Douglas Emmett, Inc. ($DEI)

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. [Operator Instructions] I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

Thank you. Joining us today on the call are Jordan Kaplan, our Chairman and CEO; and Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During 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. Actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. When we reach the question and portion, in consideration of others, please limit yourself to one question and one follow-up. Thank you. I will now turn the call over to Jordan.

Good morning, and thank you for joining us. Our operating results were once again exceptional. First, we recorded approximately 100,000 square feet of positive absorption for the second consecutive quarter. In the last 6 months, we delivered our best results since 2019, growing our lease rate by over 1%. Second, we executed over 450,000 square feet of new leases, our best quarter ever for new leasing. Third, we posted record leasing to tenants over 10,000 square feet. And fourth, we did all this while realizing meaningful straight-line rent roll-up. We understand that everyone is watching our leasing for signs of a sustained recovery. While two quarters is not sufficient to call a bottom, we are becoming increasingly hopeful. We believe that this part of the cycle presents a rare opportunity to expand our portfolio at a significant discount to long-term value. Thus far, we have made two acquisitions, including an April acquisition in which we and our joint venture partners paid $260 million for a portfolio of premium medical office properties located in the Beverly Hills Golden Triangle, encompassing almost the entire 400 block of Bedford Drive. I am proud of the outstanding job done by our operations team and our Capital Markets group. These results reflect their sustained hard work. As we have discussed, we remain hyper-focused on growing earnings through leasing, acquisitions and the redevelopment of Studio Plaza, the Landmark Residences and 10900 Wilshire. We have also been successful at extending our debt at lower rates than are available to the broader market. Before I finish, I can't help but mention recent referrals in the media to Jevons paradox, which compares the impact of AI adoption on job growth and office demand to past transformative technologies such as personal computers, the Internet and cloud computing. With that, I will turn the call over to Kevin.

Thanks, Jordan, and good morning. This April, a new joint venture managed by us, acquired the Bedford Collection, a 5-building 246,000 square foot medical office portfolio located in the Beverly Hills Goldman Triangle. We hold a 13% stake in the joint venture's $150 million of equity. The joint venture also borrowed $130 million secured by a nonrecourse interest-only first trustee loan maturing in April 2031. The [indiscernible] lowers interest of SOFR plus 170 basis points, which we have effectively fixed at 5.26% per annum through April 2030. The three development projects that Jordan mentioned are progressing nicely. In Brentwood, our multiyear redevelopment of the 712-unit landmark residences continues in full swing. At 10900 Wilshire in Westwood, we expect to commence construction this year to convert the property into a 323 unit apartment community. At Studio Plaza and Burbank, the redevelopment is completed and leasing is well underway, with some tenants already taking occupancy. With that, I will turn the call over to Stuart.

Thanks, Kevin, and good morning, everyone. During the first quarter, we signed 218 of leases totaling 909,000 square feet, including a single quarter record of 461,000 square feet of new leases. We signed 448,000 square feet of renewal leases. And as Jordan mentioned, leasing was particularly strong from new tenants over 10,000 square feet. Tenant retention remained strong, consistent with our historical average. Our first quarter office demand was diversified across many industries with legal, financial services, entertainment, real estate and accounting representing the top 5. Our leasing spreads also improved in the first quarter as we continue to sign new leases that are more valuable than the expiring lease for the same space. The overall straight-line value of new leases we signed in the quarter increased by 5.3%. Cash spreads are lower by 7.7% as a result of our very healthy fixed 3% to 5% annual renting over the life of the expiring lease. First quarter office leasing costs averaged [Audio gap] ] per square foot per year, significantly below the benchmark average for other office REITs, though slightly elevated for us due to exceptional new and larger leasing, which typically require more tenant improvement costs. Our residential portfolio continues to perform well, with cash same-property NOI, up 4.2% compared to the first quarter of last year. Demand remains very strong across our markets, and our portfolio remains over 99% leased. With that, I'll turn the call over to Peter to discuss our financial results.

Thanks, Stuart. Good morning, everyone. Compared to the first quarter of 2025 Revenue remained essentially flat at $251 million. FFO decreased to $0.37 per share, and AFFO decreased to $49 million, reflecting higher interest expense and lower interest income, partly offset by strong family performance. Same property cat NOI decreased 1.4% for the quarter. At approximately 5.4% of revenue, our G&A remains the lowest among our benchmark group. In terms of guidance, we still expect our 2026 diluted net income per common share to be between negative $0.20 and negative $0.14. And our fully diluted FFO per share to be between $1.39 and $1.45. We expect the FFO gains from the Bedford acquisition to be largely offset by higher assumed interest expense, reflecting the flattening interest rate curve. 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 property acquisitions or dispositions, common stock sales or repurchases, financings, property damage insurance recoveries, impairment charges or other possible capital markets activities. I will now turn the call over to the operator so we can take your questions.

[Operator Instructions] Our first question comes from Steve Sakwa with Evercore ISI.

I don't know, Jordan or maybe Stuart, could you guys maybe just expand a little bit on the leasing volume? Obviously, the new leasing was quite strong, and we're just trying to get our arms around whether there were any larger leases that might have kind of skew the quarterly volume here, if you could provide any maybe insight on how many over 10,000 have done this quarter versus historically done, just to kind of gauge the breadth of the leasing activity.

Yes, Steve, it's Stuart. Yes, as we said, it was a record amount of leasing in that over 10,000 category, the most we've ever had. So really strong. There were a number of deals between 10,000 and 20,000 feet, and there were a few deals over 20,000 feet that we're in. So very strong, a bunch of industries, entertainment, legal, so it was a wide variety of industries in that larger category, but it's the strongest leasing we've had of that size ever.

Okay. And then maybe a follow-up, Jordan. Can you provide any just additional, I guess, valuation metrics, kind of yield, return on equity, stabilized yield on the Bedford transaction. Obviously, we can back into a price per foot. But any kind of going in cap rates or return on equity that you could share for [indiscernible] it would be helpful.

Well, we agreed with the seller not to get that information, although [indiscernible] back and the price per foot. I think we gave it to you. It's in around $1,000 a foot, [ 9, very high 9s. ] It's a portfolio that is also going to sound I've been trying to buy since the '90s. And I'm beyond pleased with the deal. I think that we're particularly lucky that it came up at a time when it was a good time to buy almost anything. So I'm very, very pleased with the deal. Steve, next time you're out here, we'll walk you around it, and you will be surprised by amount of control we have. Anything else?

Our next question comes from Alexander Goldfarb with Piper Sandler.

Sure. Jordan, you mentioned [indiscernible] Paradox. So I had to Google that to look what that is. But are you seeing that -- you're just making that comment on its own, or are you -- do you have real anecdotes that you're seeing in the marketplace to keep saying, hey, because of AI and all the innovations going on, we actually need to hire more? I'm just sort of curious if it was just a comment that you threw out, or you're actually seeing it in leasing discussions?

Our leasing is really picking up, as you saw. I cannot say I see that exact thing happening. But the reason I was just so thrilled to read about that is that I feel like I've been saying it now for a year or two years about AI. I mean, as AI empowers people to be more efficient and effective, I just think the result would be people want to hire more people that can do that. Now there are some people, if they don't embrace it, they're going to feel left behind. And I'm sure that will happen. But if you said to me the number of people employed or the more direct statement is that like your hospital is going to be empty because no one needs to hire anybody. I don't believe that one bit. And if you look back at all the technologies in the past, that have made that same prediction that people were going to either stay home or whatever the case might be, and the exact opposite has happened. So -- and I just felt like I was so surprised to see it show up from a guy from the 1,800s who was talking about coal and as things became more efficient, he thought less coal be used, but in fact, more about [indiscernible] use. But there's many examples since then.

Okay. And the second question is, and I know I've asked you before about the South Bay, like El Segundo in those markets south of LAX, but just hearing recently about more demand for aerospace and defense and that's sort of that community's long history. Do you guys, as you think about acquisitions, especially you've shown -- you still have a lot of JV capital that launch into the market, would you reassess and possibly consider entering some of those markets if you feel like the aerospace defense has renewed legs over the cycle or your view or maybe Ken's views there's enough acquisition demand in your traditional markets and maybe you're not so sure how long aerospace demand is that you're going to stick where you are versus possibly entering some new submarkets?

I think the problem with those other markets that you're mentioning is that people can still build and if aerospace really picks up down there, they're going to build more facilities for them. And that always worries me in a market because you don't have to just be good about getting in, you got to be really careful to get out at the right time. I'm much more comfortable here where even in a period like COVID, real estate recession, et cetera, we have throughout it all, and I know we've lost a lease rate over the last, whatever it is, 6 years for the most part, due to COVID. There's such a durable demand here and such an extreme limit on supply that I'm just very comfortable in, if I look at all the other factors that the well tier, the homes, the people that are working here, the other drivers like the universities, to places industries that have focused their research here, especially on like medical and research and medical research and tech research. I just have a lot more comfort here than banking kind of moving further out. And as you said, I do feel there are more deals. And we're saying that to our JV partners and so on, everyone's everyone's focused on it.

The next question will come from Anthony Paolone with JPMorgan.

Jordan, you talked out just find bottom here, but can you maybe step back just give us your thoughts on [ LA ] in general, and how that's playing into tenant behavior or desire to sign leases? Just a little bit more on the ground in terms of what the feedback has been from prospective tenants.

So When you say, [ LA, ] in general, I don't know if you're saying as opposed to another one of the gateway markets. But LA in general, in many aspects just generally feels like it's coming back. I mean, you see it in the leasing. We see it in the differences of policing and attitudes in the cities that we're operating in. The way things are kind of -- people are done with the kind of permissiveness that was incubated by COVID. And so we see a lot of ways where things are coming back. And of course, we're just seeing a lot more tenant demand. I hope it holds up.

Okay. And then Studio Plaza, you said it sounds like tenant start to take some space there. When should we think about that just being put to bed in terms of stabilized and up and running?

Well, we'll call it stabilize when we get up into the 90s, and we're working our way towards that. The tenants are moving in. And separately, I'm very pleased with the mix of tenants I felt like while it was definitely great to have a single tenant there that stayed for 30 years, it was always sort of a risk hanging out in our future. And when Warner Bros moved out. I will -- I was talking to Ken about it. And I'm so happy now to see like a real good mix of tenants, good demand for the building leasing it up and a good mix of some tenants or provide many of the big just the whole thing is working extremely well and the way we redid the building. So it's one of my greatest happy news and relief to see how it's moving on.

I mean, do you think it's another year to get to 90 plus or two years out?

Tony, we're not going to give a timeline out there. We're pleased with the pace so far like when it stabilized, we'll move back into the in-service portfolio, but we don't like to have individual building data. We don't want to put a time line on ourselves.

Our next question comes from Jana Galan with Bank of America.

Congrats on the strong start to the year. The spread between the leased and commenced occupancy continues to widen. When you think about the expected commencements, the forward pipeline and then the expiration schedule, does it seem like this quarter has been kind of the trough in the occupancy number?

As [indiscernible] said in his remarks, we're not ready to call a bottom. We're certainly pleased with the pace of leasing in the last few quarters and hope to continue. We're really pleased to see that lease to occupied spread widen out. It's 3.5% now. That means we've been doing a lot of leasing. Of course, those folks will need to move in, which will happen over the next few quarters. With the larger leases that we're signing, that takes a little longer than our typical tenant. So the commencement dates are out a little further than the typical 2,500-foot guy that we can in very quickly. But hopefully, that spread stays wide. We need to do a lot of leasing. And when that spread is wide, that means that we've done a lot of leasing and those folks need to move in.

And can you give us maybe like just rough estimates for the under 10,000, that would be maybe like a two-quarter lag? And then maybe the larger or any kind of rule of thumb for us to think about in modeling?

Yes. So the typical -- the 2,500-foot guy, we can get them in very quickly. I mean we build a lot of and ready spec suites. That's a program that we're very excited about. We try to have all of our buildings have a couple of seats ready to go. Those can be in extremely fast. But a more typical average for that smaller tenant is a few months, so they can be moved in within a quarter or two of when we sign a lease. And then for the larger guys, it really depends on the level of build out. Studio Plaza has some significant build-outs going on. So some of those folks will be moving in next year. So that is really deal-specific.

Our next question comes from Seth Bergey with Citi.

I guess just to follow up on some of those comments on the sign up-commenced spread. How much of that 350 basis points is smaller tenants that you can kind of get in quickly versus skewed by some of the larger leases that will take a bit longer to those tenants moved in.

I don't have the breakdown between small and large in that singed off events. I know a lot of it is still are under 10,000 PIs. So I suspect we'll have steady move-ins throughout the rest of 2026. And then some of the larger guys are going to take a little longer, like I said.

Great. And then just as a follow-up, I know you're not ready to kind of call a bottom here, but what are you seeing in terms of tour activity or kind of the forward pipeline that gives you confidence that things will kind of improve over the coming quarters?

It's the good activity that we've been seeing these last 6 months, that's continued. The pipeline is good, healthy activity, tours, calls, all the metrics we look at, all seem very healthy.

Our next question comes from Upal Rana with KeyBanc Capital Markets.

On the Bedford acquisition, is there any kind of market opportunity...

Upal, we can barely -- we couldn't hear you.

Yes, you're cutting out.

Can you hear me now?

Yes.

Yes.

On the Bedford collection, is there a mark-to-market opportunity there or any kind of expected rent growth that you can achieve there?

I think there's always a small mark-to-market opportunity in everything we've been doing. But not a stunning one, Mike, with -- sometimes you buy a building with [indiscernible] the less than half, and it's an old lease. That's not there.

Upal, we own a lot of medical office. This isn't kind of our first foray into that product in probably about 1 million feet of medical office. It's a fantastic product. We love the tenants. They're very sticky. They invest a lot of their own money in the space. So we're very pleased to add to that.

Okay. Great. That was helpful. And then could you maybe talk a little bit on the potential to do additional external growth opportunities that you're seeing in the market? I know you've talked about developing resi and trying to buy a stabilized office which you're doing, but just curious what kinds of opportunities you're seeing and the depth that you're seeing out in your markets.

So, it's Kevin. We're seeing a lot of activity. And more than half of it is off-market, where somebody reaches out. And so we're feeling pretty good about that about the engagement that we're having with people, we just need to close the gap and come up with pricing that makes sense.

And as we've said, we're focused on office.

Up next we have John Kim with BMO Capital Markets.

With the Bedford collection, you announced that you have 1/3 of the Class A office space in Beverly Hills. And I'm wondering if you could talk about what kind of scale of that and just the pricing power that provides you?

There are several advantages we get on the market control we have across our portfolio. On the operating side, there's tremendous synergies. We've looked at like the last 10 or 11 acquisitions we've made, we're able to lower operating expenses on average about 20%. So it's meaningful savings. We do that because we're so localized. We have such concentrations of buildings close to each other that we can have expensive people shared across properties. We don't have to have a manager at every single building or a very expensive engineer at every single building we also negotiate very large contracts across our portfolio, so that gets us better pricing. And more important than the operating side is on the leasing side, gives us the ability to offer space to any tenant sit them into our portfolio. If we've already got them in the portfolio and they're growing or they're shrinking, we can then maybe about the street in one of our other buildings that has space that will for them. And generally, with the small tenants that we have, our goal is not to read out the space every time spend $200 a foot rebuilding it. The spaces are built out pretty standardized, and we want to move tenants into a space that already works for them, the configuration with the conference room and lose the way they like it and spend a little bit of TIs, new paint, carpet, whatever that is, get them in quickly and not spend a lot of capital. That's why you see our leasing costs on average are so much lower than the other office REITs you'll look at and having the concentration markets allows us to do that because if we own 30% of the space in Beverly Hills, we're going to have an opportunity to take any requirement in that market and show them several options that should work for the amount of space they need.

So is your intention to keep this portfolio of medical office, or are you indifferent in the kind of lease any that?

If you're speaking about the Bedford collection, it will stay medical office. Is that your question?

Yes.

Yes. Bedford will stay medical. We own several medical office properties in Beverly Hills, like I said, is a fantastic product. But my comments on the synergies work across medical and just regular office.

Got it. Okay. And you mentioned that you're not really call the bottom. Is that on occupancy or leasing. I'm just wondering at the midpoint of your occupancy guidance is achievable if there's the floor to come down even further?

Well, we definitely feel like it's achievable. That's why we left the range where it is. So we're comfortable with the range on occupancy. Q1 is typically a tough occupancy quarter for us because more than their fair share of leases expire on 12/31 for whatever reason. So then anybody that that moves out that occupancy hits Q1. So it's not unusual for us to see a small decline in occupancy in Q1 and then ramp up throughout the rest of the year, which is what we expected in our own guide when we gave the range.

Our next question comes from Dylan Burzinski with Green Street.

Just maybe touching on the various submarkets. We noticed that net interest or at least a percentage increase in the west side and Honolulu decline in the Valley. Any sort of discernible trends from that? And should we expect the valley to maybe a lag in its recovery versus the west side?

No, I wouldn't expect that. I think we did some good leasing in the Valley. It's just pockets here and there, and it depends on whatever leases got signed in that quarter. But we would expect the valley to increase along with the west side. We're getting good activity there. [ Sherman Oaks Encino ] has had a lot of activity, more center, which has typically been our laggard market out there, also good tours, good activity. So no, I wouldn't expect the valley to continue to lag. We're working hard to increase the lease rate in all our submarkets. And we definitely think that's achievable.

And then just touching back on sort of the capital markets and transaction environment. Given that what appears to be just a recovering leasing backdrop, are you seeing any increased competition from other buyers that are getting in bidding tents as you guys take a look at all these transactions that you guys referenced?

So I think the term people are using is office curious. And so people are kicking the tires. There hasn't been a lot of the type of assets in our markets that we get super excited about like we did with Bedford. So as I believe, and you're seeing this up in San Francisco, and you're seeing this in New York, as these markets recover, more and more people start to pay attention to it. But right now, we're trying to buy as much as we can because the prices relative to the long-term values are at a significant discount.

I think that I remember this kind of thing happening in the '90s. I think that one of the things with office buildings when people have been exiting it for a while, the operating platforms get denuded. And so as they want to come back in, they're even more nervous because its operations and the income that people are focusing on more than ever now. And I think it's going to give us an edge for a little while because I've seen many operating platforms sort of dissolve and shifted third party, which means you don't really have the people and the information you need to understand and try and do deals. Now the capital -- there's capital, but it doesn't mean they're super comfortable in terms of being aggressive on deals.

Our next question comes from Rich Anderson with Cantor Fitzgerald.

So Jordan, you said when Warner Bros. left [indiscernible] Plaza, you described yourself as frightened. Remember you saying that at the time, but nonetheless, I get it. But I'm curious, when you think about the totality of your business today, obviously, things are looking great in terms of a possible bottoming. But where is work still left to be done? Like where are the shortcomings of the Douglas Emmett portfolio in your mind that still need your attention?

Well, first of all, I actually was frightened, but I wasn't frightened because I thought the building won't lease [indiscernible], would take to get tenants because it was right dead center at a time when leasing was added an incredible [indiscernible]. I mean, the press around entertainment was very bad. It turned out that neither of those was true with respect to this building, and the redo that was done by our operations group has been very well received and appealing. So if you have a chance to count here and see it, it's extremely nice building. So it's attracting tenants are kind of voting to be there regardless of what's going on around today, I would say, I mean, you don't have a partner that runs operations, can answer. So my area that I should focus on all the time is capital markets. Today, I'm focused on kind of finishing off our debt program. There's not a lot left to do to extend that out and rightsize and get all that correct. And then finding acquisitions and getting as much capital purchase as we can while what I consider to be, and you've heard everybody here say an opportunity that -- I know Ken and I haven't seen it for for 30 years, and we talked about it all the time. So that's going to -- I want to debt finish. I think my -- I think that's pretty much getting done. But I want to make sure on [ done, done and done, ] that's nice and clean. And then I need to get out there and make sure we make good acquisitions and keep talking to our partners and trying to kind of shake some stuff loose because as Ken said, A lot of the stuff become a relationship oriented. In some of the last things we've been -- are doing and close on have been people just phoning me that I've known for a long time. So that's been an important part.

Okay. Second question. Stu, you said the larger tenant leasing is a mix of all different types of industries. So what would you say the common thread is to this happening for you guys because this is the second time or at least a second we're hearing some optimism around larger leases. What is the communication from those entities sort of saying about why they're willing to do? Is there any sort of theme around why you're seeing more in the way of larger lease activity?

I think that, as I said on the last call, a lot of what we're seeing is sort of sideline fatigue. I mean they've been holding off, holding off, holding off, trying to wait to see where things are headed. You're able to make a lot of money in this market, and they finally have started breaking and saying, well, we're just going to do deals are expanding because we're going to get left behind. And I mean, the last time I look at the stats, our expansions were way above our traction and our new tenants coming into the market are rushing to set it up and have some type of new business that makes them think to meet more people. So maybe they're just tired of winning. Maybe the -- I mean, there was an article recently that said that people just become sort of indifferent towards the wild fluctuations and they're going to just do business as usual and move forward. I don't know what mix of things that is because I think a lot of it's just driven by the broader economy. But there definitely has been a change in attitude.

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

Well, looking forward to speaking with you again next quarter.

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