Q2 2025 Douglas Emmett Inc Earnings Call
Speaker #1: 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.
Speaker #3: 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 it will be available for replay during the next 90 days.
Speaker #3: 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 in today's call in the earnings package.
Speaker #3: 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.
Speaker #3: 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 our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect.
Speaker #3: 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 #3: 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.
Speaker #4: Good morning, and thank you for joining us. While we continue to closely monitor macroeconomic concerns, we haven't seen any impact on leasing in our markets.
Speaker #4: We saw strong results in both our office and residential portfolios last quarter. We leased 973,000 square feet of office space, including over 300,000 square feet of new leases.
Speaker #4: So, we have now achieved positive absorption across our total portfolio for three of the last four quarters. Our office rental rates remain steady, and concessions remain low.
Speaker #4: Our multifamily portfolio had another tremendous quarter with full occupancy, increasing rents, and same-property cash and OI growth exceeding 10%. We're also making good progress on the four key growth strategies I talked about last quarter.
Speaker #4: Leasing up our office portfolio, which remains our number one focus; redeveloping our 712-unit Brentwood apartment property, now rebranded as The Landmark Residences; re-tenanting Studio Plaza; and augmenting our existing portfolio with best-in-class properties.
Speaker #4: In that regard, I'm pleased to announce that we plan to convert our recently acquired 10900 Wilshire office property into 320 apartments in the Prime Westwood submarket.
Speaker #4: As you saw with our office-to-residential conversion in Hawaii, we expect this conversion will not only enhance the value of $10,900 Wilshire but will also reduce office vacancy in the submarket.
Speaker #4: Finally, having already addressed all of our 2025 maturities, we have begun refinancing our 2026 debt maturities at very competitive rates. Which, Kevin, we'll discuss.
Speaker #5: Thanks, Jordan, and good morning, everyone. At 10,900 Wilshire, we are now planning a 320-unit apartment community with state-of-the-art amenities in one of L.A.'s most desirable apartment markets.
Speaker #5: The Westwood residential submarket has significant unmet demand for UCLA faculty and executives. The existing 247,000-square-foot office tower will be converted into apartments and integrated with a new residential building that we are constructing on Ashton Avenue.
Speaker #5: Including the cost to acquire the property, to convert the existing office tower, and to construct the new building, we expect that our new plan will increase the total project cost to be approximately $200 million to $250 million.
Speaker #5: The first apartments in the existing office tower could be delivered in the next 18 months. Like our very successful conversion of 1132 Bishop in Honolulu, the conversion will take place in phases over a number of years as office floors in the building are vacated.
Speaker #5: We anticipate that the ground-up development of the new building should take approximately three years. At Studio Plaza, we remain pleased with the market response to the revitalized project.
Speaker #5: Our repositioning work is moving along rapidly, with a lobby renovation and several floors of corridor and restroom upgrades now complete, and our first tenant taking occupancy.
Speaker #5: We expect the remaining exterior site work to be completed during the third quarter, with additional floors completed on a rolling basis. Turning to financing, after quarter-end, we refinanced a $200 million office loan that was set to mature in September 2026.
Speaker #5: The new non-recourse interest-only loan has a floating rate of $200 over SOFR, which we have swapped to a fixed rate of 5.6% until August 2030.
Speaker #5: The new loan matures in August 2032. With that, I will turn the call over to Stuart.
Speaker #4: Thanks, Kevin. Good morning, everyone. During the second quarter across our total portfolio, we signed 245 leases covering 973,000 square feet, including over 300,000 square feet of new leases, with healthy leasing to tenants occupying over 10,000 square feet.
Speaker #4: Looking ahead, our office leasing pipeline is robust. Our remaining office expirations in 2025 and 2026 are below historical averages. The overall straight-line value of new leases we sign in a quarter increased by 2.4%.
Speaker #4: With cash spreads down 13.3%, our leasing costs during the second quarter remained well below the average for other office rates in our benchmark group, at an average of only $6.06 per square foot per year.
Speaker #4: Our residential portfolio remained essentially fully leased at 99.3%, with strong demand. With that, I'll turn it over to Peter to discuss our results.
Speaker #6: Thanks, Stuart. Good morning, everyone. Compared to the second quarter of 2024, revenue increased by 2.7%. FFO decreased to $0.37 per share, and AFFO decreased to $54.5 million.
Speaker #6: And same-property cash and OI was down 1.1%, as office expenses in the prior year were reduced by a large property tax refund, creating a tough comparison.
Speaker #6: Excluding property tax refunds, our same-property cash and operating income would have been slightly positive. At approximately 4.9% of revenue, our general and administrative expenses remain low relative to our benchmark group.
Speaker #6: Turning to guidance, we now expect our 2025 net income per common share diluted to be between $0.07 and $0.11. We are also narrowing our guidance range for FFO per fully diluted share to be between $1.43 and $1.47.
Speaker #6: For information on the assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future property acquisitions or dispositions, common stock sales or repurchases, financings, property damage insurance recoveries, impairment charges, or other possible capital markets activities.
Speaker #6: I will now turn the call over to the operator so we can take your questions.
Speaker #1: 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 #1: 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.
Speaker #1: Thank you. At this time, we'll pause momentarily to assemble our roster. Your first question comes from John Kim with BMO Capital Markets. Please go ahead.
Speaker #7: Thank you. I wanted to ask about your leasing activity versus the occupancy and lease rate, because the activity was very strong once again. When you look back at last quarter, you had 351,000 square feet expiring during the quarter.
Speaker #7: So it would seem like there would be a build-up in occupancy and lease rate during the quarter. but there wasn't. So I guess that what's implied in that it was that over 600 thousand square feet of the leasing done this quarter were for early renewals or, leases not expiring during the second quarter.
Speaker #7: I was wondering if that was abnormally high for you, and where do you think occupancy goes for the rest of the year?
Speaker #8: So, okay. So there's, at the moment, yes, that was a lot of questions embedded in there, John, but at the moment, we are at a pretty wide gap on lease to occupied.
Speaker #8: Okay? Now that's, you know, most of the time you would look at and go, "That's a good day." So, for instance, in 2009, which was our lowest period on that gap, we were under 100 basis points.
Speaker #8: Right now, we're up around, what, $280?
Speaker #9: 270 basis points.
Speaker #8: We're at 270 basis points. So you can look at that gap and go, "Are they doing a lot of leasing, or are they languishing?" Now, of course, we've also told you we've itched over, and we're starting to do larger deals, which, by the way, we love our larger deals, but larger deals take longer to get in, and that means that they're lacing somebody that was there.
Speaker #8: So we're moving through the leasing as we are. As I said in my prepared remarks, actually, the leasing pipeline is strong, and it's good.
Speaker #8: And I'm still optimistic about where we're headed. But, you know, if you want to look at an indicator, if that gap starts really dramatically shrinking, you're going to say, "Wait a minute."
Speaker #8: We're not leasing as much. Now, it can also shrink when we're very full. But it mostly shrinks when we're having trouble doing leasing, and so our lease is very close to our occupied.
Speaker #8: So I know that a lot of people looked and received it, and it kind of the reverse and said, "Oh, I saw the occupied go down." But I looked at it, and I said, "Okay."
Speaker #8: This is good because we're doing a lot of leasing. So we're at a very high number. I think our average over a very long period of time for that number would be something around 150 to 180, or some median or something in that range.
Speaker #8: So this is a meaningful gap up, which I would call a good sign, but, you know, the market takes it for what it's worth.
Speaker #7: And so when you look at your leasing pipeline or what you're negotiating today, how much of that is a continuation of this? Right? Larger tenants, I may not take occupancy in the near term.
Speaker #8: Well, least is least. That's signed deals. That's not in the pipeline anymore. That's over. Okay? So what we're looking at is deals in process at various stages: letter of intent, the actual lease being negotiated.
Speaker #8: And, and, you know, how far are we from signing? Okay? And then it goes into leased. And so when we say to you, "We have back having big deals," we say, "We're back liking the way Studio Plaza's going." We're saying, "Our pipeline looks strong." Those are the numbers we're looking at.
Speaker #8: Now, you know, I wish it was getting signed very rapidly. Everything was getting signed quickly, but we're signing a lot. The other number that I thought—and I tried to write it in the prepared remarks—but it got too cumbersome, then it got booted out by the rest of the people working on it.
Speaker #8: But, but, you notice that when I say when we're having a good day, we did 300,000 feet on 900 and something. So we're over 30% new.
Speaker #8: That's another whether it impacts it that moment or not. That's very positive because, you know what our role looks like. I mean, you know what our retention looks like over the long period.
Speaker #8: So we're like going in the right direction on that number, too. That was actually the number that made me happiest about these numbers this quarter.
Speaker #8: So, you know I'm negative on what's going on in leasing. In the past, I've said leasing's very tough; we're having a rough time.
Speaker #8: But I'm doing quite well, and it is very tough. I'm not saying right now that I'm negative on it; it's going quite well.
Speaker #7: That's great color. Thanks.
Speaker #8: All righty.
Speaker #1: And your next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Speaker #10: Great. Thanks. Good morning out there. Can you tell us what the lease rate is on Studio Plaza at this point? How should we think about the timing of NOI contributions from those leases that you've signed thus far, and maybe just some color on the demand for the additional space at the property?
Speaker #10: Hey, Blaine. So we're not giving leasing stats on individual buildings or, you know, individual leases, consistent with the way we've kind of always done that.
Speaker #10: Obviously, you know you can tell based on our comments that we're pleased with the velocity of the leasing and how well the building's being received.
Speaker #10: By tenants in that market, and as Kevin said, we already moved our first tenant in. So we'll have some rent coming in that, you know, the real NOI contribution will come over time.
Speaker #10: Some of the deals we've done are larger, so, like Jordan said, they take longer to build out and move in. So, we'll look for that—not, you know, not a big impact this year.
Speaker #10: Great. Thanks, Stuart. And then, the second question with respect to 10900 Wilshire: can you talk about the timeline a little bit and touch on any major lease expirations at the building that will allow you to go in and convert the space?
Speaker #10: And also how we should think about the NOI drag from those vacates in '26 and maybe any offsetting capitalized interest.
Speaker #8: Okay. So starting at the beginning of that, you know, we're going in to do something very similar at that. There's a lot going on at that building.
Speaker #8: Let me just start. So, there's like 100 versions of questions you guys can ask. But to answer your particular question, I think you're asking about the tower.
Speaker #8: And with respect to the tower, we're going to do the same thing as we did in Hawaii. As we get space back, we're moving in and converting it to residential.
Speaker #8: Now, we also have a big conversion of the first floor and the amenities, and we're changing where the entrance is. We're building a building in the back that's going to take capital.
Speaker #8: But, but we’re, you know, there will be a lag, just like there’s always a lag between someone moving out and new people moving in. But this is a very reliable, I mean, actually, in a weird way, I would say 1132 Bishop, which was the 500,000-square-foot conversion we did in Hawaii, we kind of accelerated into a better situation, even though there were still office tenants and it was still going as an office building, into a better situation as we got faster and faster at building out the floors because the floors were leasing super fast.
Speaker #8: So when we were finishing residential floors, it was just, you know, a snap of the fingers, and they were like, "All 20 units are leased." So, you know there will be a lag.
Speaker #8: We have a major build-out on each floor we need to do. We're also going to be doing amenities in the building. We're also doing a lot of other stuff.
Speaker #8: But I'm sure that you'll see a giant difference coming out of the fact that we're doing the conversion. Other than that, we're done. I think you're going to really like the amount of NOI and stable NOI coming out of the building.
Speaker #7: Got it. That's helpful. Thanks, Jordan.
Speaker #8: All right.
Speaker #1: And your next question comes from Anthony Paloni, with JP Morgan. Please go ahead.
Speaker #11: Yeah, thank you. I wanted to go back to John's questions on the occupancy side. You kept your guidance for the full year at 78% to 80%, but I think the first half, it looks like that was in the low, maybe 78%.
Speaker #11: So do you think you're going to see a second half where there's some absorption, then? And it gets you to the middle of that range, or how should we just think about that, given you kept the range?
Speaker #10: Yeah. So the guidance is an average for the year, Tony. You know, obviously, we're still comfortable with that range, and you know we're not going to give guidance on just the second half where we're going.
Speaker #10: But you know, hopefully, we’ll get some absorption. But I think you know we’re very comfortable that we’ll be within that range for the full year on the average.
Speaker #11: Okay. And then the second one's following up on 10900. Any brackets around just what the yield on the all-in cost might end up being when you're done?
Speaker #8: Well, we actually have given that. I mean, we told you because we didn't just wake up one day and say, 'Let's convert it.' We've been looking at these various scenarios depending on where leasing went, and tenants, and how we thought we were going to get floors back. And frankly, some work that we're being required to do because the rails are coming through, and it's right in the middle of the building.
Speaker #8: We have to move the entrance. But but anyway, I I told I think I told you already when we bought it, you we we're going in over a 10, and I think we're going to be right around there on the way out too.
Speaker #11: Okay. On that full.
Speaker #8: And by the way, that's you that's yield on cost. And then we're still not even talking about cash flow IRR, which is like good.
Speaker #11: All right. So, on your new updated budget numbers, you feel good about a 10 on that?
Speaker #8: You realize these numbers kind of roll out over years, but yeah, I feel very good about what we're doing. Yeah.
Speaker #11: Okay. Great. Thank you.
Speaker #1: And the next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Speaker #12: Hey, good morning. Morning out there. Nice on the office conversion. Certainly, if it's anything like the Bishop project, it should be good. The first question, Jordan, just big picture.
Speaker #12: On the apartment rate earnings calls, this quarter, LA was cited as like among the weakest. And the different apartment rates cited, you know, everything from weak jobs to, you know, still COVID delinquencies to some supply pressure to the Hollywood strikes, etc.
Speaker #12: But for you guys specifically on the west side and up in the valley, is your view that right now LA, as an economy, and demand for real estate, is soft?
Speaker #12: Or I'm just trying to understand the apartment rate commentary, being perhaps broader about LA. Versus, in fact, maybe you guys are saying, "Hey, you know what?
Speaker #12: Typically, this far into a recovery, yeah, we'd expect LA to be doing better this year versus where we thought it would be, you know, back in January.
Speaker #12: So, just trying to stand where LA is now versus your expectations in January, and a few share the apartment rate view, or if your view is different.
Speaker #8: I think some of what I am saying is that a lot of what you're mentioning concerns people who own their product, where they own their buildings and where those buildings are located.
Speaker #8: I can tell you, well, first of all, I do the reverse. I'm surprised by how, I mean, we're not going to— and I've said this many years in the past— we're not going to get this kind of growth in our residential rents the way we've been getting recently over the long term.
Speaker #8: They're just too high. The history of residential rents for us, in our markets, is between 4% and 5%. So when you get up to these really lofty numbers—and I think it was like 10% this year, this quarter—that those are crazy unsustainable numbers.
Speaker #8: But we are in a very narrow piece of the market here on the west side, which is very tight. We own very high-end product, high-end, and also we're spending money on it and even making it nicer.
Speaker #8: And so our stuff is obviously, you can see from the numbers, extraordinarily well received. And if it wasn't, and if this quality wasn't, we wouldn't be converting 10,900.
Speaker #8: But it is. And there's a real shortage. So, but I maybe, if their product is in the broader LA County, I can't say what's happening with that stuff.
Speaker #8: Now, the truth is, these larger, more meaningful large residential deals, we've been aggressive buyers of in this really tight market. So I know that a lot of the rates don't actually have a lot.
Speaker #8: That’s where you're getting data, in this kind of tighter west side market where we know we exist primarily in Brentwood, Westwood, and Santa Monica.
Speaker #8: So, I suspect that's the reason for the difference.
Speaker #11: But I'm thinking bigger picture, though. LA overall, including office, what’s your view on what’s going on right now? Back in January, did you think LA would be stronger and that your portfolio would be stronger today?
Speaker #11: Is it on pace, or is it a little behind? That's what I'm trying to get at. And that's off 10 apartments, like the overall tenant.
Speaker #8: Yeah, I think, well, I just told you I thought apartments were ahead of where I thought. Apartments are, you know, really doing extremely well.
Speaker #8: I think the office is very hard to judge one quarter to the next, but I still expect the year to be where I think the year will land where I expected the year to land.
Speaker #11: Okay. Second question is, in our PowerPoint, one of the things that, and I'm sure it's been in there a while, Stuart, but that jumped out is that L.A. has more tech workers than Silicon Valley.
Speaker #11: And certainly, with the uplift that San Francisco has been having, you know, recently, especially with AI, do you expect that LA's tech scene will, you know, we'll be hearing the same positive, you know, strong leasing demand stories that we're hearing out of San Francisco?
Speaker #11: Or is LA's tech scene fundamentally different than the Bay Area, such that what's going on up there, and especially with the AI push, may or may not resonate with the tech users in LA?
Speaker #8: I think the LA tech scene revolves around entertainment. They're here to a very large extent because this is where kind of the entertainment world is.
Speaker #8: I think in the kind cut in the world of cutting-edge research, I think I I I have more of an expectation that in medical medical research and quantum computing, I think we're going become a center for both those things.
Speaker #8: But that's because UCLA is spending $500 billion on, I mean, they're spending an enormous amount of money creating a colossal center for all that stuff that's bringing in people from all over the world to do that research.
Speaker #8: I mean, it's going to be one of the larger quantum computing centers in the country, and it's going to be for sure the largest immunology and research center.
Speaker #8: So, if you told me that tech, as pure tech, especially around AI, I know these guys are all sitting around tables with me. I have not seen that.
Speaker #8: We've seen tech come here more to be involved with content producers, which is the entertainment world, not even just the studios. But we have all kinds of versions, whether it be gaming or otherwise, of entertainment companies here because it's where the talent is, and that's what brought the tech here.
Speaker #8: If you could, Peter, you look like you want to say something. Okay, so that's why I think it's going to happen with them.
Speaker #11: Thank ou.
Speaker #8: All right. Thanks.
Speaker #1: And your next question comes from Upal Rana with KeyBank Capital Markets. Please go ahead.
Speaker #10: Great. Thank you. I just wanted to follow up on Blaine's question regarding Studio Plaza leasing. You mentioned you already have a tenant moving in, but for the other ones that have leased space but haven't moved in, do you anticipate them to move in at some point this year, or is this more of a '26 event?
Speaker #10: I think we'll have other tenants moving in this year, yes. Okay, great. And then on Barrington Plaza, you know, now the Landmark Residences, what's driving the redevelopment costs higher there?
Speaker #10: You know, it looks like you anticipate 400 million now versus 300 earlier this year. And what do you expect the yield to be there now?
Speaker #8: I think what we said is over 300 million, and I didn't say it is 400 million. I said it's approximately. And I think what's driving it, I mean, the primary thing driving it is we have contracts now.
Speaker #8: So we actually know the cost. That's a big thing. Before, we were making estimates, but I'm sure there are other cost run-ups in some areas, and there have been reductions in some things.
Speaker #8: But there's a difference between estimating and thinking over 300 and somewhere in that range. We are still in that territory, but I think we're closer to the territory of 4.
Speaker #8: So, we said more approximately 4. Yield-wise, we're fine. Good shape.
Speaker #10: Okay. Great. Thank ou.
Speaker #1: And your next question comes from Nick Yulikov, with Scotiabank. Please go ahead.
Speaker #13: Thanks. Going back to the residential conversion, can you just talk a little bit more about the Westwood office market? I know you control several of the major buildings in the market, and now you're taking one out.
Speaker #13: service, you know, the benefit, you think that might have for the submarket there. And then also whether you've if you've lined up any of the tenants that are you ow, larger tenants that are expiring in that building.
Speaker #13: If you've already lined them up to take space in your other buildings, you have there, or in our portfolio.
Speaker #8: So for the most part, they're learning about this at the same time you are. but of course, we will put a huge effort to make them happy and hopefully move them into other of others of our our our building and we we we're focused on that.
Speaker #8: But it's not like Hawaii. I don't want to give people the misunderstanding. I mean, it's taking some space out of the market. That's true.
Speaker #8: But in Hawaii, they really didn't have, you know, they were going to go into the other buildings one way or another, because that's all that's there, right?
Speaker #8: But here, Westwood can trade with Century City. It theoretically can trade a little bit with Beverly Hills. If theoretically, you could trade a little bit with an Olympic office corridor.
Speaker #8: So maybe even a little Brentwood. They're not nearly as captive, but I do believe, for the most part, a lot of those tenants want to be in Westwood.
Speaker #8: And so you know, it might be helpful to the rest of the portfolio, which will always be helpful to take product out of the market.
Speaker #8: For any market, we will have that impact.
Speaker #10: Okay, thanks. And the second question just goes back to, you know, leasing volume. I know there's already some questions on this, but specifically, I'm asking about the stabilized lease rate.
Speaker #10: So nothing about, you know, occupancy or occupancy versus lease rate. Just, you know, what's the catalyst to get your lease rate improved?
Speaker #10: You know, just thinking about a volume of new leases that you need to get to. You know, what would drive that higher if it's certain industries becoming active?
Speaker #10: or any more commentary on that would be helpful. Thanks.
Speaker #8: Well, we've looked at a lot of that. I've looked at that a lot because I've been curious to like what can I expect when I can't tell you exactly, you know, as an economy, we're a huge economy.
Speaker #8: So when things get going, they just get going on all fronts, and they're going. But I've tried to, we've tried to look at what, you know, like what can we expect when the economy does get going?
Speaker #8: And when people are saying, "Okay. We're super comfortable spending, expanding, hiring, whatever that list of 'uff' is," regardless of the industry—I mean, because we have a pretty robust mix of industries in our markets.
Speaker #8: How can this thing move? How fast can this thing move? And so we've looked at you. I mean, Ken and I have been running this for, for sure, four recessions.
Speaker #8: And you might even call it five. And so we have an tremendous amount of history on portfolio recovery and lead, and how quickly we leased.
Speaker #8: I think if we look at the most recent one, that was in 2008, 2009, 2010—whatever you want to call that one—that was one of the slowest in terms of annual gains, but we didn't lose a lot in that one.
Speaker #8: It's funny because that one was like you just thought, like the great you know, even greater than a normal recession. But we actually didn't lose as much as you might have expected.
Speaker #8: But if you go back to some of the other ones, you're going to come out with an average to say you know if we're really you know in really big recovery, you know the thing can move about 3 plus or minus 3 percent a year, to you know a a a of increase in occupancy.
Speaker #8: The increase in lease rates, that's like more than like... which industry does it come from? What industry is driving it? Is it education?
Speaker #8: Is it research? Is it accounting? Is it legal? Is it entertainment? Is it you know, vacationers or whatever? Tourism. I mean, there's a lot of industries that are here, but when people are comfortable in the economy, that's kind of movement we've seen out of what we have, which is a relatively large portfolio.
Speaker #8: That's a way to move.
Speaker #10: Our average actually over 3%.
Speaker #8: All right.
Speaker #1: And the next question comes from Seth Burgi with City. Please go ahead.
Speaker #14: Hi. Thanks for taking my question. I just wanted to circle back on Studio Plaza. You know, just how are the rents that you're kind of getting there on some of the new leases kind of compared to your initial expectations?
Speaker #14: And then, you know, as we think from a timing perspective, understand you guys aren't getting a lease rate, but what is kind of the build time before you would be able to recognize revenue on some of the leases you're signing there?
Speaker #14: You ow.
Speaker #8: Yeah, I think that the second one. Well, I think our rental rates are kind of in line with our expectations.
Speaker #8: We're happy with the rates we've been doing and the deals that have been done there. So that's going well. On timing, it really depends on the size of the tenant.
Speaker #8: So the larger tenants and the larger build-outs take a lot longer. And we've already moved in, you know, like I said, we've already moved in some tenants that were on the smaller side.
Speaker #8: So the smaller spec build-outs that we do all the time, we can get those guys in very quickly. And some of the, you know, the real large ones can take quite a while.
Speaker #14: Okay. Great. And then my second one is just kind of on you know the tax credits that California passed. You've en for the you know entertainment industry, are ou seeing any impact on that you know with respect to demand?
Speaker #8: I think that you're talking about the entertainment, the movie-making tax credits?
Speaker #14: Yeah.
Speaker #8: Oh, you know we don't have a lot of visibility into that. We don't own any studios, and you're talking about kind of like the manufacturing, and we're more the administrative offices.
Speaker #8: Or all of the vendors that support it. So, you know, I think the tax credits are designed to get them to film movies here.
Speaker #8: In California, but the rest of the work is done here anyway. I mean, this is where the, you know, the people live. So whether they're doing the sound or full show, however that all works out, they're all here.
Speaker #8: And the accountants and the agents and the lawyers and all of that. So I don't know whether it's having an impact—I mean, probably Victor does know.
Speaker #8: And you know he'd be better than better than us. We did we get revenue from people filming in our buildings. but I think it's honestly, I think it's under a million dollars.
Speaker #8: Is it under a dollar a year?
Speaker #15: Yes.
Speaker #8: Yeah, it's under a million dollars a year. They're just using our buildings for, like, that Barbie movie or something. They're just there, or, or, or some other movies you guys have seen in our buildings.
Speaker #14: Thanks.
Speaker #1: And your next question comes from Jana Galon, with Bank of America. Please go ahead.
Speaker #16: Thank you. You know, maybe following up a little on Nick's question with that LA having a number of positive kind of catalysts occurring between kind of the university investment that you mentioned, the expanded tax credits, and the World Cup next year.
Speaker #16: So, just curious if you're seeing increased touring or demand in the portfolio from these segments. Or do you expect to be seeing it? Is it kind of a little too early right now?
Speaker #8: Well, I can't say those exact segments, but it's not too early to ask us how our pipeline looks, which we've been saying it looks very good.
Speaker #8: I don't ow. Maybe maybe some of that's driving it. I don't know. I don't I I I think it's every it's all the all the areas.
Speaker #8: I think people are just worn out from not having their space. They're bringing everyone back. I don't even think there's a question mark about people coming back anymore.
Speaker #8: They want to settle them into space, and they want them to get to work. And so that's causing tenants to go, "I, I, you know, the fiction that somehow my occupancy costs were going to be lower because the world from now on is going to tell people to sit at home and work, and they don't need to be around each other, is just been completely erased."
Speaker #8: So you know our, you know, people are back working, and our pipeline has grown as a result of that.
Speaker #16: Thank you. And then maybe just on the cash-releasing spreads, they were a little bit lower than they've been trending. I don't know if there was anything to call out on specific leases or just the nature of the role.
Speaker #10: Yeah. It's just kind of a mix in nature of the role. That number will bounce around quarter to quarter based on kind of the mix that gets done.
Speaker #10: And you own some larger tenants or whatever it might be. We look at the straight-line metric as kind of the one that we focus on more because that captures the full value of the prior lease compared to the full value of the new lease.
Speaker #10: We have very high annual rent escalators built into our leases. They're, on average, greater than 3% a year, so it's very hard to have a positive cash spread when you've got such good bumps throughout the lease and you're in a market like this where market rents aren't screaming up.
Speaker #10: So pleased that our cash or our straight-line spreads have stayed positive or positive again. They've actually stayed positive throughout, you know, since the pandemic.
Speaker #16: Great. Thank you.
Speaker #1: Again, if you have a question, please press Star, then 1. Your next question comes from Peter Abramowitz, with Jefferies. Please go ahead.
Speaker #11: Yes, thank you for taking the question. I was just wondering if you could provide a little more insight into the decision to convert the asset.
Speaker #11: On Wilshire, did you decide to focus on residential rather than invest in it and try to lease it as office? Was that based on something you saw in the market, or do you think it's just better risk-adjusted returns by converting it?
Speaker #11: just wondering if you could give a little bit more color there.
Speaker #8: Well, there were a number of unique things to the building that really put it into the category where we had to take a hard look at converting it.
Speaker #8: you did have some large you know there was some larger tenancy that we had already known we were going to have to replace. which creates an opportunity to have a lot of floors that ou can work on at once.
Speaker #8: We're building a residential building in the back. So we already knew that as a result of that building, we were going to, by one way or another, have residential amenities there.
Speaker #8: They're putting a subway stop literally right in front of the building. Like, when I say in front of it, I mean partly on the land of the building, okay?
Speaker #8: And that has destroyed our front entrance. We were being forced by that process to move the front entrance and completely rearrange our first floor, so we were already having to do that.
Speaker #8: And and address the first floor as a as a as a result of that. And so when you take all of those and by the way, the tower and that's not the only building we have that has this one aspect.
Speaker #8: But the tower has very good floor plates for residential in terms of depth and the way they lay out. And the way the windows work, where you can really kind of cut your units more liberally at locations.
Speaker #8: And you don't have to just immediately meet like a metal mullion that is on, you know, 5 feet on center or whatever that number may be.
Speaker #8: So because of all that, it was a kind of cost-effective good candidate and we as we've been working through it, I mean, we we we said this is a good way to go.
Speaker #8: And so, but we've been discussing it since we bought it.
Speaker #11: All right. Appreciate that, Jordan. Thanks for the time.
Speaker #8: All righty.
Speaker #1: Seeing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Speaker #11: Well, thank you all for joining us. I'm sure we will be speaking to you during the quarter. So, goodbye.