Douglas Emmett, Inc. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Office Leasing: July was strong with over 300,000 square feet leased, but August and September experienced a deeper-than-usual slowdown that lasted into the third quarter. The fourth quarter office leasing started well, but caution was urged until the quarter was completed. Remaining office expirations in 2026 and 2027 were below historical averages.
• Multifamily Performance: Multifamily same-store cash NOI increased nearly 7% year-over-year. Two development projects in Brentwood and Westwood were underway, with plans to add over 1,000 units. Recent state law changes enabled more multifamily unit development at existing locations.
• Debt Refinancing: Almost $1.2 billion of debt was refinanced at competitive rates. Three financing transactions extended debt maturities at very competitive fixed interest rates. The Landmark Residences' debt was repaid, and the property was added to unencumbered assets.
• Development Projects: Finalizing plans to convert the 10900 Wilshire and Westwood office tower to apartments and build a new ground-up apartment building (construction starting in 2026). Construction at The Landmark Residences in Brentwood was in full swing. Leasing progress was noted at Studio Plaza in Burbank.

Segment Performance

• Office: In the third quarter, office leasing saw a slowdown with 215 leases covering 840,000 square feet, including approximately 200,000 square feet of new leases. Same-property cash NOI for office increased by 2.6%. However, excluding property tax refunds, office same-property cash NOI growth would have been essentially flat. Office rental rates and concessions were steady, and remaining expirations in 2026 and 2027 were below historical averages. Office leasing costs during the third quarter were well below the average for other office REITs in the benchmark group at $5.63 per square foot per year.
• Multifamily: Multifamily same-store cash NOI increased almost 7% compared to the prior year. The residential portfolio remained essentially fully leased. Two multifamily development projects in Brentwood and Westwood were set to add over 1,000 premium units to the portfolio. Recent changes to state municipal law allowed for more multifamily units at existing locations. The multifamily segment contributed to the overall 3.5% increase in same-property cash NOI for the whole portfolio.

Guidance

• The 2025 net income per common share diluted was expected to be between $0.07 and $0.11.
• The 2025 FFO per fully diluted share was expected to be between $1.43 and $1.47.
• Guidance did 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.

Risks

• Unpredictable Tax Refunds: Property tax refunds impacted results, but their timing was unpredictable from quarter to quarter.
• Office Leasing Slowdown: The office leasing slowdown in August and September was unexpected, though the fourth quarter started well.
• Government Sector Challenges: The government sector was weak, with challenges in leasing activity, including UCLA downsizing and budgetary issues.
• Litigation Progress: Litigation related to The Landmark Residences was slow, with court processes moving at a very gradual pace.

Question and Answer

• Q: Nick Yulico asks about the office leasing slowdown and what didn't materialize in the new leasing plan? **A: Jordan Kaplan states the slowdown was temporary, no specific market, building, or industry to pinpoint, but the fourth quarter started well, though no predictions were made due to the surprise of July's strong performance.
• Q: Nick Yulico asks about other alternatives like pruning the portfolio or stock buybacks? **A: Jordan Kaplan expresses confidence in both office and residential portfolios, working on growth, and joint ventures are involved, but there was no focus on going private as the stock was considered undervalued.
• Q: Steve Sakwa asks about tax refunds and office expenses? **A: Peter Seymour says tax refunds impacted expenses, with rolling tax refunds occurring over time and expected to continue, though quarter-to-quarter prediction was difficult.
• Q: Steve Sakwa asks about leasing industries, including UCLA downsizing? **A: Jordan Kaplan notes the government sector was weak, but UCLA could be a growth engine, with other sectors showing more stability.
• Q: Alexander Goldfarb asks about funding acquisitions and joint ventures potentially going private? **A: Jordan Kaplan states excess cash was available to fund joint venture acquisitions, and there was no focus on going private as the stock was undervalued and seen as a long-term opportunity for shareholders.
• Q: Blaine Heck asks about office to residential conversions and acquisition progress? **A: Jordan Kaplan mentions working on development projects, confidence in acquisitions, and return metrics being best-in-class, consistent with current market return conditions.
• Q: Nicholas Joseph asks about transaction market competition? **A: Jordan Kaplan notes a shift to more off-market deals, with the company's reputation helping in securing opportunities.
• Q: John Kim asks about the cause of the leasing slowdown in August/September and amenities? **A: Jordan Kaplan attributes the slowdown to a delay in decision-making to close deals, with amenities used in projects but the portfolio situated in an amenity-rich area.
• Q: Jana Galan asks about the cause of the leasing slowdown and refinancing of multifamily properties? **A: Jordan Kaplan cited a slowdown in decision-making to close, with Fannie Mae aiding in refinancing The Landmark Residences by allowing flexibility during the construction phase.
• Q: Rich Anderson asks about Olympics impact and Studio Plaza leasing? **A: Jordan Kaplan said the Olympics could improve the area, and Studio Plaza leasing was progressing with entertainment deals, showing positive performance.
• Q: Upal Rana asks about the Beverly Hills office market and larger tenants returning? **A: Jordan Kaplan expressed satisfaction with Beverly Hills market moves and noted larger tenants were returning with healthy leasing activity over 10,000 square feet.
• Q: Dylan Burzinski asks about acquisition opportunities vs office portfolio vacancy? A: Jordan Kaplan emphasized focusing on buying the best buildings in strong markets, not solely on value-add, with a focus on high-quality assets in top-performing markets