Good day, everyone. And welcome to the Douglas Emmett Second Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Stuart McElhinney. Please go ahead, sir.

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.

Good morning, everyone. Thank you for joining us. During the second quarter, we signed a record 253 office leases, covering an all-time high of 1.3 million square feet. That included our second highest quarter of new leasing since becoming a public company and a substantial increase in the average tenant size. As expected, even record leasing was not enough to completely offset our abnormally high lease expirations during the quarter. So we still had a slight decline in our leased rate. In addition, as it takes time for new tenants to move in, our lease to occupied spread is at its highest point in many years. Happily, we are once again recording straight-line rent roll-off and are continuing to see substantial savings in our re-tenanting costs. While our leasing pipeline remains healthy, we still face headwinds from our local government’s response to the pandemic. Los Angeles has extended its lease enforcement moratorium until September 30th and has returned to a mask mandate, despite our submarkets vaccination rate of approximately 80% for people over 16 and over 65% for teens. Even with the moratorium extension, we have made additional progress collecting past due balances, still without giving any meaningful rent forgiveness. Our aggregate rent collections for the five quarters affected by the pandemic is now 95%, including 96% of our residential rent, 96% of our office rent and 63% of our retail rent. The next few quarters may be choppy depending on the course of the pandemic and the timing of the expiration of moratoriums. As I have said, we expect to collect much of our remaining unpaid rent once the moratoriums expire, although those collections will be spread over a number of quarters. In addition, some tenants who have not been paying rent during the moratoriums will move out once we can enforce their leases, though, we do not expect the impact on our occupancy to be meaningful. Once the turbulence moves out, I am excited about our future. We are emerging from this downturn as a stronger and more efficient company. For example, I am confident that our new seamless leasing platform, as well as the diversity and strength of our markets resulted in this quarter’s record leasing volume. I will now turn the call over to Kevin, who will give you an update on our development efforts and recent balance sheet activity. Kevin?

Thanks, Jordan, and good morning, everyone. Our two multifamily development projects continue to progress nicely. We have leased all of 174 apartments we completed at 1132 Bishop, our 493 unit Downtown Honolulu office to residential conversion. Our Brentwood apartment tower is ahead of schedule as we now expect to deliver our first units in fourth quarter 2021. We plan to begin pre-leasing units in the coming months. During the quarter, we closed a new secured non-recourse $300 million interest only term loan that matures in May 2028. The loan bears an interest at LIBOR + 1.40%, which we have effectively fixed at 2.21% until June 2026. The loan is secured by three previously unencumbered office properties. We used $175 million of proceeds to pay off our revolving credit facility balance. This new loan lowered our weighted average fixed interest rate to only 2.94%. We still have no debt maturities before 2023 and 46% of our office portfolio remains unencumbered. Given the current attractive interest rates, we continue to pursue opportunities to lower our average rate and further ladder out our debt maturities. As I have discussed in prior quarters, although property sales in our markets remain slow, we have ample liquidity for acquisitions as they become available. I will now turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. In Q2, we signed 253 office leases covering a record 1.3 million square feet. We signed 451,000 square feet of new leases and 846,000 square feet of renewal leases. Our leasing recovery was initially led by smaller tenants, but in the second quarter we saw progress with medium and large tenants. Indeed, the average lease signed in Q2 increased to 5,100 square feet, which is not only about the last few quarters but also exceeds our long-term average. As we wait for tenants to move in, our record leasing activity have increased the spread between our leased and occupied rate to 250 basis points. Our leasing spreads during the second quarter improved to 0.95% for straight-line and negative 6.6% for cash. Our net effective rents continue to benefit from lower leasing costs, which declined again in Q2 to their lowest level in almost a decade. At 99.4% leased, our multifamily portfolio is essentially full, with rents now increasing across all of our residential submarkets. With that, I will turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning everyone. Turning to our results, compared to the second quarter of 2020, FFO increased 14.3% to $0.47 per share, AFFO declined 3.3% to $77.9 million and same property cash NOI increased by 0.7%. Compared to the first quarter of 2021, FFO per share increased by $0.03, primarily due to better rent collections and about $0.01 per share of higher business interruption insurance recoveries. It’s worth noting that only 1.2% of our revenue came from non-cash straight-line rent and above and below market lease adjustments. The decline in AFFO this quarter was due to higher TIs and leasing commissions driven by the strong leasing volume in the last couple of quarters. And that only 4.2% of revenues, our G&A for the second quarter remains well below that of our benchmark group. Turning to guidance, we expect third quarter FFO per share to be between $0.44 and $0.46. This reflects the usual higher seasonal utility expenses, as well as additional interest expense from our new loan, lower office occupancy and lower business interruption insurance recoveries. We are not comfortable giving guidance for the fourth quarter, as our results will depend on the course of the pandemic and the timing and immediate impact of the expiration of the moratoriums. As usual, this guidance does not assume the impact of future acquisitions, dispositions, financings or property damage recoveries. I will now turn the call over to the Operator, so we can take your questions.

Thank you. [Operator Instructions] Our first question today will come from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Hey there. This is Ardie Kamran on for Craig. I appreciate the color on the rent collections. But can you guys give an update on the cash rents outstanding on kind of a nominal dollar basis? I know the last quarter you mentioned, it was closer to the $60 million to $70 million range, but where does that kind of stand today and as you guys continue to make deals with tenants, can you talk about what these deals look like in terms of timing and term of repayment?

Yeah. So, well, depending on where you are in the month, because that number rises a little bit, but if you go to the middle of the month, you are in the 50s. The number moves 50 to 60, like you ask me how much cash, like we snapped our fingers, we would collect, if the moratoriums were off and everyone paid what they owed. The -- in terms of the deals that are being made, basically people are making early deals to be able to extend their payments over more than three months or six months. But four quarters, five quarters, six quarters, whatever the case may be and they are also maybe extending leases or doing something else or putting interest on it, doing something to give us some benefit for being willing to do that.

Great. Thanks. And just on the leasing front, you guys did a nice job in the second quarter. Can you comment on kind of how that momentum has continued into the third quarter given some of the recent COVID-related rollbacks? And on the occupancy front, how should we think about occupancy, you guys mentioned the spread, so it seems like you are going to get a little bit of a pickup in occupancy? But how should we kind of think about that through the remaining of the year and how are you guys kind of underwriting the bottom in occupancy?

Well, I -- obviously, I started out my remarks talking about the leasing, because I felt like over the last, I don’t know whatever it’s been, five quarters of the pandemic, people have questioning the strength of the market, market coming back or tenants coming back or only small guys coming back or big guys coming back. Well, this -- if there was ever a question about the pulse of the market, I mean, the market performing like an Olympic athlete, I mean, I was really impressed. And that’s aside from our platform and how well the platform is able to take advantage of that now. So, I am really happy about that. In terms of moving forward, obviously, we got some better quarters coming, because we don’t have as much move out in the next few quarters and we are hopeful that we can turn things. Well, what was your second question?

Just kind of thinking about, so you kind of mentioned that less move-outs, but like thinking about kind of how leasing has picked up in the last quarter-to-date, given how things have kind of rolled back. I mean, have you noticed any sort of...

Yeah.

...impact?

Well, they will be in -- yeah. If COVID heats up again, I am sure there’s going to be an impact. But it’s kind of interesting and back to your question on collections, but that people are just sort of adjusting even to the moratorium being extended and whether the mask mandate’s back on, people want to get back so badly that as you have already heard, I mean, they are making deals. I think we have now made deals on something in the range of 25% plus of what was owed to us in the past, which is all in the face of moratoriums being extended though, I think people are realizing that the end is coming and they want to get back.

Got it. And just last one for me, can you guys talk about kind of the biggest pain points for tenants who have been leaving the portfolio and as you guys are kind of thinking about the leverage you can pull between rents or occupancy and retention and lease term kind of how you guys are thinking about that in your leasing process moving forward?

Well, the difference between leased and occupied is almost totally a function of how much we do in the way of new deals. This was a huge new deal quarter. So when you do a ton of new deals, you are going to have a much bigger spread as compared to renewals between leased and occupied because they have to move in. I -- we got this -- I’d like to leave some questions for some other people. So let’s keep moving. You had a good list -- good run here. Let’s move on from here. But thank you for asking all those questions.

And our next question will come from Elvis Rodriguez with Bank of America. Please go ahead.

Hey, guys. Nice job on the leasing and thanks for taking the questions. Are you -- Jordan, are you going to share what your portfolio cash mark-to-market is today relative to where it’s been in recent months?

Yeah.

Yeah, Elvis. So today it’s slightly positive around -- it’s around 1% for the overall portfolio. That’s stronger in our Honolulu and Westside markets, and softer in the Valley, as you might imagine, so still slightly positive.

Great. And then, on your Brentwood apartment project, are you able to share where market rents are today versus your underwriting and your expectation for the lease-up of that project?

Well, I wouldn’t say, I mean, we don’t go into individual buildings, so that I wouldn’t say that. I would say, in general, the apartment portfolio is seeing real increases in rents and you see that in the numbers that we present you with, the same-store numbers and you can see it in all kinds of studies about what’s happening in the residential market rents in all of our markets, both in LA and in Honolulu.

Great. I will leave some more questions for the others. Thanks.

Thanks.

And our next question will come from Manny Korchman with Citi. Please go ahead.

Hey, everyone. This is a Parker Decraene on for Manny. Thanks for taking the question. My first one is just…

Hi, Parker.

… about the Macerich lease that appeared on your guidance as the largest tenant schedule. I think that there’s some space in the building that is currently out on sub-lease that’s a little bit lower than what Macerich is currently paying. I was just wondering if you guys can talk about a potential rent roll down, as well as just your thoughts on whether that space is comparable to Macerich just overall?

I don’t even know the sub-lease space you are talking about and we don’t talk about individual leases. Although, of course, just the sort of the tide going out has caused the Macerich lease to show up on that schedule, if you go back a ways it was on the schedule and then as we leased up and fell off schedule, now it’s come back on. But I don’t have a lot of comments about the Macerich lease in particular.

Okay. Yeah. That’s fine. I guess and then my second question is just about any differences that you guys saw from an industry perspective that came through in leasing activity this quarter just with it increasing so much?

No. I think we still had great demand across our broad set of industries, which is what we love so much about these markets since we do have such a diverse group here and we did see that show up in Q2, no real trends to read through. Although, the one trend that was notable was the one I mentioned in my prepared remarks, which is we did see the average size increase significantly, so the larger tenants and the median tenant for us were in fact transacting in Q2, which was great to see.

Okay. Thanks that’s all for me.

Thanks.

And our next question will come from Steve Sakwa with Evercore ISI. Please go ahead.

Hi. I guess still good morning out there. Jordan, I was just wondering if you could talk a little bit about the new leasing activity. I am just curious were these tenants that were working from home and decided to take space now or these tenants that just had outgrown their old space and needed to move? Just trying to get a better sense for kind of the big surge in new activity and maybe how the footprints of the 450,000 compare to what they were in prior?

Well, I can tell you that big tenants are coming back and they are grabbing space and the size differentiation makes it different. I will tell -- I myself was stunned by how much new leasing we did of over 450,000 -- I think it was 450,000 feet, that’s wild. I was so happy and impressed both that we were able to do that much. And I will say again, I credit the platform for even be able to process 250 deals in a quarter and get them closed, and reach out and getting all those tenants and including some larger deals. But I also credit that the market is moving back in terms of wanting to get back in this space in a very aggressive way. Now will this continue and I know there was another question about that, because we seemed to be going in the wrong way vis-à-vis the pandemic right now. But the fact that the market has got that sort of pent-up growth or pent-up demand really made me extremely happy. The nature of the tenants was across all industries. Certainly, you saw more strength in the areas that we have always told you we are strong. I mean Hawaii, since we have made our change, Hawaii stayed strong and it’s still strong, but of course, West LA and a lot of activity among Ventura Boulevard in the Valley. But all the way through though tenant size, industry all the cuts all came in very well.

Great. Thanks. And then maybe second, I just wanted to follow up a little bit on the apartment question. We are seeing a pretty big rebound in many of the coastal markets, obviously, at full occupancy at 99.4%, so I am not going to fill that up much more. But can you maybe just expound a little bit on the types of rent increases that you are kind of putting through to existing tenants in the current portfolio today or how are the renewal discussions going with folks?

Yeah. I think we were super pleased to see great activity in the resi portfolio this quarter. Like you said, occupancy has remained strong. We are getting good roll ups. You saw 4% increase in revenues, our average in-place rents are up. So, good news across the board and activity remained strong.

Thanks. That’s it for me.

Thanks, Steve.

And our next question will come from Daniel Santos with Piper Sandler. Please go ahead.

Hey. Thanks for taking my question. My first one is on the eviction moratorium extension and whether or not you think that might impact deal flow going into the second half of the year. I’d say prior to this all signs pointed to a pretty busy second half. So I am wondering if your view on that might have changed?

Well, my first view was it was supposed to end June 30th, so that changed my view when they extend it, I can tell you that. But I think what’s happening is the eviction moratorium is still certainly impacting us, definitely impacting us from the perspecting of collecting rent. I think we have some people, as I said before, that aren’t paying and they will move out. I don’t think there’s enough of that that it will show up in any meaningful occupancy statistics, but it will like give us that space to lease which we have been waiting to get back. The -- I think it’s -- I don’t think it’s per se what’s gating the market is eviction moratoriums. I think what’s gating the market is just the whole COVID and going back to mask and then everyone wearing a mask, even you are vaccinated inside and all of that. That’s more of the types of headwinds that push against us. The eviction moratorium just impacts us vis-à-vis rent collection. As you may not realize, if someone signed something now during the pandemic even during the moratorium, that’s enforceable. So all the new leases, they are not -- they don’t have eviction moratorium. It’s only from leases prior to the pandemic.

Got it. That’s helpful. And then I was wondering if you could comment on activity up in the Valley, from our conversations with other management teams, it seems like the market is particularly strong?

Yeah. We had really good activity, as Jordan mentioned, on Ventura Boulevard and through the Valley. So that’s always been a strong market for us. Sherman Oaks/Encino, we have kind of grouped that in with the core Westside markets and so great to see tenants coming back there and some larger deals in that market.

Perfect. Thanks.

Thanks

And our next question will come from Rich Anderson with SMBC. Please go ahead.

Thanks. Good morning. So, do you guys, I guess, I will ask one question two ways. First of all, do you have a retention rate that you are working towards in the office space, and more abstractly, when you are having conversations, are people changing their plans in any meaningful way about how much space they want to keep if their lease comes due? I am just curious if you can speak kind of quantitatively and qualitatively about the leasing experience when you are renewing a lease.

Sure. So in terms of the retention rate, I think, what we have discovered over the last 30 years or whatever is that, even though we target higher retention and I have actually seen Ken. We -- the retention rate seems to be extremely stuck at an average of 69%, fixed between 69% and 70%. And I have seen Ken go all out and try and move that number even like 2% and it is just very hard. Now, it doesn’t go down. I mean, that just seems to be the number. I don’t know what all the forces hitting it are, but that seems to be not in any particular quarter, but if you go over a series of quarters, you just keep landing around that number. So I think that that’s probably our target and what you should expect all at the same time. What was your second question?

So like when you are having -- doing a deal, do you consider a tenant retained if they go from 5,000 square feet to 3,000 square feet or is your retention rate based on a square feet or based on the actual just the tenant staying or leaving?

So it would be 3,000 foot retention instead of 5,000.

Okay. So -- okay, so it’s on a square foot basis. So are you saying then that people are not readjusting downward much, they are either making a decision of...

I -- yeah. I think that we -- I mean, we have done a lot of questions trying to understand the psychology or the reasoning behind my tenants who are leasing or not leasing or this or that. And I don’t know that we could ever give like a summary of that. I hear anecdotal stuff but I am really not anxious to just give like one or two anecdotal stories and have everyone run away and go. That’s the reason people are now taking space again. I --so I think there’s all types of reasons, but for the most part, I just think that the economy is coming back and people want to come back into work.

And Rich, I talked I think a little bit about this on the last call. But as far as the way we are planning our space in our program, which has been great for us and will continue to generate outside business on the new leasing front. That’s in our kind of 2,000 square foot sweet spot in that range, 2,500 feet where we do a ton of leasing and we have not changed the way we are laying out that space. It already provides good to call it 225 feet a person, which we find still works -- worked well for us for a long time and continued to work really well.

Okay. And then real quickly, of the $50 million to $60 million rents that are still kind of outstanding, how much of that is in retail utilization or is that just office?

There’s -- so compared to our company, it’s over-weighted in retail.

Okay.

Well, you have it -- I mean, right, we are telling you, 96% collection office, 96% collection resi and 65% retail. So retail is representing too much of that number, more than its fair share.

Yeah. I know I have the dumb question, because you said that, but I guess my thought was, when you said people might leave once the moratorium ends, are you kind of most worry about that in the retail part of the portfolio?

I am not most worried about that in any of the sections. I would say I don’t expect a lot of that. Actually, the areas where, and I will say this again, anecdotally, I am hearing that is in residential, not necessarily in retail or office. When I read the list of everyone, well, more often, in residential, I will see something that says, when the moratoriums over this tends to kind of just move out and this is unlikely to be collectible, I see that on the list.

Okay. Got it. Thanks very much. Appreciate it.

Thanks.

And our next question will come from Frank Lee with BMO. Please go ahead.

Hi. Good morning, everyone.

Hi, Lee.

If we look at the average lease term on the leases signed in the quarter, looks like the term’s over five years now versus three and a half or so in the past couple of quarters. Do you get the sense that tenants are willing to commit to moratorium now that reopening plans are in motion or was there anything unusual in the quarter?

Frank, I think, mostly what that had to deal with was the larger leases that we signed. So larger tenants tend to sign longer term deals and you saw that I mentioned the average lease size was way up this quarter and that was really the driving factor to increase the average term of the leases that you saw.

Okay. Thanks. And then you provided the remaining spend for the multifamily developments in the south this quarter. Just wondering if there are any changes to the total cost or are the construction costs still tracking within the initial budget range?

I think that things are still tracking. We have got a lot of questions from people about what’s our remaining spend. I know that at the Landmark project, we have increased our spend and I don’t think it’s -- I mean within 10% for sure, because we are trying to move a little quicker. I don’t know, nobody asked a question, nobody notice that. We had originally planned to start leasing next year. We have accelerated things, that hasn’t been a cheap process, especially with the kind of supply chain crush and so we have been willing to spend money to get open and be leasing this year. But beyond that, I feel pretty good about where we are coming in and I feel very good actually about where we are coming in on both projects.

Okay, guys. Thank you.

Thanks.

And our next question will come from Bill Crow with Raymond James. Please go ahead.

Thanks. Good morning. On the commercial leases signed during the quarter, have you seen any increase in the tenants relocating from downtown, maybe any sense of how many of those new move-ins are coming from larger spaces?

Well, again, we certainly saw a lot of large tenant activity this quarter, which we hadn’t seen kind of throughout the pandemic. We had been relying on very small tenants. I think our average tenant size a couple of quarters ago was only 3,100 feet and it was up to 5,100 feet in Q2. So, certainly larger tenant showed up. Your first comment about relocations from downtown, I don’t know that we ever draw tenants from downtown. It’s not something I ever hear from our leasing guys.

Yeah. I haven’t -- I agree, I haven’t seen us trade with downtown much.

Yeah. That’s not a typical move. If you are on the Westside, if you live on the Westside near our submarkets, you have got a long commute downtown. So most folks tend to want to keep a short commute and they are somewhere in and around our submarkets and maybe they are moving between submarkets on the Westside or between buildings that we don’t own and the buildings we do own. But I don’t -- it’s almost like newsworthy to hear something going...

Yeah.

...especially newsworthy for someone to go from the Westside to downtown, but I don’t think we trade often between those markets.

Yeah. Okay. And we are seeing in other markets where as workers are working part time from home a little bit of a shift in the location of office space. But, Jordan, how politically...

I think, Bill, we might see that -- we may see that headed out toward a center. We have got guys that commute in from those areas into the Westside and we have seen that in the past where people will open satellite offices out towards Warner Center and the Valley to shorten their commute up that way. So that’s something we are looking for.

And I think that, by the way, I know I have been reading those same articles that you are talking about. And frankly, I think, the Westside went through that sometime in the 1980s or something, when the traffic was so bad to get downtown that people just insisted on having their office space closer to their homes and that’s what really created the Westside.

Yeah. Interesting. Jordan, how politically difficult is it going to be to actually evict residential tenants? I mean, even though you have all the right to, once the moratorium ends, how tough is that going to be from a PR perspective?

I don’t think we are going to have very many tenants we are going to need to evict. I mean, first of all, only 4% is not paying, I think most of them are going to pay. I mean, so you are talking about numbers that could be as small as single digits or 10, 20. I mean it’s not a lot.

Yeah.

I mean…

Most of that’s in rent-controlled spots. Is that fair?

Not necessary.

No. I don’t think so. I mean, I think, what -- I mean, the ones I saw wasn’t rent controlled people businesses and stuff, not rent control actually renting pretty nice places that then something happened with their business or they played games and the games turned into -- we don’t even know if there’s any more but we can’t get the space back.

Yeah. All right. Appreciate the insights.

All right.

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Jordan Kaplan for any closing remarks.

Well, thank you all for joining us and we will speak with you again next quarter.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.