Douglas Emmett Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 5, 2024

There are 15 speakers on the call.

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.

Operator

I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Speaker 1

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.

Speaker 1

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.

Speaker 1

For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section

Speaker 2

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. In the Q3, we leased over 1,000,000 square feet of office space, including over 350,000 square feet of new leases.

Speaker 2

Tenant demand from our diverse industries was strong in each of our three regions. Moreover, we had our best quarter for new leasing to tenants over 10,000 square feet since late 2022 when recessionary fears surfaced. Overall, we achieved positive absorption of approximately 90,000 square feet and improved our portfolio leased rate by 50 basis points to 82%. Turning to our financial results, we achieved FFO of $0.43 per share. Based on our year to date results and our improved expectations for the Q4, we are raising our full year guidance for FFO by $0.04 Looking ahead, we are primarily focused on leasing up our office portfolio.

Speaker 2

We are seeing encouraging signs of increased confidence overall as well as good interest at Studio Plaza as it converts to a multi tenant building. Leasing can be choppy quarter to quarter and, of course, there will be a drop in occupancy next quarter when Studio Plaza vacates. But I am encouraged by our lower than average lease expirations over the next 5 years. You can see the difference in the lease expiration chart in our earnings package. We are also focused on our repositioning projects, including Studio Plaza and Barrington Plaza and hope to acquire a few high quality assets at attractive prices during this part of the cycle.

Speaker 2

Now, I will turn the call over to Kevin.

Speaker 3

Thanks, Jordan, and good morning, everyone. As Jordan mentioned, taking advantage of opportunities in the office market remains a key objective for us. The few recent transactions in our markets have so far been dominated by large tenant buildings, which are not our bread and butter. Larger tenants may mean fewer leasing transactions, but because of the concentration of risk and higher TIs, we prefer the stability of smaller high end tenants. As a result, our median lease size across our entire portfolio is only 2,400 square feet.

Speaker 3

In fact, out of our almost 2,700 office leases, we have only 28 leases over 40,000 square feet and only one which was recently renewed through 2,030 7 over 100,000 square feet. In addition, 73% of that square footage covered by those 28 leases was signed after the start of the pandemic. While recent transactions have not fit within our disciplined strategy, we are increasingly confident that there will be attractive opportunities in multi tenant office buildings with vacancy, where we can leverage our operating platform to create value. Our company was founded in the early 90s, another period when office was an out of favor asset class. Our history, deep local knowledge and unique operating platform give us the confidence to lean in at times like this when others are overly cautious.

Speaker 3

With that, I will turn the call over to Stuart.

Speaker 1

Thanks, Kevin. Good morning, everyone. As Jordan mentioned, we had a terrific leasing quarter. We signed 236 office leases covering over 1,000,000 square feet, including 353,000 square feet of new leases and 650,000 square feet of renewal leases. This strong new leasing increased our portfolio leased rate by 50 basis points to 82%.

Speaker 1

The overall value of new leases we signed in the quarter increased by 0.4 percent with cash spreads down 11.2%. Because of better leasing to tenants over 10,000 square feet, we saw a slight increase in our average leasing costs during the quarter, though they remain well below the average for other office REITs. Our residential portfolio remains essentially fully leased at 99.1% with rents continuing to rise. With that, I'll turn the call over to Peter to discuss our results.

Speaker 4

Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the Q3 of 2023, revenue decreased by 1.8% primarily due to lower office occupancy. FFO decreased by 3.8 percent to $0.43 per share primarily as a result of lower office NOI. AFFO increased slightly to $68,800,000 and same property cash NOI decreased by 5.7 percent due to lower office NOI, partially offset by multifamily growth.

Speaker 4

At only 4% of revenue, our

Speaker 2

G and A remains very low relative to our benchmark group. Turning to guidance. Based on our Q3 results and higher expectations for 4th quarter operations,

Speaker 4

we have increased guidance for our full year FFO by $0.04 to between $1.69 $1.73 per share. For information on assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future property acquisitions or dispositions, common stock sales or repurchases, financings, property damage insurance recoveries, impairment charges or other possible capital markets activities. I will now turn the call over to the operator, so we can take your questions.

Operator

We will now begin the question and answer session. The first question comes from Blaine Heck with Wells Fargo. Please go ahead.

Speaker 5

Great, thanks. Good morning out there. You continue to carry a large cash balance despite paying $34,000,000 to extend the maturity on one of your loans this quarter. I guess, can you just talk about uses for that cash? Are you expecting any more principal pay downs on upcoming maturities?

Speaker 5

Are you considering paying off any of the maturities or potentially just earmarking the majority for investment in acquisitions or funding the spend on Barrington?

Speaker 2

Well, you named a lot of the good things that it's there for. I mean, it's number 1 is, it's obviously there to guard the company and have liquidity considering what we've come out of and we hopefully are moving out of. But yes, I mean, maybe there's some use for it with regard to debt. There's hope I hope there some good uses for it with regard to new acquisitions. I think we'll also have our partners involved in those, but then we also have part of that is our investment.

Speaker 2

So, I mean, it's for all those purposes. We have some relatively meaningful cash flow even following the dividend. And so, we also use that for kind of this a lot of the slower pace stuff like construction, property repositionings and stuff like that.

Speaker 5

All right. That's helpful, Jordan. And then, it looked like tenant recoveries increased pretty significantly this quarter relative to the first half of the year. I know expenses were up as well, but maybe for Peter, just wanted to ask whether there was anything one time in nature in those recoveries past just normal seasonality?

Speaker 4

Yes. Blaine, it's mostly normal seasonality. Tenant recoveries vary from quarter to quarter based on when we bill estimates, when we put out reconciliations and so on. So it tends not to be smooth over the course of the year.

Speaker 5

Great. Thank you, guys.

Operator

The next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 6

Hey, morning out there. First, just it looks like obviously Warner Brothers is going to fall out, I think as you guys said, and there's going to be an occupancy drop in the Q4, yet you're raising guidance. So can you just talk a little bit about what's going on? Is it sounds like there's better leasing coming and that the occupancy drop from Warner Brothers is going to be quickly offset? Or just want to understand how we think about earnings going up yet occupancy coming down?

Speaker 2

Well, I mean, we've been planning for Warner Bros. Moving out for Jordan? Sorry, I lost you. I don't know why the thing just went to mute. And I said that like the greatest thing while it was on mute, but I won't even be able to remember it.

Speaker 2

So let me go back to answering your question. So the Warner Brothers move out is all we've known it's been coming for a very long time obviously. But we've also been working super hard across leasing. The leasing group has been just killing it. I'm very pleased there and controlling expenses and getting revenue in.

Speaker 2

And so we're really seeing improvement across everything. I mean, little better on our G and A, better on our leasing, better on our expense controls. So it's kind of it's really all the areas.

Speaker 6

Okay. And then I guess following that on the leasing front, for the past few quarters, national big tenants have been at a weak spot. It sounds like those are coming back. So as you sit here today looking out, do you now feel comfortable that all aspects of leasing are now in a good spot going forward? Or do you think that is still going to be bumpy for the next few quarters?

Speaker 2

Well, I mean, I've been so bad at predicting the quarters that are coming up. I mean, I could tell you this, our activity is very good. And I'm really pleased to see the tenants over 10,000 square feet, that activity is good. And so that coming out of leasing, like I said, couldn't be more pleased, all right? Now go to the other side, which is roll and rollouts.

Speaker 2

You look over the next 5 years, right, starting in 2025, and it's down. I mean, it's less roll. It's lower. And I think what's going on now because we've been reporting the terms of these leases is that we're going to a little bit over the more normalized pre pandemic rates and a little bit longer leases. So all of those are tailwinds for us, right, in terms of kind of projecting out.

Speaker 1

Yes. One other thing, Alex, I will just remind, I know I remind you guys a lot, but our leasing pipeline is extremely short. So we meet these small tenants and we can kind of quickly get them through our system. So that just means that we don't have a ton of visibility into 2025. Activity is very good right now.

Speaker 1

We still have a lot of work to do that can impact the Q4.

Speaker 6

Okay. And then just one more, if

Speaker 1

you don't

Speaker 6

mind. Jordan, just all these announcements out west, sales force return to office, Amazon return to office, It reminded me that when I met you out when they came to your office earlier in the year, you guys were suit and tie versus your traditional casual Southern Cal. So have to ask if you're following this return to office trend and are still suited up or have you returned to the casual?

Speaker 2

Well, okay. So for starters, we returned to the office in summer of 'twenty, 2020, right? You can remember COVID March, summer, we're like every I never felt that that program could work and keep a company healthy. So we've been in full 5 days a week since that time. So that's being in the office.

Speaker 2

And then at the beginning of this year, we went to suit and tie across the board. Ken's always been suit and tie and Ken's reports have always been suit and tie. I probably was more of a criminal in this and I was more casual. And I wanted to be really clear that there's nothing casual about what we're doing. I want to be clear about our cultural.

Speaker 2

It's a cultural move to make sure everyone came focused, ready to work hard, ready to work longer. I mean, this is a challenging economy. And I just wanted to be clear about that from a cultural perspective that our job here is to make money for our constituents and come dressed and ready to do that. And I think it's made a little bit of a difference. I'm wearing a suit and tie every day, every day.

Speaker 7

Thank you.

Speaker 8

Thanks.

Operator

The next question comes from Michael Griffin with Citi. Please go ahead.

Speaker 9

Great, thanks. Maybe just some more color around sort of net absorption in the quarter. You've obviously talked positively about the leasing trends and demand, but was this due to maybe some of those larger leases you had been working on finally getting executed in this quarter? And then Jordan, maybe you can kind of give some insight into whether or not these larger leases, these signers have been more confident in signing leases and maybe what your expectations are in the quarters ahead?

Speaker 1

Hey, Michael, it's Stuart. Yes, so really good volume, 236 leases, that's a lot of leasing. So we had good activity from our kind of core smaller tenants. And then also as Jordan said and we've said that over 10,000 category, which has been slower for us for the last couple of years, came back and was better than it's been in a while. So pleased to see that.

Speaker 1

Honolulu was up, West LA was up, Valley was basically flat on the leasing. So we had good activity across the board. Jordan, if you want to speak to the pipeline of the larger tenants, I think we are still feeling good that that activity is there and better than it's been the last couple of years.

Speaker 2

Yes. I mean, I have already said it. I can't say it enough. For better or worse, operations, that whole area that Ken oversees, leasing operations, I mean, this is Ken's in my 4th recession running this place. And that is what pulls us out of these things.

Speaker 2

I mean, I can play every game in the world on the capital markets and then loans and this and that, but that is what pulls us out and that and it's doing it. I mean, it's just a ton of detailed work and that's what's going on here.

Speaker 9

Thanks for that. Appreciate all the color there. And then maybe just going back to sort of opportunities you're seeing in the transaction market. It seems like it's been bigger deals that have mostly been out there now, but maybe nothing exactly in your wheelhouse. Can you give us a sense when you're underwriting prospective transactions, maybe from a IRR or return of hurdle perspective?

Speaker 9

What are you getting to in order to make the math work on transactions?

Speaker 3

Hi, it's Kevin. We are not really in an IRR world right now. And the reason I say that is, if there were anything we were gauging by right now, it's probably about the price per square foot and the basis that you're getting into and then where we think we're going to stabilize those buildings on a return basis. Are targeting properties that have vacancy in them, because we want to take advantage of our operating platform. Vacancy doesn't scare us.

Speaker 3

And we are not good at buying buildings that are stabilized, because we can't add that value.

Speaker 9

Great. That's it for me. Thanks for the time.

Operator

The next question comes from Jeff Spector with Bank of America. Please go ahead. Great. Thank you. Appreciate the comments.

Operator

And Jordan, I guess my first question is on your comment around the leasing volume, new tenants over 10,000 square feet. I know when we saw you in March at your office, that was a big emphasis. What's happened there? And what gives you the confidence that that will continue into 2025?

Speaker 2

Well, I can't say that I have confidence that it will continue into 2025. I can say that the kind of the short vision that we have around our pipeline today, that looks good. But what I can say about 2025 and forward is what I said earlier, which is that our role is more forgiving. We are going back to a more typical kind of role that was before the pandemic with a little longer leases and less that we have to as we approach each year, less that we have to deal with. And that makes a big difference in terms of getting positive absorption.

Speaker 2

So that's something we can see, right? Now all we can do is feel the fact that at the moment the pipeline is stronger, but as I said, that is a lot of people working extremely hard and it's the kind of part of it's a reflection of the incredible dominance of our operating platform.

Speaker 10

And

Operator

what industries are driving this leasing? I know you have a lot of exposure to legal financial services and that's been a big boost to New York City. What's happening in your key markets?

Speaker 1

Yes, it was really broad based. We look we have that great pie chart that shows the diversity of our industries with legal and financial services, entertainment, healthcare and we saw good leasing kind of across the board from all our industries.

Operator

Thank you.

Speaker 2

Thanks.

Operator

The next question comes from Steve Sakwa with Evercore. Please go ahead.

Speaker 11

Thanks. I'll probably beat a dead horse here on the leasing front, Jordan. But it was great to see the 350,000 feet in the quarter. And I realized that there were a handful of large deals. I mean, do you feel like that level is sustainable?

Speaker 11

Or do you feel like that kind of just clicked on all cylinders this quarter and things might revert back a little bit? Because it seems like in order to really move occupancy higher, you probably need north of 300,000 feet per quarter of new deals to really sustainably move occupancy up. And so I'm just curious, how many of those larger deals do you have in the pipeline to kind of pull forward each quarter?

Speaker 2

As we sit right now, putting Studio Plaza to the side, because that's going to go out in the Q4, right? So that it would be hard to get positive absorption. As we sit right now, I've already told you what the role going forward looks good to us in terms of being able to achieve positive absorption. And I'm also telling you that I like the look of the pipeline right now. But I really to extrapolate that into a prediction of leasing next year or the next year, I mean, that would be extreme.

Speaker 2

I mean, right now, we had a good quarter, which I think we actually foreshadowed for you guys a little bit on our last call. And then right now, I'm saying I like to look at the pipeline right now. That's the amount I can say. I mean, we'll see. We'll have more information on the next call and then you'll hear some more.

Speaker 11

Okay. And then follow-up, just anything on Barrington Plaza at this point that you can sort of talk about, whether it's the kind of insurance claim or just the overall redevelopment process and kind of where are you in starting that whole project and the timeline would be helpful? Thanks.

Speaker 2

So we're down to I don't I think, never mind, maybe it's like 10% occupied. We went through a battle in the courts. The judge gave us a very clear path for achieving this, which the city wants and everybody wants. So now we are following the path given to us by the judge. I hope that we are kind of through almost everything with regard to plans and all the rest of that and ready to we're on the 5 yard line of pulling permits.

Speaker 2

So we need to get through this last bit of moving this a couple of these last few people. And then I hope to start construction and I think we will in 2025. But it's been a very long road. And with respect to the insurance, I mean, we have an extremely significant claim. And I think it's very honest to say the two sides are in extreme disagreement right now, but I guess that will also get resolved eventually over the next year or 2.

Speaker 11

Okay, great. Thanks for the comments. Thanks.

Operator

The next question comes from Rich Anderson with Wedbush. Please go ahead.

Speaker 12

Thanks, guys.

Speaker 10

So on the idea of sort of feeling confident in executing on external growth in the office space, you said this is your 4th recession. What gives you confidence that actual opportunities will materialize that fit? I mean, do you see a pipeline growing that is the small tenant variety? Or are you confident that you're comfortable to act when that comes, but you don't necessarily see much on the horizon at the moment?

Speaker 2

I think we see a pipeline growing of the type of buildings that we would like to buy. Okay. What is

Speaker 10

is there any reason why they're perhaps taking longer to come to market than those that you described that are of larger lease variety? Or is it just happenstance?

Speaker 2

Well, the larger tenant deals, people brought to market because they were it was the only thing they could bring to market and they were getting very good price per foot. I mean, those larger tenant deals are trading for like $800 over $1,000 a foot. So they're kind of looking around the country and they're going, we can trade out of these things and stable cash flow a long time and they got very, very solid prices. I mean, you would go say they got prices that were could have been a good price even before the pandemic. And so the people that had sort of leasing challenges and all those things, I think, have been hanging out for a long time, waiting to see if there's some kind of recovery, if they get saved and it just takes time for them to get worn out.

Speaker 2

Remember, when you trade out of one of those buildings, it's not like stock. You trade out, you're unlikely to get back in. I mean, we're a very dominant player in these markets, but we there are a couple of other players that are also have much less than us, but they also have portfolios that they're unlikely to do any significant trading on. So it takes a long time to make a decision to sell something like that because it's not you don't say to yourself, let's get out of this now and we'll get back in later. You're probably not getting back in.

Speaker 10

Okay. Okay. And then second question is, just in terms of the year over year growth, obviously, with Studio Plaza coming down or coming out of the system, that creates an earnings growth year over year headwind for you next year. Do you see any path to being able to produce positive FFO growth next year in light of that vacancy? If you moved quickly on it, could it potentially create enough cash flow for you to sort of breakeven from a growth perspective in 2025 or is that too much to ask at this point?

Speaker 2

Well, it's definitely too much to ask me to give guidance on next year's FFO, that's for sure. But I will say this, while we're doing leasing and we're getting some positive absorption in the lease rate, I mean, especially a building like Studio Plaza, which I feel good about, where we're headed and leasing there, we have to still like build up their space, have them move in and start paying rent. So for that in particular, even with very good news around leasing to have it flow all the way through to FFO, that takes some time. But putting that aside, I'm not giving any guidance about where we're headed next year, but we will in our next call be giving exact guidance.

Speaker 10

Miss every shot you don't take. Thanks. Appreciate it.

Speaker 2

That's fine. Thanks.

Operator

The next question comes from Nick Yulico with Scotiabank. Please go ahead.

Speaker 13

Thanks. Yes, just going back to Studio Plaza, can you just explain how this is going to work in terms of the treatment of the building from a if you're taking out of service, I don't know if you're capitalizing pieces of it now going forward, just how we should think about kind of the earnings impact there?

Speaker 2

Okay. So I am going to leave the real technical stuff that Peter and maybe you can talk to him after this. Here is what I could or you could talk now, Peter. But I will say that we are really repositioning that building and I'm talking about across the board, approach, common areas, lobbies, everything to be a multi tenant building. So that's a very big move visavis that building.

Speaker 2

And then at the same time, we're leasing and we're trying to fit we're showing them what we're doing. We're actually doing it, trying to fit the leasing in. So there's a lot there's just a lot going on there that's in process. I don't know if you want to

Speaker 8

get talk about that.

Speaker 4

No, I mean, probably, obviously, the biggest impact is you lose the NOI from Warner Brothers and then you have to build it back up as you move tenants in. And as Jordan said earlier, that process is going to take some time. I mean, obviously, we're going to try to keep the day to day expenses as low as possible and we'll probably capitalize some of the ongoing costs as we until we lease it up fully.

Speaker 13

Okay, great. Thanks. And then second question is just on the swaps, latest thinking there on for the maturities this year and next year, whether you're going to replace those or just deal with some floating rate debt exposure? Thanks.

Speaker 2

Well, we need long the stuff that's coming up in this year and in the next 2 years, there's no reason to swap it. It doesn't do anything. You need some longer term debt to be in a position to swap. And so we're working on that and getting into that position.

Operator

Was there a follow-up, sir?

Speaker 12

No, that's good. Thanks.

Operator

The next question comes from John Kim with BMO Capital Markets. Please go ahead.

Speaker 7

Good morning. I actually have questions on disclosure. So this quarter was very unusual. You had the large Warner Bros. Discovery expiration at the quarter end.

Speaker 7

It didn't show up in your occupancy. It does show up in your short term leases. But assuming that's consistent with how you've done it in the past, how should we think about that short term lease bucket? Like how much of that short term lease bucket are actual vacancies that have occurred at quarter end?

Speaker 13

Hey, John, it's Stuart.

Speaker 1

Yes, so we I'm sorry there's been any confusion around the Warner Brothers. Their lease went through 9:30. So they're still in occupancy as of 9:30. And we could have been maybe more clear that their vacancy started on tenone. So, but our long term policy in regards to that short term bucket is that leases that expire on the last day of the quarter like that move into that short term bucket kind of signaling that they're almost over.

Speaker 1

So they are in the occupancy number as of ninethirty and we moved them into that short term bucket.

Speaker 7

And do you have an estimate like on the short term lease bucket, what percentage of those are actual vacancies?

Speaker 1

No, I don't have an estimate. I can look at that after the call. What's I mean, this happens every quarter. You guys just don't notice it because typically our leases are small, but any leases that expire on that last day of the quarter would be in that bucket. I can go back and look and see what kind of percentage that is.

Operator

Okay. And then, we noticed

Speaker 7

on Page 13 of your supplement, you eliminated the submarket occupancy and rents. It's now kind of consolidated into regions. But I'm wondering why you made that decision? Was it for competitive purposes or just too much of distraction for investors?

Speaker 1

The latter. I mean, we've felt for some time and been saying for some time that because our individual submarkets that that data can be impacted even by a single lease and those markets are pretty small that the confusion and the kind of the time spent focusing on small changes kind of outweigh the benefits of disclosing those markets. So we think about it internally along those three region lines and we thought that was a better way to present it.

Speaker 7

Okay. Thank you.

Operator

The next question comes from Peter Abramowitz with Jefferies. Please go ahead.

Speaker 8

Yes. Thank you for the time. Just wondering if we can get your latest thoughts and sort of how things feel on the ground in terms of leasing from the entertainment industry. Just curious if things are picking up anymore given the challenges over the last year and a half or 2 years or so?

Speaker 1

Yes. When we looked at the Q3 stats, entertainment was kind of there in a typical pace of represented kind of as they normally be in our portfolio. I know there if you go back a ways that entertainment got a little slow there, but I think it's been more normalized recently.

Speaker 8

Okay. And then I noticed there's nothing particularly junky next year, but you do have about 100 and 20,000 square feet in total with UCLA, I believe, next year. So just curious from your early conversations sort of where they stand on those renewals and your thoughts on kind of the chances of keeping them in the same space?

Speaker 1

Yes. UCLA has a number of leases with us. So if you look at that 120,000 feet, it's a lot of smaller leases. And they don't act as they don't act like a large tenant. They act like a bunch of different small tenants.

Speaker 1

So they can be making different decisions on all those spaces. They can literally they've expanded with us in the same quarter they've given back space in other buildings. So you said it right, there's nothing chunky coming up. We have pretty normal roll and actually as Jordan has mentioned, lower roll going forward. But we don't have any no prediction yet from UCLA on how that's all going to shake out.

Operator

The next question comes from Dylan Brzezinski with Green Street. Please go ahead.

Speaker 12

Good afternoon, guys. Thanks for taking the question. I guess just good to hear the comments on leasing picking up and then the pipeline potentially being strong. I mean, I guess, is there certain submarkets where you're seeing outside strength in activity or is it pretty broad based across the portfolio today?

Speaker 1

Yes, it was good broad based activity across the three regions. Nothing that stood out as unusual, but we were happy to see good tenant mix and good region mix in the leasing this quarter.

Speaker 12

And then maybe just one on in terms of acquisition opportunities. Obviously, things are still tough out there in order to put capital to work today. But I guess just looking at your guys' JV funds platform, I mean, is there any appetite for your current partners sell interest to you guys? Or is that sort of a nonstarter today?

Speaker 5

They're

Speaker 2

buyers. They're full on buyers.

Speaker 12

Great. Thanks, guys.

Operator

The next question comes from Upal Rana with KeyBanc. Please go ahead.

Speaker 14

Thanks. This is Gabby on for Upal. It appears multifamily is performing better than anticipated. So are you able to provide some color on what's driving that? And then you've touched on this in past quarters, but do you see any potential opportunities for any more office to residential conversions where it would make sense to pursue?

Speaker 2

Well, I can't I don't know what to say about the multifamily. Our multifamily has been it's just such a strong performer all the time and it's continued to be a strong performer. So nothing about its performance has surprised me. We have incredible long term CAGR on that portfolio in terms of growth. In terms of the conversions, you really needed a proper mix of very high residential rent rates, low office rates, low value for the buildings and it worked in Hawaii, no doubt about it, that worked in Hawaii.

Speaker 2

But it is in the markets we're in, we're in pretty strong office. I mean, I know right now people aren't happy about what's going on in the office world, but we're in pretty strong office markets. They don't really get any new competition from new supply. We have a lot of really strong industries driving demand. So values hold up quite well and rents hold up quite well, making it extremely difficult to justify spending the whatever it is, dollars 500 foot or $600 a foot on top of whatever you think the value of the building is today to convert it, you have to get extraordinary residential rates.

Speaker 2

I mean, there are circumstances that could occur to try and make that happen, but it's just really rare. We had that circumstance in Hawaii. We had very, very strong residential and very weak office. And then once we took that building out, even office rents went way up and they're still moving at a good clip because another lady is doing it with 2 other another developer is doing it with 2 other buildings. But I don't think that's I think that's going to be more rare here in the markets that we're in here in LA.

Speaker 14

Okay. That's helpful. That's it for me. Thank you for the time.

Speaker 2

Thanks.

Operator

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

Speaker 2

Well, thank you all for joining us, and we look forward to speaking with you again next quarter. Goodbye.

Operator

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

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Earnings Conference Call
Douglas Emmett Q3 2024
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