Douglas Emmett Inc Q1 FY2025 earnings call

Management Statement and Operational Highlights

• Leasing Success: Achieved positive absorption across the total office portfolio, signed over 300,000 square feet of new leases, with new leasing to tenants over 10,000 square feet well above historical averages.
• Studio Plaza Conversion: Leasing there is well above expectations, and remodel work on the common areas will be done later this year.
• Residential Redevelopment: Barrington Plaza residential redevelopment is on track, and a new residential building at the recently acquired Westwood property is expected to cost approximately $150 million to $200 million over a three to four year period.
• Debt Refinancing: Closed a non-recourse interest-only $127.2 million loan secured by a residential property and refinanced a $335 million secured office loan with an effective fixed interest rate of 4.57%.
• FFO Restoration: Working on four avenues to restore and exceed prepandemic FFO: leasing up the existing office portfolio, redeveloping Barrington Plaza, converting Studio Plaza, and acquiring additional office and residential properties.

Segment Performance

• Office Portfolio: In Q1 2025, leasing was successful with over 300,000 square feet of new leases and positive absorption across the total office portfolio. Class A office portfolio maintained stable in-place and asking rental rates. Studio Plaza conversion to multi-tenant office building is above expectations, and there are below average office expirations in 2025 and 2026.
• Multifamily Portfolio: Enjoyed very full occupancy and robust revenue growth, with high-end residential communities in coastal submarkets appealing and strong demand.

Guidance

• Net Income: Expect 2025 net income per common share diluted to be between $0.07 and $0.13.
• FFO: Expect FFO per fully diluted share to be between $1.42 and $1.48.
• Debt Cost: Anticipate cost of debt to increase between 100 and 200 basis points from the pre-COVID average of 3%.

Risks

• Economic Volatility: National policy volatility could pose challenges to office leasing and potentially tip the economy into a recession.
• Interest Rates: Higher interest rates are a drag on income, and the impact of refinancing on the cost of debt is a concern.
• Market Uncertainty: Potential tenant fallout or leasing deals falling out from import/export related businesses, and the risk of stagflation or recession.

Question and Answer

Q: Could you provide more color on leasing with larger tenants and smalls?

A: Good demand across all industries, over 10,000 sq ft leasing was strong last quarter with diverse industries involved like legal, real estate, fitness.

Q: What are the pricing trends in multifamily?

A: Asking rents unchanged, very full occupancy with people frequently calling to get into the properties.

Q: How is leasing progress at Studio Plaza?

A: Leasing is surpassing expectations, the team is doing well, and remodel work on common areas will finish later this year.

Q: What is the timing for the Westwood development?

A: Already working on plans, with a timeline of 3-4 years for completion if entitlements go well.

Q: How to think about absorption and spread performance?

A: Leasing velocity exceeded expectations, cash re-leasing spread was down 12% but straight line spreads are still positive.

Q: Future acquisitions and partners?

A: Focus on the office side, partners are intrigued by opportunities, and JV is considered for acquisitions.