Q4 2023 Douglas Emmett Inc Earnings Call
Operator: Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode.
Ladies and gentlemen, thank you for standing by welcome to Douglas Emmett quarterly earnings call. Today's call is being recorded at this time all participants are in a listen only mode. After management's prepared remarks, you will receive instructions for participating.
Operator: After management's prepared remarks, you will receive instructions for participating in the question and answer session. If you require operator assistance, please press star then zero. 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. 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 in 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.
And the question and answer session. If you require operator assistance. Please press Star then zero I will now turn the conference over to Stuart Mcelhinney, Vice President of Investor Relations for Douglas Emmett.
Stuart Mcelhinney: Thank you joining us today on the call our turn Kaplan, our president and CEO, Kevin Crummy, our CIO and Peter Seymour our CFO.
Speaker Change: This call is being webcast live from our website and will be available for replay during the next 90 days.
Speaker Change: You can also find our earnings package at the Investor Relations section of our website.
Speaker Change: You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.
Operator: During the course of this call, we will make forward-looking statements. These forward-looking statements are based on our beliefs, 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.
Speaker Change: 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.
Speaker Change: 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.
Jordan L. Kaplan: When we reach the question and answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan. Good morning, and thank you for joining us.
Speaker Change: Reached the question and answer portion in consideration of others. Please limit yourself to one question and one follow up.
Speaker Change: Now I'll turn the call over to Jordan.
Jordan: Good morning, and thank you for joining us and.
Jordan L. Kaplan: In 2023, higher interest rates fueled recession fears. As a result, tenants became more cautious, office leasing slowed, and our leasing gains immediately following the pandemic were reversed. Our office occupancy declined, but large fixed rent increases, stable rental rates, and low concessions in our markets mitigated the impact on revenue. Interestingly, remote work does not seem to have meaningfully reduced demand from our tenants.
Jordan: In 2023 higher interest rates field recession fears as a result tenants became more cautious office leasing slowed and our leasing gains immediately following the pandemic were reversed.
Jordan: Our office occupancy declined, but large fixed rent increases stable rental rates and low concessions in our markets mitigated the impact on revenue.
Jordan: Interestingly remote work does not seem to have meaningfully reduced demand from our tenants. In addition, due to our typical five year lease terms more than two thirds of our current leases were actually signed after the pandemic began.
Jordan L. Kaplan: In addition, due to our typical five-year lease terms, more than two-thirds of our current leases were actually signed after the pandemic began. As Peter will tell you, our 2024 guidance anticipates lower FFO as a result of vacating the Barrington Plaza apartments, the expiration of one large lease, and higher interest costs. Our guidance does not take into account any significant recovery in leasing demand, even though we see the potential for that as tenant confidence increases. I am pleased that shortly after quarter end, one of our largest tenants signed an early renewal for 250,000 square feet. We continue to grow our residential portfolio. We have added almost 1,300 apartments over the last five years in our strongest markets. Despite removing Barrington Plaza from the market, our residential portfolio now provides almost 20% of our rental revenue. In addition, we have not experienced the residential building boom seen in other major markets.
As Peter will tell you our 2024 guidance anticipates lower F. F O as a result of vacating the Barrington Plaza apartments, the expiration of one large lease and higher interest costs.
Our guidance does not take into account any significant recovery in leasing demand, even though we see the potential for that as tenant confidence increases.
Jordan: I am pleased that shortly after quarter end one of our largest tenants signed an early renewal for 250000 square feet.
Jordan: We continue to grow our residential portfolio, we have added almost 1300 apartments over the last five years and our strongest markets.
Jordan: Despite removing Barrington plaza from the market our residential portfolio now provides almost 20% of our rental revenue.
Jordan: In addition, we have not experienced the residential building boom seen in other major markets. So our apartments remain fully leased that said the rapid rent growth during the pandemic seems to be normalizing.
Jordan L. Kaplan: So our apartments remain fully leased. That said, the rapid rent growth during the pandemic seems to be normalizing. There are challenges and opportunities ahead, but we are prepared for both, as I am confident in the long-term prospects of our market. Our supply-demand dynamic is among the best in the U.S. Our sub-markets are vibrant, and our office tenants have overwhelmingly returned to work. We have significant cash on hand, meaningful free cash flow, no corporate level debt, and almost half our office properties remain unencumbered. With that, I will turn the call over to Kevin. Thanks, Jordan, and good morning, everyone.
Jordan: There are challenges and opportunities ahead.
Jordan: We are prepared for both as I am confident in the long term prospects of our markets.
Jordan: Our supply demand dynamic is among the best in the U S. Our submarkets are vibrant and our office tenants have overwhelmingly returned to work.
Jordan: We have significant cash on hand meaningful free cash flow.
Jordan: No corporate level debt and almost half of our office properties remain unencumbered.
Jordan: With that I will turn the call over to Kevin.
Kevin A. Crummy: Thanks, Jordan and good morning, everyone.
Kevin A. Crummy: I would just like to take a moment to mention that we have completed the lease-up of our 376-unit Landmark LA property in Brentwood. At our office-to-residential conversion in Honolulu, we finished the conversion of another office floor, and, as expected, the 22 new apartments are leasing quickly. As the remaining two office floors vacate over the next few years, we will add the final 47 units to complete that project. Otherwise, our cash and strong JV relationships position us to take advantage of new opportunities in our markets, and we're focused on finding those opportunities in both residential and office. Stuart, thanks, Kevin. Good morning, everyone.
Kevin A. Crummy: I would just like to take a moment to mention that we have completed the lease up of our 376 unit landmark L. A property in Brentwood.
Kevin A. Crummy: At our office to residential conversion in Honolulu, We finished the conversion of another office floor and as expected. The 22, new apartments are leasing quickly.
Kevin A. Crummy: The remaining two office forced vacate over the next few years, we will add the final 47 units to complete that project.
Kevin A. Crummy: Otherwise, our cash and strong JV relationships position us to take advantage of new opportunities in our markets and we're focused on finding those opportunities in both residential and office.
Do it.
Speaker Change: Thanks, Kevin and good morning, everyone for all of 2023, we signed 872 office leases totaling $3 2 million square feet for an average of 800000 square feet per quarter during.
Stuart Mcelhinney: For all of 2023, we signed 872 office leases totaling 3.2 million square feet for an average of 800,000 square feet per quarter. During the fourth quarter, we signed 202 office leases covering 710,000 square feet, including 243,000 square feet of new leases and 467,000 square feet of renewal leases. These results do not include the 250,000 square foot renewal in Beverly Hills, signed after quarter end, extending the term for 10 years through 2037
Speaker Change: During the fourth quarter, we signed 202 office leases covering 710000 square feet include.
Speaker Change: Including 243000 square feet of new leases and 467000 square feet of renewal leases.
Speaker Change: These results do not include the 250000 square foot renewal in Beverly Hills signed out for quarter and extending the term for 10 years through 2037.
Peter Seymour: The overall value of new leases we sign in the quarter increased by 4.3%. Cash spreads were down 6.1 percent, reflecting the strong annual rent increases built into our leases. At an average of only $5.86 per square foot per year, our leasing costs during the fourth quarter remained well below the average for other office REITs in our benchmark. Our residential properties continued to perform well during the fourth quarter, ending the year at 98.5% leased. With that, I'll turn the call over to Peter to discuss our results. Thanks, Stuart. Good morning, everyone.
Speaker Change: The overall value of new leases, we signed in the quarter increased by four 3% cash.
Speaker Change: Cash spreads were down six 1%, reflecting the strong annual rent increases built into our leases.
Speaker Change: At an average of only $5 86 per square foot per year.
Our leasing costs during the fourth quarter remained well below the average for other office Reits and our benchmark group.
Speaker Change: Our residential properties continued to perform well during the fourth quarter ending the year at 98, 5% leased.
Speaker Change: With that I'll turn the call over to Peter to discuss our results.
Peter Seymour: Thanks, Stuart good morning, everyone.
Peter Seymour: When reviewing our results compared to the fourth quarter of 2022, revenue increased by 2%, partly from higher multifamily revenues and ground rent. During the fourth quarter, we prevailed in a ground rent reset arbitration on land that we own. The result was a one-time payment of accumulated back rent of approximately $5.5 million. And going forward, there will be approximately $1 million of additional annual rent. FFO decreased by 12% to $0.46 per share, primarily as a result of higher interest expense.
Peter Seymour: Reviewing our results compared to the fourth quarter of 2022 rare.
Peter Seymour: Revenue increased by 2%, partly from higher multifamily revenues and ground rent.
Peter Seymour: During the fourth quarter, we prevailed in the ground rent reset arbitration on land that we own.
Peter Seymour: <unk> was a one time payment of accumulated back rent of approximately $5 $5 million.
And going forward, there will be approximately $1 million of additional annual rent.
Peter Seymour: F O decreased by 12% to 46 cents per share primarily as a result of higher interest expense.
Operator: AFFO decreased 8.1% to $74.6 million, and same-property cash NOI decreased by 1.1%, driven by comparison to a strong prior period that benefited from one-time tax refunds on a residential portfolio. Adjusting for those items, residential cash, same property NOI, would have been positive 3.3 percent, and overall cash NOI growth would have been negative 0.6 percent. Our GNA remains very low relative to our benchmark group at only 5.6% of revenue. Turning to guidance for 2024, we expect FFO per share to be between $1.64 and $1.70, reflecting the expected move out of one large tenant in Burbank, the removal of Barrington Plaza from the rental market, higher interest costs, and modest leasing assumptions. 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 financing.
Peter Seymour: <unk> decreased eight 1% to $74.6 million and same property cash NOI decreased by one 1% driven by a comparison to a strong prior period.
Peter Seymour: Benefited from one time tax refunds on our residential portfolio.
Adjusting for those items residential cash same property NOI would have been positive three 3% and overall cash NOI growth would have been negative <unk>, 6%.
Peter Seymour: Our G&A remains very low relative to our benchmark group and only five 6% of revenue.
Peter Seymour: Turning to guidance for 'twenty 'twenty, four we expect <unk> per share to be between $1 64, and $1 70, reflecting the expected move out of one large tenant in Burbank, the removal of Barrington Plaza from the rental market higher interest cost and modest leasing assumptions.
Peter Seymour: 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.
Operator: 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 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: I will now turn the call over to the operator, so we can take your questions.
Speaker Change: 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 speaker phone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please.
Blaine Heck: If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Again, in consideration of other participants, please limit your queries to one question and one follow-up. Thank you. At this time, we will pause momentarily to assemble our roster. The first question comes from Blaine Heck with Wells Fargo. Please go ahead.
Speaker Change: Just press Star then two again in consideration of other participants please limit your queries to one question and one follow up. Thank you at this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Blaine Heck with Wells Fargo. Please go ahead.
Jordan L. Kaplan: Great, thanks. So Jordan, it seems like some of the rhetoric in the market has shifted back towards interest rates that could be higher for longer. I guess, how are you thinking about where rates will go in the next year or two? And has anything changed about your thoughts on how to handle the upcoming swap and debt maturities in 2024 and beyond? So the reason there are swaps coming up is that, you know, we typically do a seven-year loan, and we swap five years of it. That gives us a two-year window to then refinance the loan. So most of the time when swaps are coming up, it means that we need to, you know, start having a point of view toward refinancing. But more importantly, it means that it's probably not worthwhile to try and swap two years or one year or whatever's left, which is, to some degree, what you see coming up.
Blaine Heck: Great. Thanks, So Jordan it seems like some of the rhetoric in the market has shifted back towards interest rates that could be higher for longer I guess, how are you thinking about where rates go in the next year or two and has anything changed around your thoughts on kind of how to handle the upcoming swap and debt maturities in 'twenty four and beyond.
Jordan: So the reason they're swaps coming up is that you know, we typically do a seven year loan and we swapped five years of it that gives us a two year window to then refinance alone. So most of the time when swaps are coming up it means that we need to start to happen in my point of view.
Jordan: Refinancing, but more importantly, it means that it's probably not worthwhile to try and swap two years or one year or whatever's left.
Jordan: Which is which is to some degree what you see coming up.
Jordan L. Kaplan: But, you know, as we refinance those loans, we'll focus on then, you know, swapping them, and they'll be fixed at whatever rate we're in the market at that time, and hopefully, we have a good spread. All right, great. That's helpful. Then just the second question with respect to Barrington Plaza, I guess, can you guys give any update on your expectations with respect to insurance proceeds, any update on litigation from prior tenants, and then talk about kind of the mechanics of that project, especially how capitalized interests might impact numbers and, just at a high level, how we should be thinking about the impact to earnings this year and beyond. Okay, so I'll answer the first part, and I'll let Yeah, okay. It's Peter.
Jordan: But you know as we refinance those loans.
Jordan: Well our focus on then you know swapping them and they'll be fixed at whatever rate you know, where where you know is in the market at that time and hopefully we have a good spread.
Speaker Change: Alright, great. That's helpful. And then just second question with respect to Barrington Plaza I guess can you guys give any update on your expectation with respect to insurance proceeds any update on the litigation from prior tenants and then talk about kind of the mechanics of that project, especially how capitalized interest might impact.
Speaker Change: Numbers and just at a high level, how we should be thinking about kind of the impact to earnings this year and beyond.
Speaker Change: Okay. So I'll answer the first part and I'll, let Peter answer the second part but.
Speaker Change:
Peter Seymour: In terms of the well go ahead, you can answer a section that didn't come back and I asked or whatever you don't answer.
Peter Seymour: Okay, It's Peter.
Peter Seymour: Yeah, I mean with respect to the impact of Barrington. This year, we had about four and a half cents of Barrington in 2023, and you know that will be reduced to about half a cent in our in our numbers for 2024, mostly due to the remaining retail commercial.
Peter Seymour: Yeah, I mean, with respect to the impact of Barrington this year, we had about four and a half cents of Barrington in 2023. And, you know, that will be reduced to about half a cent in our numbers for 2024, mostly due to the remaining retail commercial. The Bulletproof Executive 2013, And then, you know, our interest guidance assumes a certain level of capitalized interest, you know, but obviously that's going to depend on how quickly we move and how much we spend. Okay, so then your questions then revolved around... The litigation and the insurance, right? Your initial questions.
Peter Seymour: Tenants are in the property and then you know our interest guidance assumes a certain level of capitalized interest.
Peter Seymour: Obviously, that's going to depend on how quickly we move and how much we spend.
Speaker Change: Okay. So then your questions then revolved around.
Speaker Change: The litigation and the insurance right you're beginning questions.
Jordan L. Kaplan: Well, we feel it's insured. I mean, we still have to get the insurers on board with that. So we're dealing with that. And then, in terms of litigation coming from tenants, I mean, obviously, that is also insured. But it's ongoing. And all litigation is disruptive.
Speaker Change: Hmm.
Speaker Change: Well, we we feel its insured I mean, we still have to get to the insurers on board with that so we're dealing with that.
Speaker Change: And then in terms of litigation coming from tenants I mean, obviously that is also ensured but you know it's ongoing and all and all litigation is disruptive so I mean that's.
Jordan L. Kaplan: So I mean, that's a drag that it's going on, but, you know, we're dealing with it. All right, we'll stay tuned for an update. Thanks, guys. All right. The next question comes from Michael Griffin with Citi. Please go ahead.
Speaker Change: It's a drag that is going on but you know we're dealing with that.
Speaker Change: Alright, we'll stay tuned for an update thanks guys.
Speaker Change: Alrighty.
Speaker Change: Our next question comes from Michael Griffin with Citi. Please go ahead.
Michael Jason Bilerman: Great, thanks. Jordan, I want to go back to your comment you made on the leasing front. You know, you said that two-thirds of your leases have already been signed during or after the pandemic. Is it fair to assume that leasing is going to materially pick up in the next couple years? Or is this just kind of the new normal that we should expect?
Michael Griffin: Great. Thanks, Jordan I wanted to go back to your comment you made on the leasing front. You know you said that two thirds of your leases have already been signed during or after the pandemic is it fair to assume that leasing is going to materially pick up in in the next couple of years or is this just kind of the new normal that we should expect.
Jordan L. Kaplan: I fully believe that leasing will pick up over the next couple of years. As a matter of fact, as I tried to really make this point a huge number of times, which is that you saw our leasing pick up right after COVID kind of got lifted. But what's happened now is the country, and particularly a lot of people holding office space, have gotten some sort of recessionary fear, shrinking costs. I mean, you don't hear about many companies saying, here are the units that we're expanding, right? Everybody's focused on cutting expenses, and we're just one of the results of that going on across the country and certainly here. So people aren't making big commitments to doing new things.
Jordan: I fully believe that leasing will pick up over the next couple of years as a matter of fact as as I've tried to really make this point a huge amount of times, which is that you saw our leasing pick up right. After the COVID-19 kind of got lifted but what's happened now is the country and in particular a lot of people.
Jordan: Paul.
Jordan: Holding office space have gotten some sort of recessionary fears shrinking cost cutting I mean, you you don't hear about many companies, saying here's the units that were expanding right everybody's focused on cutting expenses and we're just we're just you know one of the results from that going on across the across the country.
Jordan: Certainly here, so people aren't making big commitments, you're doing new things are small or smaller tenants are going forward, great and you see it you see we're doing a lot of leasing.
Jordan L. Kaplan: Our smaller tenants are going great, and you see it; you see we're doing a lot of leasing. But the large ones are very hesitant around commitments.
Jordan: The large ones are are very hesitant around commitments and frankly, what I keep saying and having nothing to do with COVID-19 or a return to work or any of it I just see that they're showing telling the analysts you guys. What you Wanna here, which is we're cutting costs by cutting staffing and Theres just one article another like that so as soon as that lightens up.
Jordan L. Kaplan: And frankly, what I keep seeing, and this has nothing to do with COVID or return to work or any of it, I just see that they're telling the analysts, you guys, what you want to hear, which is that we're cutting costs by cutting staffing. And there's just one article or another like that. So as soon as that lightens up, I fully expect the market to return to where we were before. And by the way, most of our history, when we weren't in a process of buying or acquiring a lot of vacancy, we have been at very high levels of occupancy with the portfolio, ranging from 92 to 95 or 96. And, you know, you go, well, what's the reason for that?
Jordan: I fully expect the market to return to where we were before and by the way most of our history, when we weren't in a process of buying or or or acquiring a lot of vacancy.
Jordan: We have been.
At a very high levels of occupancy with the portfolio ranging from you know 92 to $95 96.
Jordan: And you know you go well what what's the reason for that why do we feel that such a great market and it is what I said, we have the best supply demand dynamic of any market in the United States, we effectively have no new supply coming in and we have a lot of industries that drive demand and and I know you know nobody wants to keep hearing about tech and.
Jordan L. Kaplan: And why do we feel it's such a great market? It is what I said. We have the best supply-demand dynamic of any market in the United States.
Jordan L. Kaplan: We effectively have no new supply coming in, and we have a lot of industries that drive demand. And I know, you know, nobody wants to keep hearing about tech and entertainment, but we have medicine, we have universities, we have research. All of those are our space occupiers. And you're seeing articles about it even today.
Jordan: Entertainment, but we have medicine, we have universities, we have research all of those are our space takers and youre seeing articles about it.
Jordan: Even even today, so I'm very optimistic about where our buildings will be headed as soon as what I I think what you'll actually see is you'll see interest rates light lighten up and tenants kind of come back strong in the market all around the same time, so I mean, but we all need to make predictions about that.
Jordan L. Kaplan: So I'm very optimistic about where our buildings will be headed as soon as, you know, I think what you'll actually see is you'll see interest rates lighten and tenants kind of come back strong into the market all around the same time. But we all need to make predictions about that, and I don't think they're market-specific for us. Gotcha.
Jordan: And I don't think they are market specific for us.
Jordan L. Kaplan: Appreciate the insights there. And then, I was wondering if you could give some additional color on the 20% acquisition in your JV fund. Was this more opportunistic, given the existing relationship you have there?
Speaker Change: Got you I appreciate the insights there and then I was wondering if.
Speaker Change: You could give some additional color on the 20% acquisition and your JV Fund was this more opportunistic given the existing relationship you have there or should we read into this as as Youre looking more proactively at acquisition opportunities.
Jordan L. Kaplan: Or should we read into this as you're looking more proactively at acquisition opportunities? In general, when we're in these JVs, our recommendation is always, you know, we think this is a good holder; we think we should all be selling at the same time. But then, specifically, when one of our JV partners wants to sell, we work hard to make sure there's a market for that and they can get liquidity. And this is a, you know, this was a relatively small deal.
Speaker Change: So.
Speaker Change: In general.
Speaker Change: When we're in these jv's are recommendation as always you know we think this is a good hold or when you think we should all be selling at the same time, but then in the specific when one of our JV partners want to sell we work hard to make sure there's a market for that and they can get liquidity and this is it.
Speaker Change: This was a.
Speaker Change: A relatively small deal I mean, it's not very material, but we were certainly happy to provide that liquidity for that partner that wanted to get out and that's all that really happened there.
Jordan L. Kaplan: I mean, it's not very material, but we were certainly happy to provide that liquidity for that partner that wanted to get out, and that's all that really happened. Great. Well, that's it for me. Thanks for the time.
Speaker Change: Great well that's it for me thanks for the time.
Speaker Change: Okay. Thanks. The next question comes from Nick <unk> with Scotiabank. Please go ahead.
Nick Yulico: The next question comes from Nick Yulico with Scotiabank. Please go ahead. Thanks. Maybe the first question is on, you know, acquisition opportunities and how you're thinking about, you know, those and, particularly, in relation to, you know, if you have a portfolio right now where you're already dealing with, you know, some unstabilized occupancy levels, I mean, are you still willing to go out and, you know, find investments if they pencil and make sense and put capital to work with JV Partners? Absolutely. Absolutely. I mean, I think, I mean, we're definitely spending time trying to find deals, and I think it's an amazing opportunity right now. And when I think back to the last time, I thought it was such an obvious and amazing opportunity, which maybe the rest of the world didn't think, but it did turn out to be the case.
Speaker Change: Yeah.
Nick: Thanks, maybe.
Nick: Maybe first question is on acquisition opportunities and how you're thinking about you know those in and particularly in relation to you know if you have a portfolio right now where you're already dealing with you know some unstable wise occupancy levels. I mean are you still willing to go out and and you know find invest.
Nick: But if they if they pencil it makes sense and put capital work with our JV partners.
Nick: Absolutely.
Speaker Change: Absolutely I mean I think.
Speaker Change: I mean, we're spending are definitely spending time trying to find deals and add I think it's an amazing opportunity right now and when I think back.
Speaker Change: To the last time I thought it was such an obvious and amazing opportunity, which maybe the rest of World then thing, but it did turn out to be the case you Gotta go all the way back to 1990, 90, 190, 293, when Ken and I were just getting going with this company with Dan and Chris and we looked at what was going on out there and we said Wow I mean, the price you can buy these bill.
Nick Yulico: You've got to go all the way back to 1990, 91, 92, 93, when Ken and I were just getting going with this company, with Dan and Chris, and we looked at what was going on out there, and we said, wow, I mean, the price you can buy these buildings for, assuming some of this stuff comes up and we have a chance to get it, they're epic. They're, apparently, 130 years
Speaker Change: Things for assuming some of this stuff comes up and we have a chance to get it.
Speaker Change: Or there are their epic there.
Speaker Change: Apparently there 130 years.
Jordan L. Kaplan: And we and I don't want to miss that opportunity at all. All right, thanks. And then the second is just on the William Morris extension.
Speaker Change: And we and I don't want to Miss that opportunity at all.
Speaker Change: Alright, Thanks, and then second is just on the William Morris extension are you able to give us any feel for how the the rent spread worked on that I mean, I guess, we'll learn next quarter. When you put the new rent in the Sop, but any preview you can give us on that along with how to think about you know the capital.
Jordan L. Kaplan: Are you able to give us any feel for how the rent spread worked on that? I mean, I guess we'll learn next quarter when you put the new rent in the SUP, but any preview you can give us on that along with how to think about, you know, the capital you had to extend to get the lease done? Yeah, so the current lease expires in 27. This is a 10 year extension. So now it's 2037. They have kept all their current space.
Speaker Change: You were you had to extend to get the lease done.
Speaker Change: Yeah.
Speaker Change: Yeah. So the current lease expires in 27 has a tenure extension. So now it's 2037 they kept all their current space.
Jordan L. Kaplan: You know, there's not gonna be any current impact on cash revenues because it doesn't start for a while. But we're doing, You know, we're doing some building work, but I don't think the TIs, I don't think you're going to look at the TIs and say that was a big difference. I doubt they'll impact anything in terms of averages or any of that, and there will be a very significant cash and straight line rent rollout. Thanks.
Speaker Change: You know, there's not going to any current impact on cash revenues because it doesn't start for a while but.
Speaker Change: We're doing.
Speaker Change: You know we're doing some building work, but I don't think the tier I don't think you're going to look at it and say that was a big difference I doubt they'll impact anything in terms of averages or any of that and there will be.
Speaker Change: Very significant cash and straight line rent roll up.
Speaker Change: Thanks.
Jay Povkat: All right. The next question comes from Jay Povkat with Evercore. Please go ahead.
Speaker Change: Alright. The next question comes from Jay <unk> with Evercore. Please go ahead.
Operator: Hey, thanks for taking my question. I was wondering if you could just provide a little bit of color on where you typically see renewal percentages at the start of the year, just thinking through kind of how occupancy will trend throughout 24.
Jay: Hey, Thanks for taking my question I was wondering if you just provide a little bit of color on where do you typically see renewal percentages at the start of the year, just thinking through kind of how occupancy will trend throughout 'twenty four.
Operator: Yeah, you know, our long-term average renewal rate for our office tenants is in the high 60s, between 65 and 70%, kind of over the long term. If you're looking at the supplemental on the roll over the next four quarters, obviously, that renewal percentage goes down the closer you get because most of our tenants have renewed, you know, six months or a year before their term ends. So if you want to try to, like, map something more specifically near term, you know, I can talk about that offline. But the long-term average, you know, it's in the high 60s. Okay, that's helpful.
Jay: Hey, Jay Yeah, you know our long term average renewal rate for our office tenants is in the high Sixty's you know between 65 and 70%.
Jay: Over the long term if you were looking at the supplemental on the roll over the next four quarters, obviously got renewal percentage goes down the closer you get because most of our tenants have renewed.
Jay: Six months or a year before their term and so if you want to try to like map something more specifically near term you're not going to talk about that offline, but our long term average it's in that high <unk> range.
Speaker Change: Okay. That's helpful. Thank you and then just going back to the distress front as well I'm curious if you could provide anything on just where you expect to see that whether it's on the office front multifamily maybe a combination of both.
Jordan L. Kaplan: And then just going back to the distress front as well, I'm curious if you could provide any information on just where you expect to see that, whether it's on the office front, multifamily, or maybe a combination of both. I'll take that. Good morning.
Speaker Change: I'll take that good morning.
Jordan L. Kaplan: We're going to see it on a combination of both. I mean, when you look at the headlines, lenders are taking back both office and multifamily. And I mean, candidly, I was just at something yesterday where they were showing upcoming maturities and the pending defaults on some of these very, very... Low-capitalization rate multifamily assets that were bought with floating rate debt. It's a pretty deep bench.
Speaker Change: We're going to see it on the combination of both I mean, when you look at the headlines lenders are taking back both office and multifamily and I mean candidly I was just at something yesterday, where they were showing upcoming maturities and depending defaults and somebody who's very very.
Low cap rate multifamily assets that were bought with floating rate debt.
Jordan L. Kaplan: So you know, I'm expecting that we're going to see more of both of those as the year progresses. Great, thanks. That's all for me. The next question comes from Dylan Brzezinski with Green Street. Please go ahead.
Speaker Change: A pretty deep bench so.
Speaker Change: Hum.
Speaker Change: I'm expecting that we're gonna see more bulk of that as this year progresses.
Speaker Change: Yeah.
Speaker Change: Great. Thanks, that's all for me.
Mika Brzezinski: The next question comes from doing Brzezinski with Green Street. Please go ahead.
Dylan Brzezinski: Hi guys, thanks for taking the question and I appreciate your comments sort of on longer term leasing expectations. But as we think about what's embedded in the current occupancy guidance, is it your sense that, I call it, the 700,000 square foot leasing volume per quarter is going to be more the norm here as the economy works its way through a lot of the uncertainty, or do you think that the level seen earlier last year is more representative of what's embedded in guidance today? Well,
Mika Brzezinski: Hi, guys. Thanks for taking the question and I appreciate your comments sort of on a longer term leasing expectations, but as we think about what's embedded in that in the current occupancy guidance is it your sense that.
Mika Brzezinski: You know call. It 700000 square foot leasing volume per quarter is going to be more than norm here.
Mika Brzezinski: The economy works its way through a lot of the uncertainty or do you think that the levels seen earlier last year is more representative of what's embedded in the guidance today.
Mika Brzezinski: Well.
Jordan L. Kaplan: I mean, actually, we averaged last year 800 or a little over 800,000 square feet. I'm hopeful, but I'm not gutsy enough to say that we're willing to put in guidance for some kind of big, big recovery. And that's why, as we said, we probably, hopefully, in terms of the leasing and what we thought would happen, I mean, that's in our guidance, and you have it now. But, you know, I'm hopeful.
I mean actually we averaged last year, I think 800 or a little over 800000 square feet I.
Mika Brzezinski: Uh huh.
Mika Brzezinski: I'm hopeful, but I'm not gutsy enough to say that we're willing to put in guidance some kind of big big recovery and that's why as we said we.
Mika Brzezinski: Probably hopefully it turns out the leasing and what we thought would happen I mean, that's in our guidance and you do you have it now.
Mika Brzezinski: But you know I'm hopeful, but just like everybody's kind of watching the overall economy, which which you know won't be any different for us than it will be for the rest of the country.
Jordan L. Kaplan: But just like everybody's kind of watching the overall economy, which, you know, won't be any different for us than it will be for the rest of the country. And then as you think about acquisition opportunities, understanding that we may be in the early innings of things, but just curious internally, as you guys think about deploying capital, is there some sort of. You know, yield on cost or IRR, that would really get you guys excited.
Mika Brzezinski: And then as you as you think about acquisition opportunities understanding that we may be in the early innings of things, but just curious internally as you guys think about deploying capital or is there some sort of.
Mika Brzezinski: You know yield on cost or our IRR that would really get you guys excited in and if so can you kind of walk through sort of how you guys are thinking about that.
Jordan L. Kaplan: And if so, can you kind of walk through sort of how you guys are thinking about that? I don't look at each opportunity as unique based on the rent role, what the property is, you know, the metric that gets us really excited right now is cost per square foot. It's going to be very attractive. And then it's a function of taking what we believe in the leasing and the debt market and figuring out what that IRR is going to be. But, you know, the opportunities are certainly going to be richer than they were pre-interest rate environment height. I appreciate it. That's it for me.
Mika Brzezinski: Yeah.
Mika Brzezinski: I don't look at each opportunity is unique based on the rent roll what the property is you know that.
Mika Brzezinski: The metric that gets us really excited right now is cost per square foot.
Mika Brzezinski: Is going to be very attractive and then it's a function of taking what we believe in the leasing in the debt market and figuring out what that IRR is going to be.
Mika Brzezinski: You know the opportunities are certainly going to be richer than they were pre interest rate environment.
Speaker Change: I appreciate it that's it for me.
Upaul Rana: Again, if you have a question, please press star, then one. The next question comes from Upaul Rana with KeyBank Capital Markets. Please go ahead.
Speaker Change: Again, if you have a question. Please press Star then one the next question comes from Paul <unk> with Keybanc capital markets. Please go ahead.
Operator: Great, thank you. I'm going back to the retention rate here, you know, based on your occupancy guidance. You know, retention seems to imply about 62%, which is, you know, marginally below your historical range that you mentioned. You know, if most of your new leases don't come online in 24, or if new leases slow, the required retention rate would need to be increased. So I was wondering how curious you are about that and how confident you are about that. And if you can achieve that.
Paul: Great. Thank you.
Paul: Yeah, just going back to the retention rate here I know you know based on your occupancy guidance, yeah retention. It seems to imply about 62%, which is marginally below your historical range that you mentioned.
Paul: Yeah, if most of your new leases doesn't come online in 'twenty, four or if new leases slows you know the required retention rate what would need to be increase. So I was just wondering how curious a how confident you are on that and if you can achieve that.
Operator: Yeah, so of course, this year includes the Warner Discovery move out, which is, you know, two and a half percent of our square footage. So that, and that's built into the range we gave you. So that's going to skew the retention average for this year down lower than it normally would be. You know, the high 60s retention rate that's our historical average is over a long period of time, but something that large will skew this year, so that's certainly taken into account. Beyond that, one move out, as Jordan mentioned, we're keeping our leasing assumptions pretty in line with what we've seen the last couple of quarters, and we're not assuming any kind of any ramp up from here. Okay, got it.
Speaker Change: Yeah. So of course this year include so the Warner discovery move out, which as you know 2.5% of our of our square footage so that and that's built into the range. We gave you. So that's going to skew the retention average for this year down lower than it normally would be the you know the high sixty's retention rate that's our historical average.
Speaker Change: He has over a long period of time, but something that large will skew. This year. So that's certainly taken into account beyond that.
Speaker Change: One known move out as Jordan mentioned, we're keeping our leasing assumptions pretty in line with what we've seen the last couple of quarters, and we're not assuming kind of any ramp up from here.
Jordan L. Kaplan: Thank you. That was, And then just, you know, I want to get your thoughts on the future of UCLA and in your portfolio. You know, they've made that pretty big purchase at Westside Pavilion Mall, and they do have a number of expirations coming up over the next couple years. So I want to get your thoughts on what their future looks like with you guys. Well, there are a lot of different leases. I cannot, I know the mall deal is not, it's all new. So it's, it's for a new, it's a whole new program.
Speaker Change: Okay got it. Thank you that was helpful and then just I'm.
Speaker Change: I want to get your thoughts on the future of UCLA and in your portfolio you know they've made a pretty big purchase at Westside Pavilion mall and they do have a number of expirations coming up over the next couple of years, So want to get your thoughts on on what their future looks like with you guys.
Speaker Change: Well, it's a lot of different leasehold. So I cannot I know the mall deal is not it's all new.
Speaker Change: So it's for me, it's a whole new program the whole the state is funding a new center for research and and.
Jordan L. Kaplan: The whole, the state is funding a new center for research and immunology, and then also there's a completely separate set of backers that are funding a brand new research center for quantum computing. And so that's not, in any sense, a drain of anything, even from campus. I mean, from anywhere. In terms of just in general, UCLA's plans and what they're doing, it's very hard to tell. All those leases, the decisions about those leases are independently made by the people in those departments, and so it's hard to say one thing or another about them. Okay, great, thank you. The next question comes from Peter Abramowitz with Jeffries. Please go ahead.
Speaker Change: Immunology and then also there.
Speaker Change: Lately separate set of bankers that are fun funding a brand new research Ah ones 500000 feet, then there's 70000 feet with brand new.
Speaker Change: The whole research center for quantum computing.
Speaker Change: And so that's not in any sense, a drain of anything even even from campus I mean from anywhere.
Speaker Change: In terms of just in general Ucla's plans and what they're doing it's very hard to tell all those leases are either decisions about those leases or independently made by the people in those departments and so it's hard to say one thing or another about them.
Speaker Change: Okay, great. Thank you.
Speaker Change: The next question comes from Peter Abramowitz with Jefferies. Please go ahead.
Peter Abramowitz: Thank you. I just wonder if you could provide an update. Have you had any initial tenant conversations about potentially backfilling that space in Burbank? Is it more likely to, You know, do you think you can do it as one large release, or...
Peter Abramowitz: Thank you I just wonder if you could provide an update have you had any initial tenant conversations about potentially back filling that space in Burbank or is it more likely to be you know do you think you can do it as one large lease or something.
Jordan L. Kaplan: . http://TheBusinessProfessor.com, Well, we're doing showings, and there are certainly tenants there. I think there's reticence to committing, but I mean, I think that will happen. So I'm not nervous about leasing the building. And all I can say is I hope it's not one large lease again because we've spent... 30 years talking about that lease. Every 10 years when it came up, I'd rather have it be multiple leases and be done talking about it, but I'm not sure how it will end up. There are obviously large tenants in that market. Thanks. And then I will try one more.
Peter Abramowitz: And you anticipate having to break up and it's a small or midsize leases.
Speaker Change: Well I mean of course, we're doing showings and and there are certainly tenants there.
Speaker Change: I think theres reticence to committing but I mean, I think that will happen. So I'm not nervous about leasing up the building and all I can say is I hope, it's not one large lease again, because we've spent.
Speaker Change: 30 years talking about that at least every 10 years when it came off and I'd rather have it be multiple leases can be done be done talking about but I'm not sure. How it will end up there. There's obviously a large tenants in that market.
Speaker Change: Thanks.
Speaker Change: Then one other.
Operator: Besides the move out of Discovery there, any other kind of big components in the same story? I know I grew up guidance to consider sort of what are sort of the other swing factors there aside from that move out. Hmm. I don't know, you know, same store is a tricky calculation. I couldn't make a good analysis of that for you. You could give... Peter, call me later and try and figure if there's something out.
Speaker Change: Besides the move out of discovery, there any other kind of big components in the same store NOI growth guidance to consider sort of what are what are sort of the other swing factors there.
Speaker Change: From from that move out.
Speaker Change:
Speaker Change: I don't know you know same stores.
Speaker Change: A tricky calculation I couldn't make a good analysis of that for you here you could give.
Speaker Change: Carl I guess later and try and figure out if there's something out I don't think theres anything unique driving that night and driving that guidance.
Operator: I don't think there's anything unique in driving that guy down. Got it, thanks, and also Studio Plaza is not included. Okay, so it's mainly the occupancy drag that's kind of leading to the negative growth there, but other 2013 University of Georgia College of Agricultural and Environmental Sciences UGA Extension Office of Communications and Creative Services, That's correct. The next question comes from Camille Bunnell with Bank of America. Please go ahead. Hi everyone.
Speaker Change: Got it thanks.
Speaker Change: And then also the studio Plaza is not included in the same store.
Speaker Change: Okay. So it's basically the occupancy drag that that's kind of.
Leading to the negative growth there, but other than discovery.
Speaker Change: That's correct.
Speaker Change: Okay. Thanks.
Camille Borne: The next question comes from Camille borne out with Bank of America. Please go ahead.
Camille Borne: Hi, everyone can we get your thoughts on the media sector and how it shook hungry is trending since the strikes I think theres all just based on the conversations you're having in the pipeline.
Camille Bonnel: Can we get your thoughts on the media sector and how its recovery is trending since the strikes have been resolved, just based on the conversations you're having in the pipeline? The Bulletproof Executive 2013, I don't, I, mean... I don't. I don't know that I have the greatest, I mean I don't have a lot of thoughts, I mean they're urgh. Do you have any thoughts on that?
Camille Borne: [laughter].
Speaker Change: I don't I mean.
Speaker Change: I don't.
Speaker Change: I don't know that I have been.
Speaker Change: Great.
Speaker Change: How about thoughts I mean, they're there.
Speaker Change: Uh huh.
Speaker Change: And do you have any thoughts on it I'd say this we you know getting the strikes was all paths has to be a good thing on the margin. We do certainly have entertainment clients and tenants and so some of that stuff did slow down a little bit on the margin during the strike. So I think it's got to be a good thing for us going forward, but you know I don't I don't know that it's a huge needle mover in.
Operator: We, you know, getting the strikes resolved has to be a good thing on the margin. We do certainly have entertainment clients and tenants, and so some of that stuff did slow down a little bit on the margin during the strikes, so I think it's got to be a good thing for us going forward, but, you know, I don't know that it's a huge needle mover in the near term. You know, there's still caution in the market, as Jordan's been describing, but I'm happy that those are resolved. We need those tenants to grow, and hopefully that'll happen here when the economy gets a little better. I think we have one large entertainment tenant, but we know they're leaving. So I don't think we have any other big entertainment tenants. Not big ones, but we do have small tenants, you know, small leases with writers groups and other small entertainment.
Speaker Change: The near term.
You know, there's there's still caution in the market as Jordan's been describing but Ah I think happy that those are resolved, we need those tenants to grow and hopefully that'll happen here when when the economy gets a little better.
Speaker Change: I think we have one large entertainment tenant we know they're leaving so I don't think we have any other big entertainment tenants are big ones, but we do small we do handle tenants small leases with writers groups and other small entertainment yeah.
Operator: Yeah. Yeah, just trying to get a sense of like the smaller guys are coming back to the table to have conversations looking to, you know, start new projects. Just trying to get a sense of whether anything's changed since. Well, I mean, you just thought W, I mean, you just saw renewal. The tenant in Beverly Hills that we renewed was an entertainment tenant. Got it. And for my second question, I was just wondering if you're able to provide any additional color on the same store NOI outlook for office versus multifamily?
Speaker Change: Yeah, just trying to get a sense of like the smaller guys are coming back to the table to have conversations looking too.
Speaker Change: Start new projects, just trying to get a sense if anything's changed since.
Speaker Change: Well I mean, you just saw Debbie I mean, you just saw a renewal of a tenant and in Beverly Hills that we renewed was is an entertainment tenant.
Got it.
Speaker Change: And for my second question I was just wondering if you're able to provide any additional color on the same store NOI outlook for office versus multifamily.
Operator: Yeah, we don't break that out between the two. I think that the recent trends that you've seen are, you know, would be helpful for you to think about going forward. Residential has, you know, remained pretty strong, and we're dealing with the occupancy drag that's hurting office a little bit. So, you know, that'll be the case for 2024 as well, I'd assume. Okay, thank you. The next question comes from Bill Crow with Raymond James. Please go ahead. Good afternoon, guys. I have two quick questions.
Speaker Change: Yeah, we don't break that out between the two I think that the recent trends that you've seen or are you know would be helpful. For you to think about going forward. A residential has remained pretty strong and you know we're dealing with the occupancy drag that that's hurt office, a little bit so that'll be the case for 2024 as well.
Speaker Change: Okay. Thank you.
Speaker Change: The next question comes from Bill Crow with Raymond James. Please go ahead.
Bill Crow: Good afternoon guys.
Bill Crow: Two quick questions first of all is there any real organic or not organic I guess demand in your markets in other words since it's just a market share game still are you seeing.
Bill Crow: First of all, is there any real organic or non-organic demand in your markets? In other words, is it still just a market share game? Are you seeing actual new space demand? I think we, I don't think from large towns we're seeing new space demands, but I think we're seeing kind of, You know, from the smaller ones, I think we're seeing a lot of business as usual, but larger ones for us are really like over 10 or 20,000 feet, so it's impactful when they don't grow or don't renew. Yeah. Okay, second on downtown, and I know it's not your market, but the flow out of downtown can be helpful. Have we reached the bottom on this downward cycle? Or is it still, is the market still declining? Well, downtown, most of downtown went to Century City, right? I mean, a couple other fields.
Bill Crow: Actual new space demands.
Bill Crow: I think we I don't think from large tenants, we're seeing new space demands, but I think we're seeing kind of.
Bill Crow: You know from the smaller ones I think we're seeing a lot of business as usual, but but but larger ones for us are really like over 10 or 20000 feet. So it's impactful when they when they don't grow or don't or don't renew.
Speaker Change: Oh, okay.
Speaker Change: Secondly, I'm downtown and I know, it's not your market but.
Speaker Change: The flow out of downtown can be helpful.
Have we reached bottom on this downward cycle or or is it still is the market still declining.
Well downtown most of downtown went to century city right.
Speaker Change: Couple of other deals.
Jordan L. Kaplan: And it was probably pretty positive. It was very positive for Century City. I'm not sure how the cycle downtown will play out. I mean, if you're there, you'll maybe..., have a better, better feel than I do. I mean, there's a lot of people that are focused on getting that area recovered, but there are a lot of tenants that have said, "You know, for better or worse, my next 10 years are going to be on the west side." It's not going to be downtown. So I, you know, that's certainly going to have an impact. I don't know how that's going to play out. This year, we still see out migration from downtown.
Speaker Change: And it was probably pretty positive it was pretty positive for century city.
Speaker Change: Hmm.
Speaker Change: I'm not sure how this cycle downtown will play out.
Speaker Change: I mean, if you're there you'll maybe.
Speaker Change: Have a better better field, an idea I mean, there's a lot of people that are focused on getting that area recovered, but theres a lot of tenants that have said.
Speaker Change: You know for.
Speaker Change: For better or worse. My next 10 years is going to be on the west side, it's not going to be in downtown. So I you know the.
Speaker Change: That that's certainly going to have an impact I don't know, how that's going to play out.
Speaker Change: So you're still seeing.
Speaker Change: Out migration from downtown.
Jordan L. Kaplan: I don't think we've been a beneficiary, I mean, our markets have been a beneficiary, I'm not sure that we've been a primary beneficiary, so what we're in particular seeing, I cannot, you know, I cannot say that, you know, we're seeing anything meaningful from that. Okay. Alright, thanks for the talk. This concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan for a closing remark. Well, thank you for joining us, and we look forward to speaking with you again in a quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. The Ultimate Parody Site! BF-WATCH TV 2021
Speaker Change: I don't think we've been I mean, our markets have been a beneficiary I'm not sure that we've been a primary beneficiary. So what what we're in particular, saying I cannot.
Speaker Change: Cannot say that.
Speaker Change: We're seeing anything meaningful from that okay, alright, thanks for the time.
Speaker Change: Alright.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Jordan L. Kaplan: Well, thank you for joining us and we look forward to speaking with you again in a quarter.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Speaker Change:
Speaker Change: [music].
Speaker Change: Yeah.