Prepared remarks
Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett Quarterly Earnings Call. Today's call is being recorded. At this time, all participants are in listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Thank you. Joining us today on the call are Jordan L. Kaplan, our Chairman and CEO; Kevin Andrew Crummy, our CIO; and Peter D. Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package in the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs, assumptions 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. Thank you. I will now turn the call over to Jordan.
Good morning and thank you for joining us. We had a very active quarter and made real progress on all four of our strategic priorities: leasing up our office portfolio; acquiring properties at attractive pricing; redeveloping properties to maximize value; and refinancing upcoming debt maturities. We signed 960 thousand square feet of office leases, with a good mix of new and renewal deals, and achieved positive absorption of approximately 60 thousand square feet. Healthy office rents and low concessions helped us sign new leases that were 3% more valuable than the expiring leases they replaced. Of course, most of the positive impact of this leasing will occur over the next 12 months. Our apartment portfolio remains fully leased and continues to increase rents. On the acquisition front, we and a few of our joint venture partners acquired an extremely well-leased block of prime Beverly Hills medical office properties. Our redevelopment efforts are exceeding expectations. Studio Plaza in Burbank is now leased well over 50%, so we have moved it from development to in-service. Our apartment redevelopment projects are on track to add over 1,000 new units. Finally, we refinanced over $800 million of debt this quarter. So with that, I will turn the call over to Kevin.
Thanks, Jordan, and good morning. As Jordan mentioned, in April, we and our joint venture partners acquired the Bedford Collection, a five-building, 246 thousand square foot medical office portfolio in the Beverly Hills Golden Triangle, for $260 million. We manage the joint venture and hold a 13.3% equity stake. The entity was capitalized with $150 million of equity and $130 million of debt. In addition, during the quarter, we refinanced two office loans scheduled to mature later this year. In May, we refinanced a $400 million loan for four years and effectively fixed the interest at 6.15% until June 2029. In June, we refinanced a $415 million loan for four years, and effectively fixed the interest at 6.18% until July 2029. With that, I will turn the call over to Stuart.
Thanks, Kevin. Good morning, everyone. During the second quarter, we signed 34 office leases totaling just under 960 thousand square feet, including nine new leases totaling over 375 thousand square feet and 25 renewal leases totaling over 584 thousand square feet. A healthy leasing volume for us and it builds on the momentum we have been seeing over the past few quarters. On rental rates, the straight-line value of leases we executed in the quarter increased by 3.2% compared to the prior leases for the same space, with our typical 3% to 5% annual fixed rent bumps continuing to more than offset the impact of lower beginning cash rents. As Jordan mentioned, we have now moved Studio Plaza to our in-service portfolio. Since the first-generation leases at Studio Plaza take longer to build out, this will have the effect of widening our lease-to-occupied spread for the next few quarters. In addition, while the lease rate at Studio Plaza is now well over 50%, its inclusion will mean lower reported leased and occupied percentages for our office portfolio until occupancy at Studio Plaza equals or exceeds our average office occupancy.
Our lease transaction costs averaged $5.35 per square foot per year, well below the benchmark for other office REITs. Our residential portfolio continues to perform well, with cash same-property NOI up 2% compared to the second quarter of last year. Demand remains very strong across our markets with our portfolio still over 99% leased. With that, I will turn the call over to Peter to discuss our financial results.
Thanks, Stuart. Good morning, everyone. Compared to the second quarter of 2025, revenue increased from $252 million to $257 million. FFO increased but still rounded to $0.37 per share and AFFO increased from $54 million to $56 million. Same-property cash NOI decreased 1.2% for the quarter. At approximately 4.9% of revenue, our G&A remains the lowest among our benchmark group. We are now including Studio Plaza in our occupancy assumption for the full year. Despite being leased well over 50%, its occupancy has not yet reached the average for our portfolio. Solely as the result of including Studio Plaza for the full year, we are lowering our office occupancy guidance range to between 75% and 77%. Our operating income expectations have improved from our prior projections, but we anticipate that this improvement will be more than offset by the impact of higher market interest rates. Therefore, we now expect our 2026 diluted net income per common share to be between negative $0.20 and negative $0.16 and our fully diluted FFO per share to be between $1.39 and $1.43.
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
We will now begin the question-and-answer session. You are using a speakerphone; please pick up your handset before pressing the keys. Again, in consideration of other participants, please limit your queries to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steve Sakwa with Evercore. Please go ahead.
Thanks. Good morning. Maybe Jordan or Stuart, could you comment a little bit more on the leasing activity? You have obviously now had two pretty solid quarters on the new lease side, and I am just curious if there is any sort of larger deals that may be influencing that trend? And what is your expectation for new leasing volume moving into the back half of the year?
I will jump in. I would say we have had three really good quarters in a row. We are building on the momentum here, so we are excited about what is going on in leasing. This was another great quarter with 960 thousand square feet. I think Q1 had record new leasing and was chunkier with some larger deals. This quarter was less so; we had pretty typical activity from the larger group that we call over 10 thousand square feet, so not super chunky. I think we are very optimistic that we will have good momentum continue through the second half of the year.
I am very happy with what our leasing group is doing. I hope that we are getting a little wind at our back and we will continue. It feels that way. But as I keep saying, I do not know if the proof is in one quarter or multiple quarters; I look at what we have done and I feel very good. On the debt and swap maturities: we do not choose to live in a world where we have a lot floating. When you see something go to floating, it is probably during the last bit of the term of that loan, which means we are going to refinance that loan. We have started working on refinancing that loan and it can get refinanced at the beginning of that window or later; we have a window to do it. I do not think we are going to stay floating. I am not thrilled with where interest rates are. We are really trying to think through solutions to deal with those interest rates because the rest of the company is doing very well and the increased cost of interest is clouding our performance, and it bothers me. None of our buildings or ownership are jeopardized, but the higher interest expense is affecting our reported performance. We are thinking about solutions to that.
Our next question comes from Jamie Feldman with Wells Fargo. Please go ahead.
Great. Thanks for taking the question. I'm sitting in for Blaine today. Interesting portfolio transaction in Beverly Hills. Can you just talk more about any other interesting opportunities you are working on or that might be out there, whether unique asset types or larger portfolio transactions? And then, with the transaction market improving and investor expectations, how have return requirements changed — both in terms of what you are willing to get and what your investors are looking for?
We are looking at a number of opportunities. We had a great quarter and I was a bit surprised the stock was off because it really felt like the best time to be in real estate. We are working on a bunch of acquisitions. Will we make them? I don't know, but there are definitely some large ones and they are a ton of our focus. Over the years people have accused us of doing only one thing — only buying or only developing — and the reality is we do both. We are developing residential and we love buying deals at good pricing. I think the opportunities are extremely good right now; pricing and the current rate environment have created opportunities to buy fantastic buildings. We have been focused on this and it is driving most of my travel.
So, second part of the question: how are return expectations changing given markets are improving? And how are your investors changing or what they are looking for changing?
Everybody is looking for better returns, driven by where interest rates are and the relative lack of available equity and debt in the market, which is part of what is creating the opportunity. It means we are not always in agreement with the seller, but we are making deals and many of them in partnership with our joint venture partners who continue to ask what's next. There is definitely an appetite now, even for office in our markets, so we have to get the next opportunities organized and in front of our partners appropriately.
Okay, thank you for that. For my follow-up, it looks like there were some adjustments in the UCLA tenancy this quarter — you have two more leases with them and one additional property and some expirations were shifted. Can you give us a general idea of how your conversations with them are going? How committed to their space in your portfolio do they seem to be? And can you also comment on the 77 thousand square foot Stanley expiration in 2027? Thank you.
Sure, Jamie. We are in good conversations with UCLA about the remaining expirations this year. They do not act like a single large tenant; they have multiple leases with us and different departments tend to act independently. We've even had a quarter where they gave back space and leased space in the same quarter because of that. We feel good about the space that is coming up. Same with Stanley next year — I think there are productive conversations happening and we are feeling good about the expirations that are next year for Stanley.
Do you have a sense of when you might have an answer on Stanley? How early do they tend to lock things in?
We generally are not in the business of giving details on individual tenants, though I understand why you are asking. I will mention that it is more than one lease with Stanley, not a single large lease; they have multiple leases totaling that approximately 77 thousand square feet.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, morning. Jordan, on your debt comment and where interest rates are: as you think about the company, you run it at pretty low leverage overall. But if you think about the individual asset financing that you do and the JV structures, are you thinking that you and your partners would run the buildings with lower leverage — meaning as loans are maturing you would either pay them off entirely or refinance them at lower LTVs? In that way, you cannot do anything about interest rates, but you can do something about where the loan balances are.
It is a little more complicated than that, but you are right that there might be ways — especially when we are buying and bringing partners in — to reduce our exposure to fluctuations in interest rates. We do not really have high leverage across the portfolio; unlike many peers, we have equity across the board and are in good shape there. But interest has moved against us and it is a cost hitting us now. The great news is that when rates move they will move both ways; and when they drop, that will be beneficial because our NOI and cash flow coming off the properties before interest have been outstanding. As properties lease up, you'll see a lot of NOI. The question is: do we take more permanent steps to reduce exposure to interest, or do we accept the current environment as a moment in time while making accretive acquisitions at attractive pricing? We are weighing those options, and honestly the interest environment is getting in the way of people realizing how well our markets and our operations are doing.
Okay. And then on the Paramount situation and the state attorney general debate about the merger and whether they might relocate — is there any concern in L.A. that the environment may cause corporate Hollywood to shift to other markets, or is this just headline noise and unlikely to materially change the market and the office users there?
I think the deal is going to close. I do not fully understand why state government is opposed to two California companies merging, but putting that aside, I think the underlying fundamentals remain positive. The talent, directors and capital commitments are here. The tenants we have are local — they live in the neighborhood and lease from us — so I do not think this impacts us materially. I do hope the state lets the merger proceed; I believe the new company will produce more and lean into big movies, which is healthy for the industry here.
Our next question comes from Rich Anderson with Cantor Fitzgerald. Please go ahead.
Thanks. Good morning. On Plaza moving into the operating portfolio, besides it affecting your reported occupancy guidance going forward, what else was the impact on guidance, if anything? For example, is there a capitalized interest burn-off as a result? What role did Studio Plaza play in the guidance, if any?
Studio Plaza does not have debt, so if it had debt it would have been included already, but it does not. Most of the steps for Studio Plaza have been included for some time; it is mainly the leasing and same-store statistics. The inclusion mostly affects reported occupancy, and part of the operational improvement we mentioned is offsetting some of the interest; including Studio Plaza is part of that.
The impact on leasing is the main piece. Studio Plaza was not leased as well as the rest of the portfolio when we moved it into service, so it slightly reduced aggregate occupancy, but it has been leased up quite rapidly for a redeveloped building and we are pleased with the progress. We included it because people had asked us to include it rather than leaving it off-cycle.
Our next question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.
Great. Thank you. Jordan, you talked about lease activity over the past three quarters. Could you comment on where some of that tenant demand has changed the most over the past few quarters? Any industries that may have surprised you either positively or negatively?
Surprised is not the right word, but I'm happy that larger tenants have come back. They came back even a little more than a quarter ago, and that has been reflected in our numbers. Small tenants were always rolling along, but when a large tenant does not renew it takes many small tenants to fill the space. Now we are getting a healthy mix of large and small tenants, which helps avoid visible holes in the portfolio. We went through a bottom in late 2024 to early 2025, and it feels like we are moving at a good clip now.
If you look at the industry pie chart, the top categories that comprise our largest exposure have all had very good demand. Leasing demand has remained diverse across industries: legal, financial services, real estate have been active, and entertainment has been very strong despite the headlines.
We keep getting asked about entertainment versus studios. We are actually doing a lot of leasing to entertainment users — that has been a solid tailwind and part of why Studio Plaza has performed well.
That was helpful. You mentioned the benefit from this quarter's leasing will not be realized until the next 12 months. Your leased-not-occupied spread is now almost 500 basis points. Can you quantify how much annualized NOI is embedded in these leases that have been signed? Should we be thinking about meaningful NOI flow into 2027?
You have a sense of our average lease rate and the square footage involved. If you model the move-in timing over the next 12 months and apply the rent economics, you can approximate that amount. It is a very meaningful number and we are pleased with the trajectory. We expect to continue to add to that as leasing volume remains high.
I saw the spread over 470 basis points and that is excellent news. A wide lease-to-occupied spread indicates active leasing. When that spread is wide, it means we're leasing a lot and capturing positive economics; that is one of the best signs you can see operationally.
Our next question comes from Dylan Przybylinski with Green Street. Please go ahead.
Hi, good afternoon. Thanks for taking the question. Jordan, on your comments around the team being active on acquisitions, have you seen pricing change over the last six to nine months? And as you underwrite opportunities, are you able to share the yield-on-cost you are targeting so we can understand whether you are able to get deals done now?
Pricing is down from peak periods like 2017–2019 and even more recently, so this is creating opportunities. In my career this is only the second time I've seen owners sell buildings for less than they bought them, and that creates real buying opportunities. What's changed is that rates have been high for long enough that some owners are willing to trade; that's enabling sales at price points that work for us and for our JV partners. As to yields, our all-cash IRRs on a 10-year look are probably coming in at 10% or better on deals we're pursuing, which we haven't seen for a long time.
And on the insurance matter at Barrington Plaza, any update?
I don't have an update that I think would be helpful for this audience. There has been a lot of paper movement and attention; it's getting a lot of attention and we'll provide updates when appropriate.
The next question comes from John Kim with BMO Capital Markets. Please go ahead.
Thank you. Given the opportunities you are seeing in office acquisitions, are you putting some of the residential developments, such as your 1,000-unit pipeline, on the back burner for now? In particular, I wanted to ask about 10900 Wilshire, which I think you said last quarter was going to start this year. Is that still in the works? Any update on redevelopment?
It's still possible for 10900 Wilshire to start this year. We purposely slowed the timing because we see potential for meaningful office interest from large tenants; we want to preserve flexibility so the project can be mixed-use if it makes sense. Plan A included office and Plan B residential; either way, the site will have residential as part of the long-term plan, but we did not want to preclude the opportunity to accommodate larger office leases. We are ready from a funding and permitting perspective, we just wanted to let the market mature a bit before committing to a start date.
Given opportunities, and banks no longer redlining office as an asset class, have you thought about reestablishing a credit facility? You have significant cash on the balance sheet, but would a facility give you additional flexibility?
We think about that, and every time we run the math we compare borrowing against a committed credit facility versus borrowing when needed and arbitraging into short-term interest-bearing accounts. Given current pricing for unused fees and other costs associated with credit lines, the calculation often favors simply borrowing when needed rather than maintaining a large committed facility at today's terms. If market terms change materially, we would revisit that decision.
Sorry about that. All right. Sorry.
Our next question comes from Seth Bergey with Citi. Please go ahead.
Hey, thanks for taking my question and good morning. Going back to acquisitions, you mentioned it's a good time to be in real estate and your last acquisition was outpatient medical. Are you treating medical office as office for your strategy? Are there other asset classes, including residential, that you're focused on? And on the office piece, how many high-quality buildings are out there that cater to smaller tenants similar to your portfolio construction?
We see sizable opportunities across several areas. We like medical office and we pursued the Bedford Collection because characteristics fit our strategy. We've also evaluated large office properties that could be converted or that can support mixed use. Apartments are still trading at relatively low cap rates in many cases, so while there are transactions driven by stressed construction financings, apartments are not broadly as attractive on an acquisition basis as some office opportunities where prices have shifted. There are high-quality office buildings in our markets that serve smaller tenants and those are attractive to us. Overall, we are focused on where the risk-return trade-off works for Douglas Emmett and our partners.
Does that 10%-plus IRR you mentioned earlier include the economics of doing deals in JV structures?
No — that was a simple answer referencing all-cash IRRs on a 10-year look. We evaluate JV economics separately when partnering, and the returns to the company and to our partners are modeled accordingly.
Our next question comes from Jana Galan with Bank of America. Please go ahead.
Thank you. Following up on the multifamily portfolio, can you talk to rent growth expectations for the second half of the year given your high occupancies?
Over the last couple of years rent growth ran at a clip that was not sustainable relative to long-term historical trends. I would expect rent growth to move toward the long-term trend rather than continue at the elevated recent levels. The long-term trend can be calculated many ways, but in short, we expect normalized growth rather than the outsized increases seen in the last few years.
This concludes our question-and-answer session. I would like to turn the conference back over to Jordan L. Kaplan for any closing remarks.
Well, thank you, everybody, for joining us. We look forward to speaking with you again soon. Goodbye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.