.

So.

There's no more people that weren't paying around.

And the other people are saying.

There's money still owed to us by some people that are paying and we work out deals that they pay over time and there's money still address by some people that are out there that we're still pursuing her stuff.

Collection from yeah, but but in terms of occupancy.

This strange and personnel and occupancy are people that were in occupancy, but they werent paying so that was weird right you're used to if they are in their pain and.

That's what COVID-19 and the more clients did and that's resolved.

But they're all there.

Negatives are that that's at all.

For office and residential it'll be resolved by the end of March.

And the occupancy number okay.

Yeah.

Alright, thank you.

Alrighty.

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

Great. Thanks, Jordan, just circling back to the state legislation that opened up residential zoning in certain areas in L. A I guess do you think that change is going to trigger a lot of additional supply in the market and have you seen any projects announced as a direct result of that legislation or is it just too early to tell.

Yeah.

I mean, I hate to say that I don't think it's gone up on a lot of new supply simply because they sort of name yeah. We happened to be a developer that happens on a lot of land in those areas I don't think a lot.

For infill type product, where we're from that perspective.

They.

You know they didn't make it cheaper right. If you wanted to if you just wanted I liked out rural and now I'm going to go buy a piece of land because I know about that role I don't think that that they did anything that makes atlanta any cheaper probably made it more expensive. They just kind of enhance the value of our land cause so we can now.

It kind of developed that as residential without having gone going through as many hurdles. So yeah.

It at least 10 of them are in the areas, where we own all of this property I don't I mean it.

Say this to them I don't want to I'm gonna repeal up but I don't think it will.

Did anything out of them for someone like us they happen to have so many sites they didn't do much to boot.

Boost that production.

Oh apartments.

Yeah.

Alright, that's helpful. And then last one for me there were some reports that came out earlier this year that Regal cinema was looking to close the Sherman Oaks location. There I think leasing from you can you just comment on that situation the potential earnings impact and any plans you may have for that space.

Yeah.

Well I don't want to talk about individual tenants and.

It's true we saw that too.

I don't know, whether that's what happens there or not but I don't want to I mean, if it all went up.

Talk about individual tenants.

Alright fair enough. Thank you guys.

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

Thanks, Good morning out there so.

Intrigued by your comment in the call here, Jordan, where you thought that there was more opportunity I think I heard you right more opportunity office and there wasn't a residential first of all did I catch that.

And correctly.

Yes.

And then so the answer the question is why I mean like you don't Marina.

World, where hybrid office is sort of the thing.

Not a need based situation, but it wont based and in some cases, whereas residential is quite different you have a very unique residential platform well what is it that's making it more interesting on the office side from an investment standpoint from your from your line of sight.

Well I'll tell you I spent I.

We had this one paragraph in my prepared remarks. It was at the end of my prepared remarks.

And Ted called Overwork paragraph when she said the Overwatch and Mark because I just wanted to get it right. So much.

But basically what I try to.

What that paragraph said, which was trying to give people feel for why I'm. So positive on office in our markets as well.

Well, we have gone into.

For real estate leased to recessionary economy.

The things that you just mentioned and the things that I'll reiterate for you, which is whether it be at work from home or people not paying us.

So interested in.

Urban office or commutes or public transit.

All of those things that seem to be additional obstacles for people that are on office buildings across the markets I, just don't see them being here, they're not here.

And so when.

Covid finally, lightened up a year ago, you saw leasing booming I mean, we were in full recovery and I was extremely optimistic.

But not optimistic because I'm just optimistic guy optimistic because we had like some of our strongest leasing quarters in our company's history, and we have multiple of them in a row at new and and in total.

So when you go that's happening you certainly post the time that these discussions about these other items are there.

Okay that gives me a lot of confidence that's number one okay, well so put that as a giant number one though because I don't think that those are issues. Our markets are dealing with and then add to that for a number two which is where one of the only big gateway markets that has true diversity around the tenant base right. We're not just here.

Jack just entertainment jet your or just finance like New York or whatever just cars like Detroit whatever you want to talk about we really have a lot of industries that drive the man here and then that is the last thing is that.

All through this pandemic period end plus plus in probably our whole careers for me and can we.

We've been strengthening our operating platform.

And now our operating platform I mean to say it doesn't know equals an understatement, it's really an understatement I mean in our market and our market. So I just feel like that platform. The diversity of tenants. The fact that these larger issues that I'm not sure, they're even going to be correct for other markets, but.

100 per cent Theyre not correct right now for our market. Okay that those issues are living that's creating probably a buying opportunity against a backdrop, where I am totally confident long term in the performance of our office portfolio for the reasons I just said.

So that's why right now.

Apartments, which people still have a lot of confidence around apartment, so maybe they're not gonna be discounted as much but theres a lot less confidence around office juxtaposed with confidence I. Just told you I have which is that over rework paragraph that I haven't said it in my speech makes me go that's probably what it's going to be more opportunities, okay, and so kind of related.

To that.

You had a couple or three quarters in 2022, where things were moving along nicely and then you had to pick up in the fourth quarter in that.

That experience kind of did I did want to inform you about 2023 guidance and flat occupancy scenario and so on.

That seems like a really kind of.

Sensitive.

Topic in the sense that it could.

Turn it back on pretty.

Pretty quickly right like if the fed gets it right. It quoted it turned off quickly yes.

That's what I tried to say when I was asked about our occupancy guidance. That's my point, So maybe you know.

The fact that it moves so quickly in one direction is your is your your confidence behind office, I guess and I guess I'm kind of parity and what you just said but.

So setting flat occupancy is the absolute probably.

Worst case scenario and more likely you'd probably see occupancy lift as the year goes on as long as you know, we kind of get the macro right and we don't have like a really disruptive economic scenario from from fed activity and so on is that the way youre thinking about it.

Setting a floor.

Well the one thing.

So, but real estate is not designed to be judged quarter to quarter I know that's the world we bought into and that's what we're doing so that's what people are probably more clear about that.

As I just said would you just said in summary, both said so with both of them He had agreement on.

I'm very optimistic about our market.

Not so optimistic if you're bringing a point of view back to the quarter to quarter view total where the economies going.

The fix is gonna be so quick that we're like okay. We're done now.

I thought the handset move off the table. So we have to see how this year plays out and probably a lot of our guidance. Our guidance is not trying to give you your messaging around what we know.

So think of the long term prospects for our market or our ability to lease up our buildings, that's giving your messaging around Oh, we don't have a good idea to how much if that's going to keep increasing rates and keep tamping down I actually think the fact that the employment numbers came in so strong and all the rest that probably means that that's gonna be nominal it's even harder and the beer.

From the fed is certainly having a much bigger impact on real estate than some other industries. It's out. It's you know maybe it's also beaten down on Tac, but somebody is doing a bunch of hiring and girl and some are out there and therefore, they that's probably going to give them confidence to being on us even more and that and that's what concerns me.

Yeah.

So you are ready to start acquiring if you can sooner rather than later before there is any sort of recovery.

During more competition and so on right like do you Wanna get get moving before all of that starts to happen again.

Yeah, when we do something as much wanted to do with the opportunity. That's presented that my timeline that in my mind, I mean, I need to cut opportunity.

Look everything I'm, saying first of all it's not a public call and secondly, it's no secret that beautiful and an office building. If you on an office building in West L. A you're not sitting there going I'm dead forever.

Because you're saying that.

We need it and we need the right I'm trying to come up.

Okay fair enough thanks very much.

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.

Thank you for joining us and we look forward to our call a quarter from now.

Bye bye.

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

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