Douglas Emmett, Inc. (NYSE:DEI) Q4 2024 Earnings Call Transcript

Douglas Emmett, Inc. (NYSE:DEI) Q4 2024 Earnings Call Transcript February 5, 2025

Operator: Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s Quarterly Earnings Call. Today’s call is being recorded. At this time all participants are in a listen-only mode. After management’s prepared remarks, you will receive instructions for participating in the question-and-answer session. I would now like to turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

Stuart McElhinney: 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.

Jordan Kaplan: Good morning and thank you for joining us. The recent fires in and around Los Angeles have been devastating impacting many of our friends, partners and coworkers. Douglas Emmett is supporting the city’s recovery efforts with our personnel and expertise. Fortunately, none of our properties were damaged by the fires. We’ve made significant progress on several key growth initiatives. In January, we purchased an office property and buy right residential development site at the corner of Wilshire and Westwood Boulevards. In Burbank following the move-out of Warner Bros., we have begun redevelopment of our 456,000 square foot Studio Plaza office building to convert it into a multi-tenant property. We are signing leases that will commence as common areas and the related floors are completed.

Our 712-unit Barrington Plaza residential property now has a permit to begin construction. As expected, our fourth quarter was adversely affected by the Warner Bros. departure. Lower office occupancy and higher interest rates also negatively impacted 2024 revenues and FFO. However, we maintained stable office rental rates, good control over our operating expenses and continue to produce strong performance across our residential assets. Excluding the Warner Bros. move-out, we achieved positive absorption during the second half of 2024 even with muted fourth quarter leasing due to the holidays, both falling mid-week. Looking ahead, our 2025 lease expirations are 25% lower than 2024’s record high and well below our five year average. We’re also seeing a rebound in demand from larger office tenants.

Given these factors, I’m optimistic that we will achieve positive absorption during 2025. I am also excited that our ongoing development projects will provide strong long-term growth. Kevin can provide some details on our new development project.

Kevin Crummy: Thanks, Jordan, and good morning everyone. As Jordan mentioned, we formed a new joint venture to acquire a 17-story, 247,000 square foot office building and adjoining residential development site in Westwood. We estimate the JV’s total investment including acquisition, upgrades to the existing tower and construction of a new residential building will be approximately $150 million to $200 million over a three to four year period depending upon our final plan. That new JV obtained a $61.8 million secured non-recourse interest only loan that matures in January 2030 and has a fixed rate of 6% until July 2027 and 6.25% thereafter. We manage and own a 30% interest in the new JV and expect to enjoy significant operating and leasing synergies due to the proximity of our other Westwood properties.

During December 2024, we also closed a $325 million loan for another of our joint ventures in which we own 20%. The loan replaced a $400 million loan that we paid down using cash on hand in that JV. The new debt matures in December 2028 and is secured by five office properties with interest swapped at a fixed rate of 6.36% until January 2028. With that, I will turn the call over to Stuart.

Stuart McElhinney: Thanks, Kevin. Good morning everyone. For all of 2024 we signed 876 office leases totaling a record 3.8 million square feet for an average of 945,000 square feet per quarter. During the fourth quarter, we signed 204 office leases covering 796,000 square feet, including 242,000 square feet of new leases and 554,000 square feet of renewal leases. New leasing demand from tenants over 10,000 square feet improved again in Q4 and is now back to our pre pandemic average. The overall value of new leases we signed in the quarter increased by 4%, with cash spreads down 7%. At an average of only $5.46 per square foot per year our leasing costs during the fourth quarter remained well below the average for other office REITs in our benchmark group. Our residential portfolio remained essentially fully leased at 99.1%, with good demand. With that, I’ll turn the call over to Peter to discuss our results.

Peter Seymour: Thanks, Stuart. Good morning everyone. Reviewing our results, compared to the fourth quarter of 2023, revenue decreased by 5.5% due to lower office occupancy, which combined with higher interest expense, lowered FFO to $0.38 per share and AFFO to $58.7 million. And same-property cash NOI decreased by 4.5% due to lower office revenues, partly offset by 6% multifamily growth and good expense control. At just under 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 negative $0.17 and negative $0.11. And our FFO per fully diluted share to be between $1.42 and $1.48. Our guidance includes the consolidation of our previously unconsolidated fund and the new joint venture that we just formed.

However, we do not expect a significant contribution to FFO from the new joint venture during 2025 as we only own 30% and we expect NOI to be impacted by construction. 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.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Thank you. And our first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb: Hey, good morning. Good morning out there and certainly thoughts and prayers with those affected in the communities. Jordan, first question I’m sure you can imagine is we’re reading a lot about some local politicians proposing or wanting to have rent freezes or eviction moratoriums. Just a sense of on the ground what you think the likelihood of any of these happening and how you think if CEQA and the Coastal Commission truly will stand down and allow the development to go on or if you think they are also going to be challenging some of the Governor’s emergency initiatives?

Jordan Kaplan: In terms of the rent freezes, I mean, I hope they don’t do anything. I know it was like moved kind of off the agenda for a while, snuck back onto the agenda. I don’t know what’s going to happen with it. I’m hopeful from conversations that we don’t have to face that again. It certainly hasn’t been good for the production of rental housing. In terms of the Coastal Commission and CEQA impacting the redevelopment of the Palisades. If you’re talking about the Palisades for Coastal Commission for sure, I think the governor’s order was extremely clear. And then he reissued a second order to make sure it was triply clear. When the Coastal Commission came back and said we still want to be involved. And in terms of kind of the politics and the way the Coastal Commission is created, if what he wants is them not to be involved, they’re not going to be involved.

And he came on super strong. And by the way, the city also came on super strong. They want to fast track the reconstruction and they’re working pretty hard to make sure in their words and conversations I’ve had with them, to make sure they stay out of their own way. So I’m optimistic on that front.

Alexander Goldfarb: Okay. And then the second question, Jordan, is you gave optimistic outlook that you’ll see positive absorption this year and that leasing is trending the right way. But when we look at the occupancy for the year, the guidance is 78% to 80%, which is basically, I think, we’re 79% now. So, how do we drive that average office occupancy, which basically implies flat with your positive comments on absorption and leasing trends?

Jordan Kaplan: Well, I mean, the office occupancies are ranged, to be fair. But I will also say occupancy is people moving in. We’re working on a lot of leasing. Leasing has a lag time and especially if we are successful and we get positive absorption out of the year, and you’ve seen this, I know you’ve seen this in the past, that when our leasing amps up, the spread between leased and occupied widens. And so I am hopeful that we see positive absorption on leasing. And, of course, that’s always like a great sign for occupancy moving up or eventually moving up. But there’s a real lag there all the time.

Alexander Goldfarb: Thank you.

Jordan Kaplan: All right.

Operator: Our next question will come from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico: Thanks. Following up on the leasing topic and guidance, is there a way you could give us a feeling for leasing volume assumed in guidance this year versus last year, flat, up, down in order to get to the occupancy range that you’re talking about?

Jordan Kaplan: So last year, at the end of the year, we saw a real slowdown, which a leading indicator for us is showing. So we saw it really slow down. I mean, like substantially below the amount of showings we would expect to have even in December, because of the way that kind of those two – there were two Wednesdays with holidays, so people seem to have sort of blown out both weeks at the end. But – so it didn’t even get to our average. And we’re now seeing showings in January and going forward that are way above our average. And that’s one, if not, there’s others of the reasons I’m just feeling – it’s that combined with that we have historically very low move-outs or very low roll this year, I would have said roll, not move-outs.

We have very little roll this year, which we typically expect to get about 70% up. So when you have a lower roll and then you turn around and you go, I’m feeling good about showings and you’re feeling good about the pipeline, then I’m going to be optimistic and I’m telling you guys that I am.

Nick Yulico: Okay. Thanks. And then I guess, secondly, is just in terms of – if you could just talk about how – a little bit more about how January leasing is shaping up. I don’t know how much January really makes or breaks a year or not. But anything you could talk about in terms of if the fire has impacted, whether it’s sort of existing tenants thinking about space or leasing decisions that were kind of in the works with people, if there’s been any impact so far on leasing?

Jordan Kaplan: I think it’s very hard to tell whether the fire is going to have any impact on. Quite frankly, I don’t think it is. But there’s not any data out there to figure that out yet. And even if it does have a tiny impact, and I couldn’t even tell you it would be plus or minus, the tide, the general positive tide that I just described, in terms of kind of our outlook and what’s going on, I think would overwhelm it. So I don’t think it was meaningful anyway.

Nick Yulico: All right, thanks. Appreciate it.

Jordan Kaplan: All right.

Operator: Our next question will come from Steve Sakwa with Evercore. Please go ahead.

Steve Sakwa: Yes, thanks. Good morning. Jordan, I know you’re probably loath to talk about like cap rates on individual deals, but can you just help us kind of size up maybe what the economics look like for both kind of the office and the planned apartment at the new acquisition of 10,900 just so we can kind of help think about either stabilized yields, IRRs, how do we think about that investment?

Jordan Kaplan: So that’s great that you know – I mean, we’ve only been working together for, what, just almost our 20th year or something. So that’s true. I hate cap rates. I don’t think cap rates are particularly indicative other than the cap rate on a like at market leased apartment building. But I will – because you asked, I will say, with you knowing, I really don’t like cap rates as an indicator of anything that I think we’re going in at a little over a 10% cap rate, and I expect when we’re done with all our work to be over 10% cap rate.

Steve Sakwa: And just to be clear, that’s on the – that’s just on the office component or that’s office and residential combined?

Jordan Kaplan: Well, going in couldn’t be on anything, but the – obviously, the office and then coming out, that’s combined.

Steve Sakwa: Okay. And then moving up to the Warner Bros. building, just as we think about the money you’re putting in the $75 million to $100 million of CapEx redevelopment, I know Warner Bros., was paying kind of low-60s rent on that building. When you’re done with the work, how do you think the new rents for the multi-tenant building will stack up to that prior rent?

Jordan Kaplan: I think that – well, I will say – so remember, they just moved out like a month or two ago. I think that we’re very pleased with our leasing and we’re not going to talk about individual deals. But we tried to describe in our prepared remarks that we’re already leasing. And what’s now is like we got to get this work done and get the common areas done and get some of these floors done, so we can get these people in and paying. So I would say this, we feel very good about what’s going on there.

Steve Sakwa: Okay. Thanks.

Jordan Kaplan: Okay. Thanks, Steve.

Operator: Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck: Great. Thanks. Good morning up there. Just a follow-up on a couple of your answers. Can you remind us what the lag is between leasing and occupancy that’s typical in your portfolio? And I guess, you mentioned 70% for retention. So just to confirm that’s what you guys are expecting this year, especially given that we noticed you’ve got a lot of expirations in the Valley towards the end of the year. Are those a concern at all?

Jordan Kaplan: So we are expecting, and I got to tell you, historically, with a lot of regularity experience I think the real number is like 69-point-something and that’s very – has historically – quarter-to-quarter, it isn’t not a big deal, but it’s very reliable over three, four quarters. So that’s why we’re expecting and then I would expect it here. And so that, that, that was your question on renewal. What was your other question?

Blaine Heck: Just the typical lag between leasing and occupancy.

Jordan Kaplan: So that number can range from 100 basis points to like 350 basis points and even higher. I mean, if you’re really leasing at a torrid pace, it gets up above 300. When things are extremely lackluster, it gets down, it can get down to 100. I would say if you just look at it like – there’s never a normal time in real estate. But anything you would call normal time maybe 150 basis points. But I got to tell you, if you go back a few years when we were doing a ton of leasing, I don’t know if you remember going back, but there was a time when like sort of COVID was over, but I know people weren’t talking about recessions. We had a kind of a weird year there where we got positive again. And I remember we got up to about 350 and everyone was saying, when are they going to move in?

When are they going to move in? And I said, well, you just want to keep that 350 because it means we’re just doing a lot of leasing. Because they were trying to like get to 350 back down, you don’t want it to go down because those people move in, you want to have more people that are in that pipeline. But that seems to be the nature of it.

Peter Seymour: And Blaine, if you’re asking about timing on moving folks in after we’ve signed a lease, typically, it’s very quickly, we can move folks in the quarter or within two quarters when they sign their lease. But of course, on Studio Plaza, it was building out multi-tenant quarters and that kind of stuff, it’s going to take longer.

Blaine Heck: Great. Very helpful.

Jordan Kaplan: [Indiscernible]

Blaine Heck: No, it’s fine. That was helpful commentary from you too, Jordan. And then just secondly, on the acquisition, it looks like this is a new JV partner, if that’s the case. Can you tell us anything about that partner and their willingness to do more deals with you. And then whether QIA was considered as a partner and kind of their ongoing interest investing with you? Thanks.

Jordan Kaplan: So we don’t really like to talk about our JV partners. And to be perfectly frank, they don’t – they’re not anxious to be in the press. If they want to say something themselves, they’re always welcome to do it. But we’ve been asked the question. I got to tell you, I think every quarter for now four or five years, we’ve been asked whether our JV partners still had an interest in buying office, still had an interest in resi, how did this, that, then I said, yes, they definitely do. And you can look at the fact of how much we got squeezed down on this deal to know how aggressively they do want to be in these deals. I mean that money is out there. And I’m happy that we were able to do a deal and give those guys some way to have some participation because if you don’t give them deals, you’re going to lose their attention.

And I know like Kevin has been doing a good amount of traveling with Stuart and Griff, and they’ve been getting out and continuing saying those guys, we think we’re going to be able to make deals and now we’re making them. So I’m super happy about that.

Blaine Heck: Thank you.

Operator: Our next question will come from Jeff Spector with Bank of America. Please go ahead.

Jeff Spector: Great. Thank you. Jordan, a follow-up question on your comments around absorption. When we’ve met you in the past, you’ve talked about in a healthy – I guess if there’s health positive absorption, you want to see one-third new, you want to see 2 to 4, 10,000 to 15,000 square foot tenants. Can you provide a bit more color on what you’re seeing in the market that backs up your thoughts for 2025 besides the fact that you have less role? Thank you.

Jordan Kaplan: So we – less role makes a big difference for sure. But we’re just getting a lot of activity, as Stuart has said, and this is one of the questions he was going to answer. But – we, again, saw last quarter, a great return of the over 10,000 square foot tenants and back to like at or above our norm, which has been what’s been missing in terms of us achieving really the big goal, which is to get something in the 800,000 and to be one-third new. And so we were really having trouble getting there with the one-third new because we need some of these larger guys that come back and they’ve come back. And then add on to that, that as this year has launched out, I mean, we’re just seeing – we’re just really much better about everything that’s going on in terms of the actual lease activity, the showings and all the rest of it. I mean that’s what caused me to write that in our prepared remarks.

Jeff Spector: Thank you. And I guess, could you talk a little bit more about that new demand, in particular, the larger tenants, what type of industries they are coming from? Or they’re in, I should say. Thank you.

Jordan Kaplan: Yes. We saw demand across the board. It wasn’t concentrated in any particular industry. So we saw real estate, we saw across the board kind of demand in Q4 for those larger tenants.

Jeff Spector: Thank you.

Operator: Next question will come from Michael Griffin with Citi. Please go ahead.

Michael Griffin: Great, thanks. Maybe to expand a little bit on Jeff’s question surrounding the large tenant demand. I mean, in your summation, what has maybe changed in that tenant’s mindset that makes them more confident to go out and sign leases? Is it improved business confidence? Is it an updated outlook on the economy? I know that work from home was never really an issue with your tenant base, but maybe just kind of the why you’re seeing those sort of tenants come back to the market.

Jordan Kaplan: I might – I didn’t know why they weren’t back last year. I didn’t really – I know that many large tenants were taking sort of a posture of prepare to be in a like extreme recession or that’s what’s coming or whatever. And I’m sure that attitude has changed and that’s played some role. But I got to tell you, I also watched our leasing group, our operating platform and I will add our kind of development group, which we kind of maintained and actually oddly grew during this time, and a lot of people are kind of falling away from some of those things. And they’ve adjusted strategies. They’ve been figured out how to be and where to be aggressive in this market and how to get attention. And I don’t know whether it’s us, it’s everybody, it’s them changing their attitude, but we are – some of it is just – I can see it in our platform because I saw when we were bidding against that other deal that what was going on and other people that were trying to come in the market because they might have thought that would be a good deal.

And I could see that we’re now substantially more qualified to handle and take advantage of these opportunities, both from a leasing perspective in terms of even the – our platforms even more robust now and from the perspective of having not only maintained but sort of built up our development platform. This is rare. We’re now taking on multiple development deals. And I know on that deal we just bid on, I don’t think anyone was even realizing there was another development opportunity there. So I’m feeling really good about all. I mean, I feel great about it. Not even just really good about our growth stuff. And I wrote that in my prepared remarks like we have a lot of growth things going on now.

Michael Griffin: No, that’s a helpful color. I can definitely gauge the excitement in your voice there. And then just maybe one follow-up on the 10900 Wilshire acquisition. Do you envision this as a big tenant building? Would it be more your bread and butter kind of tenants? And anything you can comment on the upcoming rent roll or lease maturities and whether or not there’s a mark to market opportunity in the building.

Jordan Kaplan: That building uniquely has presented us with more than one extremely good option. And we need to – before we talk more about it, we need to decide what direction we’re going in. So we need to spend a little more time on that. I feel that that building provides a lot of opportunity, but we got to decide in what direction we’re going to go in. And we need to get that done in the next relatively soon. So I’m going to let that sit for a while.

Michael Griffin: Sounds good. Appreciate it. That’s it for me.

Jordan Kaplan: Thanks.

Operator: And the next question will come from Rich Anderson with Wedbush. Please go ahead.

Rich Anderson: Thanks. Good morning. So a quarter or two ago, Jordan, you had mentioned on Warner Center, I hope it’s not single tenant. And now it’s definitely not single tenant sounds like based on the money you’re spending. What have you guys done to sort of gauge the market to get you to the point where you’re so committed to multi-tenant execution that you’re spending that kind of money on it? Was there some work done on the ground to say, okay, we got some real opportunity here, but it’s not going to be 450,000 square feet. I’m just curious what the process was.

Jordan Kaplan: So I think you’re talking about Studio Plaza, which is – the tenant was Warner – the old tenant was Warner Bros.

Rich Anderson: Yes, yes, you know what I meant.

Jordan Kaplan: So it would have been – look, I’m not going to say just like all good developers and leasing guys. I mean if a 450,000 – if we would have had the problem we’re turning down a 450,000 foot tenant, I guess maybe I don’t know that we would have turned that down. I’ve never seen us do that. So I’m not sure that we had really the options the way you’re describing it. I will say that we like that market a lot. Our comfort level is not with large tenants. We like the distributed risk of multi-tenant buildings. It’s a great market. We did benefit from it being a single tenant building or – well, we had a decade in there when it wasn’t. But in general, two out of the three decades it was a single tenant building.

And I’m pleased now to be – obviously, nobody likes having their building vacate, but I’m pleased that we have an opportunity now to extremely de-risk that building and lease it up. And like I said, we like what we’re seeing on the lease up. I mean we like what’s going on. So that’s good.

Rich Anderson: Do you think you’ll have some real concrete stuff to talk about in the quarter that quickly from a leasing perspective?

Jordan Kaplan: Well, we’re already telling you we’re signing leases. But if you’re saying to me, are we going to start like tracking it that way? No. But we’re not going to just take one building and start tracking it. But if you’re asking me in terms of like having the building ready for those tenants to move in, we have actually given a bunch of info on that that work’s going on. I think we might even have some imagery and stuff on our website on that building and you could see what it’s going to look like going forward, it has been seen by the people we’re leasing to and our prospects.

Rich Anderson: Okay. And then second question, interest expense is projected to be up 15-some-odd percent year-over-year. A lot of clear rationale behind that swaps, expirations and so on. I’m wondering if the environment is causing you to sort of change your way – in your approach to the balance sheet at any level. You’re kind of exposed to quite a bit of variable rate debt and that increases as time passes in 2025. Anything you can share with how you might manage this situation in the current macro environment?

Jordan Kaplan: So – well, we’ve never been in love of variable rate debt. It’s just that we – you got to go variable when a loan is coming up, right? So we normally borrow seven years and fix it for five years, and we expect to refinance. And because of the way the market has been, we’ve been stuck with stuff that’s kind of during those two years has gone to floating. It’s not that, that’s been a strategy. And as you can see from the deals that we did, which Kevin described in his prepared remarks, those deals are fixed, right? They’re both in the sixes. So I mean, we’re willing to live with that. And as stuff comes up and we have the opportunity to make those changes with longer-term loan and those opportunities, and we’re probably going to swap it or do fixed rate deals.

Rich Anderson: Okay. Good luck. Thanks very much.

Operator: Next question will come from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone: Thanks. Maybe we’ll stay on debt for a minute. If we look out to 2026, I think you have about $1.3 billion [ph] coming due. Any likelihood of addressing some of that earlier than next year? And is any of that in guidance? And also just anything we should be looking out for as we look out to that, whether it’s a big increase in spreads or where some of that debt might reside at the asset level that we need to consider?

Jordan Kaplan: Well, we just announced two deals, so you have some comps on it ones, right? In terms of working on them, we definitely want to deal with them this year. And are working on that. But because of the way the market is, it’s equally uncomfortable for us is everybody that we’re having to walk down the line so far and deal with these loans when they’re so much closer to the maturity. But the 2026 debt we at this time are very focused on dealing with now and making deals and extending out. And we’re – for sure, we’re definitely working on that.

Anthony Paolone: So that – there’s some of that in the interest rate guidance, I assume?

Jordan Kaplan: No, no, because we don’t include in our guidance deals that aren’t done. So when those deals are done, then that will go in there. But until they’re done, we don’t include like prospective or potential deals in the guidance.

Anthony Paolone: Got it. Okay. And then just a follow-up. On 10900 [ph] you talked about how much you like the deal and it’s pretty unique. So should we think about that as a one-off? Or are you seeing capital markets thaw out there and deal pipeline starting to build more broadly?

Jordan Kaplan: Do you want to answer?

Kevin Crummy: This is Kevin, Anthony. So we did see a number of larger tenant format buildings that traded last year. But that’s not what we do. We’re looking for multi-tenant assets that we can apply our operating platform to. And so this was a great opportunity. It was a perfect fit. And I’m optimistic that there’s going to be more of that in our markets over the coming year.

Anthony Paolone: Thanks.

Operator: And the next question will come from John Kim with BMO Capital Markets. Please go ahead.

John Kim: Thank you. I could see why you wanted to disclose the 10% cap rate on 10900. But I wanted to ask about that. So on the office side, I think, Jordan, you mentioned that’s the going-in cap rate, but you do have some options. So, I was wondering if there was some maturities and maybe some upside to that 10% if you redevelop it? And then on the multifamily, developing at a 10% yield, is that an affordable housing multifamily development, and that’s the reason why you can get that attractive yield? I just one wanted some more details, if you can provide it?

Jordan Kaplan: So I said above 10%, I didn’t say 10%, just to be clear, in both instances. And the multifamily is not low income, it’s that market.

John Kim: So how are you able to get that? I mean it’s hard to develop above 6%, I think, in multifamily?

Jordan Kaplan: It’s a function of our – it’s a function of everything surround the deal. It’s rents in the area. It’s a cost of build to building. It’s price we paid and how that option was included in the deal. I said it on an earlier, there’s – Kevin’s remind me by writing on a piece of paper that it does not include – there’s no allocation to land because I’m telling you right now, we bought it with no building, and I just gave you the cap rate. So there’s no – when I – and you’re assuming that we’re building it for a 10% cap rate. But anyways, in what I told you is for the entire project. It’s not just for the apartment building, not to say that it won’t be a high cap rate. But it’s – what I described earlier about kind of people’s recognition of that opportunity with respect to this deal I’m pretty sure we’re the only ones that saw it because we have such a kind of robust development platform to begin with, and we know what’s going on here, obviously.

And there’s been some changes in state law that we’re very familiar with. And I’ve been pointing out to you guys that there’s locations along Wilshire that we own today and that now like it’s a new world. Now you can buy right, build resi. And with all that knowledge here and our development group and being able to understand cost and the fact that literally, I don’t know, blocks away. In Brentwood, we just built a high rise. We just have a lot of information on this front. And so we were able to recognize the opportunity and be able to also add that in, and there’s very easy to do. And we paid a price that I think when we’re bidding against everybody just contemplated that it was the building that’s standing there today.

John Kim: Congrats. That sounds great. Just wanted to follow up on your guidance. What is contemplated as far as capitalized interest? And how did capitalized interest end up last year? I think you were in an $8 million run rate in 2024.

Peter Seymour: Yes. It’s Peter. I mean we don’t give guidance specifically on capitalized interest, but you can assume that as we expand development, there will be a bit more of it. And yes, I think that’s all I have to say on that.

John Kim: Can you remind us at Studio Plaza has secured debt?

Peter Seymour: It does not.

John Kim: Great. Thank you.

Operator: The next question will come from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski: Good afternoon, guys. Thanks for taking the question. Jordan, I just wanted to go back to your previous comment about having existing density within the operating portfolio today. I know you guys kind of alluded to it in the past, but can you kind of describe just how big of an opportunity set that is?

Jordan Kaplan: I’d like to tell people on the past.

Peter Seymour: It’s thousands of units.

Jordan Kaplan: Okay. It’s thousands of units.

Dylan Burzinski: And I guess, I mean, is there any sense for a lot of these to be near-term endeavors? Or are these sort of longer term in nature in terms of being able to actually get at that and start development process?

Jordan Kaplan: So, I’ve been asked in the past, like how rapidly are we going because there was changes in state long run on how rapidly are we going to move in and build and continue building units because we’re primary owner along Wilshire where most of this is impacted by these changes. And I had said in the past, I think our goal would be to do deal in Hawaii and a deal in L.A. – have two deals going at a time at any particular time, but the deals take a few years and then you finish them and then you go to the next thing. And you would say, well, wait a minute, you’re already in like more than one deal here because we’re doing Barrington complete we do. And now we also just took on another one. And so – and as I said, I mean, I think it’s a function of how strong our development group has become.

And maybe it is the case that we can take out more than one, but I’m not anxious to take on many more than two, we have two now, and it just takes a lot. We have three now. Do we have three now? Yes. Okay. We have three now. Stuart’s putting fingers of three. So yes, we have a lot going on.

Dylan Burzinski: Great. And one more, if I may. You mentioned tenant activity over 10,000 square feet getting back to sort of pre-pandemic levels. Can you kind of just talk about, you know, what you guys think is sort of driving this renewed optimism amongst this cohort of tenants?

Jordan Kaplan: Well, as I – so I think there’s a two kind of big things going on. Number one is I do believe larger tenants are doing a betterment [ph] about face and they’re no longer in a completely guarded position vis-à-vis, like a dramatic recession that’s going to come and beat the place up. And I think that shift is definitely making a difference. But I’m going to tell you, I also see a difference in our penetration in the market and our teasing out tenants and getting access to tenants and getting these deals made. And it’s hard for me to. I don’t know how to separate the two, but I could tell you we got a lot more big tenant deals going, but we got a lot of people focused on it. I mean, if you ask any, we have 800 people, and if you go to any of them go, what’s going on at Douglas Emmett, they’re going to go leasing, leasing, leasing.

I mean, that, that, that’s what’s been going on. So if you say that long enough and hard enough and focused enough and strategic enough, you’re going to do leasing, so, and that’s what’s happening.

Dylan Burzinski: Great. Appreciate your comments.

Operator: Question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.

Upal Rana: Great. Thanks for taking my question. The $335 million loan that matures in March and that you’re currently in the process of negotiating an amendment and an extension on what are the conversations have been, been there like and what’s the probability of the amendment finalizing by the due date?

Jordan Kaplan: I mean, I don’t think I’m prepared to discuss that anything that’s going on there right now. I mean, obviously you’ve already outlined what’s going on and that’s probably the amount we’re willing to discuss. And we don’t like to discuss deals certainly in process and we really actually announce them after they’re gone and closed.

Upal Rana: Okay, sure. And then my other question would be on the 10900 acquisition, you have about 40,000 square feet expiring this summer with some of it being sublet as well. What’s your confidence that those tenants may resign and have you had any preliminary conversation with those tenants prior to purchasing the asset, especially with your plans to upgrade the existing tower?

Jordan Kaplan: Well, we’re, I mean, we’re in the market. We’re obviously familiar with all the tenants. So I don’t know that I can, I mean, we’re not going to talk about individual tenants. We kind of gave you, we have a couple paths we can follow and we have to decide what path we’re going to follow. I’m not – I don’t want to give guidance on a building like for midterm. We kind of gave you where we are today and where we’re confident we’re headed. It has a lot going on. It has redevelopment, it has residential, it has a lot going on. So we need to just play that out and make some better decisions about it or make some – make some decisions about it. I’m sure it’ll be good.

Upal Rana: Okay, thank you.

Operator: And our next question will come from Jamie Feldman with Wells Fargo. Please go ahead.

Jamie Feldman: Great. Thanks for taking the question. Just thinking big picture about the impact of the wildfires, if you fast forward a couple years here, what do you think is going to be most different about Los Angeles going forward? And then, based on the conversations going on with rebuilding and planning, what are you most optimistic about and what causes you the most concern about things moving forward?

Jordan Kaplan: So this morning there was an article in the New York Times about the Palisades, and it made a lot of projections about where the Palisades is headed in terms of a market, in terms of the people that are going to be there and how the Palisade is just going to change and the focus it’s getting. I read it and I thought that, that outcome was. That was probably a good a guess as anything because there’s a lot of history around other communities that have been impacted by fire, which is devastating. I mean, I didn’t spend a lot of time at the beginning of this thing, but you can’t imagine how much time personally, the people here at Douglas Emmett. I personally can. I mean, Stuart, Kevin, Peter, not even back in his house.

I mean, what’s going on now is. I would have never imagined. But if you want to, like jump very far forward and say, like, where does this all go in the end? You look at what has happened in Malibu and other markets where fires come through, you already know that the city’s dedicated to making a bunch of extremely positive changes to that area in terms of where, supportive of development, allowing development to be more rapid. I know a lot of people are talking about law, combination. I know very few people that are just saying, I’m out of here, actually almost to a team [ph] people are either like, how fast can I rebuild? And they’re also in the market for their neighbor’s lot. So, I see that happening, and I think to myself, this has been horrible destruction.

We’re going to go through a rough few years, but it does give me optimism about where the Palisades is headed. And so we’ll see.

Jamie Feldman: Okay, thank you for that. I know it’s a difficult topic. And then I guess just thinking about commercial real estate, we’ve heard about some high school leases in Santa Monica. Anything you think, changes in terms of the demand profile for the different sub markets you’re in or other sub markets that might be more interesting for you guys going forward as, with the rebuild and changes.

Jordan Kaplan: Well, I know we’re talking to some schools, too. I know there’s some schools that have like, kind of look for space because of course they want stay open. Right. I mean, they have all the kids and that whole thing. And I know that other schools that are, were not damaged around Santa Monica. I’m on the board of one school in Culver City. I don’t mention them, but I know they’re now accommodating other schools, students and programs to try and help out. So I know that that is all going on. Putting that aside, I have to say, again, I’m, the actual Pacific Palisades area, they had one or two medical office buildings. Medical with a little bit of normal office. There was some other normal office. There are the schools and there are businesses, but I’m not sure that transplant in the size of our market is going to be the thing that like makes a big difference.

And as I said, the tide of just the kind of tide of leasing I think would overwhelm any of that. I know that I was asked earlier, I said, like a lot of people just have been displaced and they’re renting houses that might not be as big as their other where they were before, work from home to the small degree that it existed might be much more difficult now. People want, come in the office, maybe they’re renting a smart place. They don’t have an office or something until they build their house back. I don’t even think work from home is impacting us that much. So I’m not even. I can’t even say that I think that will make a big difference to leasing and especially against where I think the tide of leasing is going.

Jamie Feldman: Okay. I would assume Santa Monica gets. No, that’s super helpful. I mean, I would assume Santa Monica would get the benefit from, reconstruction type architects, engineers. I mean, is that the closest…

Jordan Kaplan: Yes, I think Santa Monica and Brentwood and Westwood, all these areas here. I think you will that it’s way too early for that to happen. But if you’re saying to me there’s a lot of capital that’s about to come into this place and when more capital comes in, that means they need more office space and there’s going to be construction and activity here in a big way for quite a few years. Yes, I mean, that will incrementally, I’m sure, make a difference. But the difference isn’t that chance to get made yet. So we aren’t seeing it yet.

Jamie Feldman: Okay. All right, thank you. And we send our best to your entire team.

Jordan Kaplan: Thanks.

Operator: Our next question is a follow up from Nick Yulico with Scotia Bank. Please go ahead.

Nick Yulico: Thanks. Just going back to 10, 900 Wilshire. Not to beat a dead horse on this, but it looks to us that you bought the leasehold in that asset. You don’t own the ground. So, is that correct and is that also why the cap rate yield expectation you’re citing is higher than what some would expect?

Jordan Kaplan: No, we bought it in fee.

Nick Yulico: Okay, thank you.

Jordan Kaplan: We own the ground in the building. We own both. We own the whole thing.

Nick Yulico: Thank you.

Jordan Kaplan: All right.

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

Jordan Kaplan: Okay. Well, thank you for joining us. I know this was a complicated release. And I appreciate that you guys spent the time to look it over and had a lot of good questions. And we will be speaking with you again in a quarter. Goodbye.

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