Prepared remarks
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 the participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.
Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today’s call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. When we reach the question-and-answer portion in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.
Good morning. And thank you for joining us. Leasing during the first quarter of 2025 was quite successful. We achieved positive absorption across our total office portfolio. We signed over 300,000 square feet of new leases. New leasing to tenants over 10,000 square feet was well above our historical averages. Our Class A office portfolio has maintained stable in-place and asking rental rates despite this higher vacancy market. And as we convert Studio Plaza to a multi-tenant office building, our leasing there is well above expectations. In addition, looking ahead, I am encouraged by our below-average office expirations in 2025 and 2026. Our multifamily portfolio enjoys very full occupancy and robust revenue growth. This reflects the appeal of our high-end residential communities and the affluence of our coastal submarkets where the need for quality housing only seems to accelerate. We are working on four solid avenues for restoring and then exceeding our pre-pandemic FFO with good progress on all four fronts: leasing up our existing office portfolio, redeveloping our 712-unit Barrington Plaza residential property, converting our Studio Plaza office building to multi-tenant use, and acquiring additional office and residential properties.
Of course, higher interest rates remain a drag on income. As we roll through refinancing our existing debt portfolio, I suspect that our cost of debt will increase between 100 and 200 basis points from the 3% average we enjoyed before COVID. My hope is that the higher cost of debt is matched with rental income growth as the economy recovers and the market reflects the slowdown in new development. At present, our office leasing pipeline remains healthy and our multifamily demand continues to be strong, but we are keeping a weather eye on the broader economic landscape. Recent volatility in national policies affecting the public markets could pose even greater challenges if they lead to a slowdown in office leasing or worse, tip the economy into a recession. Whatever happens, our operating platform is built to weather storms. Our conservative financing strategy, diversified tenant base, and focus on the best supply-constrained markets gives us a strong foundation to manage through periods of turbulence. With that, I'll turn the call over to Kevin to discuss our investment activities.
Thanks, Jordan. And good morning, everyone. We are making good progress toward developing a new residential building at our recently acquired property in Westwood. We still expect that JV's total investment to be approximately $150 million to $200 million over a three to four year period, including the cost of acquisition, construction of the new residential building, and upgrades to the existing tower. As Jordan indicated, our Barrington Plaza residential redevelopment, including installing new fire and life safety equipment, is on track. In addition, the lease-up and repositioning of Studio Plaza into a multi-tenant office building has surpassed expectations. During the quarter, we closed a non-recourse interest-only $127.2 million loan secured by one of our residential properties that will mature in April 2030. The interest rate is fixed at 4.99% per annum. We used part of the proceeds to pay off a $102.4 million loan. We also refinanced a $335 million secured office loan with a non-recourse interest-only loan and an effective fixed interest rate of 4.57% that will mature in March 2032. With that, I will turn the call over to Stuart.
Thanks, Kevin. Good morning, everyone. During the first quarter, we signed just under 800,000 square feet in our total portfolio, including over 300,000 square feet of new leases. We also had our best quarter in more than two years for new leases over 10,000 square feet. The overall value of new leases we signed in the quarter increased by 0.9% with cash spreads down 12.6% as larger tenants skew the averages and make it hard to beat the contractual 3% to 4% annual rent bumps in our existing leases. As we sign more leases over 10,000 square feet, we expect to see an increase in leasing costs and a widening of our leased-to-occupied spread. However, even with more large leases and a higher proportion of new leases last quarter, our average leasing cost of only $6.17 per square foot per year remains well below the average for office REITs in our benchmark group. Our residential portfolio remained essentially fully leased at 99.1% with strong demand. With that, I'll turn the call over to Peter to discuss our results.
Thanks, Stuart. Good morning, everyone. Compared to the first quarter of 2024, revenue increased by 2.7%. FFO decreased to $0.40 per share and AFFO decreased to $62.3 million. Same-property cash NOI was essentially flat. Our results this quarter reflect the acquisition of 10900 Wilshire as well as the January 1st consolidation of a previously unconsolidated joint venture, which owns two Class A office properties totaling 400,000 square feet. At approximately 4.5% of revenue, our G&A remains low relative to our benchmark group. Turning to guidance. We expect our 2025 net income per common share diluted to be between $0.07 and $0.13 and we continue to expect our FFO per fully diluted share to be between $1.42 and $1.48. 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.
Questions and answers
Our first question comes from Steve Sakwa from Evercore ISI.
Jordan, could you elaborate on the leasing activity and the larger tenants you mentioned that occupy over 10,000 square feet? I assume that smaller tenants might be less affected by the tariff uncertainties. I'm curious about the leasing pace you observed over the quarter and if there were any notable changes between January, February, and March for both small and large tenants.
So pleased to see the new leasing increase this quarter. We had good demand kind of across all the industries. The over 10,000 square feet tenants were also really strong last quarter, which is great to see diverse industries and assets as well. So we saw legal, we saw real estate, and fitness coming in. So I'd say the core portfolio is still performing really nicely and this last three quarters in a row, we've seen improvement over 10,000 square feet.
They got us into positive territory, which made a big impact. Remember, we were saying to you, we need to get positive absorption and we need these larger tenants to come back, and they are getting us there.
And then obviously, your apartment portfolio did far better than we had thought. I know you added two assets into the same-store pool this quarter. But could you just maybe speak to kind of the pricing trends that you're seeing in multifamily and how much of the NOI growth was driven by rent growth versus, say, occupancy gain? And I guess, what are your expectations for rent growth moving forward on the multifamily assets?
One thing to clarify is that we have not altered our asking rents since before the fire. We are under close state monitoring, confirming that our asking rents remain unchanged. Although some tenants are moving in and their previous rents may have been lower, we are maintaining the asking rent from before the fire. This situation is contributing to our high occupancy levels. In my career, I have experienced many instances where people inquired about available units, but the current demand is unprecedented. I receive calls nearly every week, or almost every couple of days, from individuals looking to secure a unit in our buildings. I am pleased with the strong demand.
I was curious if, with the current restrictions, you’re unable to raise rents. It seems like this might just be a case of below-market leases transitioning to market rent at this time. Do the restrictions remain in effect until the end of this year?
You can move rents 10%. We're probably being a little more cautious, but we want to be clear about where we stand. As I said, we literally have not changed our asking rents before and after the fire. You were probably facing before, no fire, no nothing. You're looking at a pretty big rollover. The market was strong and strengthening before the fire. So I'm not sure you can attribute the fire to a lot of this. But I know for sure we were moving our asking rents up into the fire, and then we stopped. But we're getting those rents and we're very full.
And Steve, I'll add, the two buildings that came into the same-store pool were 1132 Bishop in Hawaii and Landmark in L.A. and Brentwood, both of which are performing really well. So having those in there helps.
Your next question comes from Nick Yulico from Scotiabank.
So in terms of the debt refinancing done in the quarter, the $335 million secured office loan, it looks like there was an extension on that. Can you just talk a little bit more about the rate that you got? It seemed pretty good for an office loan and how we should think about getting a similar rate for other debt, office debt that you're doing which is maturing over the next year?
I'm glad you appreciated the rate. I have to say, securing those loans is quite challenging. Refinancing the office portfolio has been particularly tough, but we're managing it, and fortunately, our strong relationships are helping us significantly. I thought the rate was decent, but I don't want to be overly optimistic. Generally, as I mentioned in my prepared remarks, we're focusing on our debt situation, starting with items that are two years out. We're currently handling many issues, which is a major priority for us. I'm beginning to see some progress. For a long time, we've maintained an average debt cost of around 3%, but now we anticipate being 100 to 200 basis points higher. There's still more work to do, but we're aiming to fall within that range.
And then second question is just on the absorption comment, which I know that applied to the total portfolio. If we look at the in-service portfolio, sequentially the lease rate was down a bit. Occupancy was down a bit. So is the message here that new leasing volume still needs to pick up a little bit more to show absorption in the in-service pool? And then also, I wasn't sure if there was any early termination of space issue you were dealing with in the quarter that may have affected those numbers.
No, there wasn't anything like that. I think you're connecting our in-service portfolio, which demonstrates its occupancy. At the same time, we're highlighting that we have positive absorption, as we're accounting for the properties not in the insurance portfolio. However, I will mention that these are minor fluctuations, entering positive and negative territory. I can't predict what will happen moving forward; I have concerns about the economy, as I mentioned in my prepared remarks. Yet, at this moment, we're feeling optimistic and actively leasing across both in-service and out-of-service properties. We're confident about the current situation.
Your next question comes from Connor Michel from Piper Sandler.
I guess first, Jordan, you mentioned some of the macro uncertainty and turmoil. Have you guys seen any tenant fallout or leasing deals kind of fall out from import or export-related businesses?
So far, so good. I really tried to say that right in the prepared remarks. Look, we already know this is affecting the stock market. The stock market is jumping around, but have we seen it roll to our tenants and impact our tenants? Not yet. The concern, which of course is real, is does this roll into some version of stagflation or just recession? Like I said, we're watching for it, but I haven't seen it.
And then on the acquisition of Westwood and then the related developments, did you guys mention any timing on the start of that development?
We are already working on plans, and we hope that the timing is such that we get the building built in the next three to four years if it's completed; I hope that it will be. It is by-right entitlements, and in our business plan of buying it, it was to build it.
Your next question comes from Rich Anderson from SMBC Nikko.
In terms of your comment around absorption, it sounds like leasing velocity exceeded your expectations. But would you say that the cash re-leasing spread underperformed your expectations, down 12%, which together net to sort of in-line performance on a dollar basis? Is that the right way to think about it or do I have that wrong?
No, I don't think that we're disappointed or surprised by the spreads. The spreads are going to jump around. Obviously, it's dependent on the mix of leases that get done. We did some larger leases, and you had some longer leases rolling off. Longer leases typically have higher bumps in them. We focus on the straight line spreads, which are still positive, which is great. But I think in this market, you should expect the spreads to be in the territory they've been and they'll be a little volatile quarter-to-quarter.
But all in, meeting your expectations, you would say or exceeding your expectations when you take into account the pace of leasing, the velocity?
The comment about exceeding expectations is related to Studio Plaza leasing, so let's set that aside. I want to emphasize that, as we've mentioned in various ways over the past few quarters, I'm somewhat surprised we haven't observed much change in rents despite the market vacancy. I understand why that is, as tenants need to be in locations they prefer. However, I can't speak for the B and C product in the market, which seems to be struggling. Nevertheless, people want to be in the buildings we manage. They are well-operated, clean, nice, with good amenities, and these factors make a significant difference in retaining tenants and creating a desirable place to be.
Jordan, you mentioned that interest costs have increased by 100 to 200 basis points, and you're hopeful that NOI will eventually align with this. Your forecast for same-store cash NOI is around negative 1.5% to negative 2%. It seems like that's not happening right now. Do you see this perspective on interest expense as a temporary situation that's going to affect this year and next year, after which we can expect a recovery in NOI as long as we avoid a major recession? Is that your three- to four-year outlook when considering these two factors?
One aspect is leasing up the portfolio, which leads to significant increases in NOI. Additionally, as the economy improves, which has been observed historically, it's essential to remain present for an extended period since there's no new development. As companies recover, conditions become tighter, resulting in faster increases in rental rates. This acceleration, whether due to inflation or interest rates, is what I hope will counterbalance rising interest rates. While interest rates might decrease, I can't predict what will happen. The reason I mentioned that is because we are actively engaged in numerous refinancing efforts right now, and we will announce details once they are finalized. I can see our trajectory and expect to maintain that range for at least the next few years. If the market improves and rental rates rise, that should counterbalance any challenges, which was the point I aimed to convey.
The next question comes from Peter Abramowitz from Jefferies.
Just wanted to dig a little more into the comments around Studio Plaza. So when you say leasing is surpassing expectations, is that just sort of in terms of demand and interest in the asset? Have you actually gotten anything signed there? And then just maybe kind of expectations around timing of when you think you could be close to full occupancy again?
All three: leasing demand, the amount of leases we're signing, and the speed at which we'll reach a very reasonable occupancy level.
I guess if you were to handicap when a reasonable occupancy level could be achieved, when do you think that is, I guess, for modeling purposes?
I hesitate to make predictions beyond sharing my observations because past predictions have come back to me. However, I can share how I feel about the situation, and we've generally been accurate in those assessments. I was apprehensive at first, given the market conditions. Our team is doing an excellent job leasing this building, which has been in high demand and unavailable for some time. We have beautifully remodeled all the common areas, and it's effectively attracting tenants. I'm very pleased with the progress since my initial concerns have eased, and now I'm feeling quite happy about it.
And Peter, that remodel work should be done later this year. Hopefully, we'll have some of the leases that we've signed already commencing later this year as well.
And then one more. Just could you comment on entertainment industry demand, I guess, in light of some of the challenges over the last two years or so, sort of how that's shaping up today?
We really have only that one building in the Media District. We haven't been a big landlord to the entertainment industry historically other than the vendors like the agents and whatnot. We've renewed a giant lease with one of the big agencies. We're having a good experience in the Media District. We don't really have enough interaction to comment more largely on overall demand, and we're not in, obviously, the studio business, which is where a lot of this discussion revolves.
Your next question comes from the line of Upal Rana from KeyBanc Capital Markets.
Just on the recovery in L.A. post the fires, how is that progressing broadly? Has there been any shifts in demand that you have noticed either by size of the tenants, industry, or submarket? I know you already commented on the residential side, but just curious how it is going on the office side.
I understand that many people believe the influx of billions of dollars into the market should lead to increased office leasing. It's clear why there's this expectation, whether it involves architects, contractors, or others wanting to be close to ongoing construction, which includes not just housing but also streets and utilities. However, from what I see, I only know of one or two small leases at this time, and I can't say we're currently experiencing that surge, but perhaps it takes time to develop. We redid the agreement with our partners and extended it out substantially. The terms of the agreement dictate whether it is consolidated or not. Under the new agreement, we're a very large owner, and there are other terms in there that dictate that under accounting rules, it is consolidated. I can't tell you I was thrilled about that; it gave us additional interest expense, kind of phantom because you act like you bought it.
When we go through the consolidation process, it affected many line items on the consolidated P&L, not to mention the gain that we had to take, which rolls through net income. Overall, it probably has a slightly negative impact to interest because we had to also fair value the debt when we put it on the balance sheet, and it's obviously at a great interest rate. We'll see some amortization roll through interest expense, maybe about a penny impact or so overall, included in our guidance.
The next question comes from the line of Seth Bergey from Citi.
I was just curious, would you look to do future acquisitions with a JV partner or fully owned? Where do you see the opportunities today, is that kind of on the multifamily side or the office side?
It's definitely on the office side. The residential pricing has backed up slightly but not to the degree that the office market has backed up. The 10900 acquisition raised a lot of eyebrows among our partners and other people that we have been talking to overseas about the opportunities. We're going to focus on finding high-quality office buildings in our markets that we can apply the operating platform to and create some value. Our partners are very intrigued by what they're seeing.
Next question comes from the line of Jana Galan from Bank of America.
Maybe digging a little bit deeper into that; I'm curious about your capital allocation thinking between these opportunistic acquisitions. Would they be for the property? Could you also think about third-party management and then redevelopment like in Studio Plaza or share buybacks?
We have already committed to rebuild and are leasing up Studio Plaza. So consider that one done. You're asking me about share buyback and versus acquisitions.
Yes, and whether they would be with partners or on balance sheet.
We have bought back shares. I think we bought back $115 million or something like that, but it's done. I don't like issuing stock, and I don't like tinkering with our stock, because I don't think we've been great at predicting where the price is or any of that. Sometimes it's so extreme that we do it, and we have a group here, and we all talk about it. But you've got to be really clear about it. In terms of doing acquisitions, I think we have an opportunity to buy stuff directly. However, if we don't include our partners in acquisitions, we're going to lose the partners because they'll look at us like we're cherry-picking. They will think that we only come to them when we don't want to do the deal, but obviously, we have money to do deals. So in general, everything we buy, we give them the opportunity to come in, and historically, they have done so. I would expect to continue that way.
The next question comes from the line of John Kim from BMO Capital Markets.
Can I just follow up on Steve's question on the multifamily growth? You had 7.7% same-store revenue, not much of a pickup in occupancy, you don't have a lot of turnover in the assets, so you can't really push rents to market. Were there one-time items in the first quarter that don't carry on for the rest of the year?
No, John, no one-timers. We did have an increase in occupancy year-over-year in the same-store pool, so that was a contributing factor. We also have pretty good turnover. We do have some rent control units in Santa Monica that turn over less frequently, but the rest of the portfolio turns over at a normal rate. We had occupancy contributing, and as Jordan said, we're very full and seeing good rent growth.
I think what is being missed is that although I’m misleading by saying we haven't raised rents since the fire, rents have been really moving up. Even sticking at that new number with the role that's been occurring over the last few months, it's rolling through in terms of not the 7% to 8% that you're referring to. I think that's probably the primary cause.
The same-store includes all of last year and rent growth over the course of that year.
So I know you don't give guidance on same-store for multifamily, but high single digits? Is that a good assumption?
Well, it has been, but we don’t give guidance.
Switching gears, can I ask about Warner Center and the new REMS Village development proposal? If you're involved at all as far as potentially selling assets to the organization or maybe overall, how that impacts the office market in Warner Center?
That's very good for the market in Warner Center. The things that Kroenke and the auto industry are doing are outstanding, and we're certainly in communication with them and are hugely in favor of the initiatives they are taking. Historically, we don't discuss deals and we still don't, so when I say yes or no, it only pertains to that single instance, and we really refrain from talking about it. When we finalize a deal, we will certainly announce it.
A few years ago, I think this was a market that you were looking to potentially exit. So I'm wondering if that's still on the cards or if this changes your view of your long-term ownership?
I don't think I ever said I was trying to exit this market. That's not correct. I don't know if that was out in the world, but it didn't come from me.
Our next question comes from the line of Dylan Burzinski from Green Street.
Most of my questions have already been asked. But I guess just can you touch on sort of the acquisition pipeline and if things are sort of accelerating as it relates to sellers willing to come to market and part ways with their properties?
I think that people's Westside assets are the family jewels. People will do as much as they can to hold on to those assets. We don't have a lot of distressed bank opportunities, but there are some core funds and other people who have portfolio pressures that might end up selling some of their Westside assets because they don't have liquidity in their other markets.
It's certainly not a flood, that's for sure.
You next question comes from Anthony Paolone from JP Morgan.
Just first one on Studio Plaza. Apologies if I missed this. But what is the lease rate at this point at that asset?
Tony, we're not tracking individual buildings or leases in that manner, so we haven't provided a rate.
And when you talk about your leasing, the new leasing in the quarter, the difference between the over 300,000 and I think the 275 or whatever for the in-service. Is it safe to assume that the rest of it was Studio Plaza or is there something else outside the in-service?
We've got two buildings not in the in-service portfolio, so it will be Studio Plaza and then the new acquisition in Westwood.
You did a couple of debt deals in the quarter. Any thoughts on the 2026 deal? Are those planned for the near term, and will they impact earnings for this year?
Yes, that's what I was referring to. We're currently addressing a significant amount of debt and we tend to start on things early. You're correct, which is why I'm able to share my prediction.
Just to remind you, Anthony, we typically like to do a seven-year loan that's swapped for five years and leave ourselves a two-year runway. Those 2026 expirations are the floating rate debt that you're seeing, so we're working with our lenders right now to figure out new deals and we'll announce them when we close.
But I tried to give you guys a feel for it, because I said in my prepared remarks, I think we're going to be up 100 to 200 basis points over the 3% rate that we enjoyed pre-COVID.
This concludes our question-and-answer session. I would now like to turn the conference back over to Jordan Kaplan for any closing remarks.
All I can say is thank you for joining us, and we'll speak to you next quarter. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.