Douglas Emmett, Inc. (NYSE:DEI) Q4 2023 Earnings Call Transcript February 7, 2024
Douglas Emmett, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 Instructions] I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
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. In 2023, higher interest rates fueled recession fears. As a result, tenants became more cautious, office leasing slowed and our leasing gains immediately following the pandemic were reversed. Our office occupancy declined, but large fixed rent increases, stable rental rates and low concessions in our markets mitigated the impact on revenue. Interestingly, remote work does not seem to have meaningfully reduced demand from our tenants. In addition, due to our typical five year lease terms, more than two thirds of our current leases were actually signed after the pandemic began. As Peter will tell you, our 2024 guidance anticipates lower FFO as a result of vacating the Barrington Plaza Apartments, the expiration of one large lease and higher interest costs.
Our guidance does not take into account any significant recovery in leasing demand, even though we see the potential for that as tenant confidence increases. I am pleased that shortly after quarter end, one of our largest tenants signed an early renewal for 250,000 square feet. We continue to grow our residential portfolio. We have added almost 1,300 apartments over the last five years in our strongest markets. Despite removing Barrington Plaza from the market, our residential portfolio now provides almost 20% of our rental revenue. In addition, we have not experienced the residential building boom seen in other major markets, so our apartments remain fully leased. That said, the rapid rent growth during the pandemic seems to be normalizing.
There are challenges and opportunities ahead. We are prepared for both as I am confident in the long-term prospects of our markets. Our supply demand dynamic is among the best in the U.S. Our submarkets are vibrant, and our office tenants have overwhelmingly returned to work. We have significant cash on hand, meaningful free cash flow, no corporate level debt and almost half of our office properties remain unencumbered. With that, I will turn the call over to Kevin.
Aerial view of the modern office buildings of a prominent real estate investment trust in Los Angeles, California.
Kevin Crummy: Thanks, Jordan. And good morning, everyone. I would just like to take a moment to mention that we have completed the lease-up of our 376-unit Landmark L.A. property in Brentwood. At our office-to-residential conversion in Honolulu, we finished the conversion of another office floor and as expected, the 22 new apartments are leasing quickly. As the remaining two office force vacate over the next few years, we will add the final 47 units to complete that project. Otherwise, our cash and strong JV relationships position us to take advantage of new opportunities in our markets and we’re focused on finding those opportunities in both residential and office. Stuart?
Stuart McElhinney: Thanks, Kevin. Good morning, everyone. For all of 2023, we signed 872 office leases totaling 3.2 million square feet for an average of 800,000 square feet per quarter. During the fourth quarter, we signed 202 office leases covering 710,000 square feet, including 243,000 square feet of new leases and 467,000 square feet of renewal leases. These results do not include the 250,000 square foot renewal in Beverly Hills, signed after quarter end, extending the term for ten years through 2037. The overall value of new leases we signed in the quarter increased by 4.3%. Cash spreads were down 6.1%, reflecting the strong annual rent increases built into our leases. At an average of only $5.86 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 properties continued to perform well during the fourth quarter, ending the year at 98.5% leased. 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 2022, revenue increased by 2%, partly from higher multifamily revenues and ground rent. During the fourth quarter, we prevailed in a ground rent reset arbitration on land that we own. The result was a onetime payment of accumulated back rent of approximately $5.5 million. And going forward, there will be approximately $1 million of additional, annual rent. FFO decreased by 12%, $0.46 per share, primarily as a result of higher interest expense. AFFO decreased 8.1% to $74.6 million. And same-property cash NOI decreased by 1.1%, driven by a comparison to a strong prior period that benefited from onetime tax refunds on a residential portfolio.
Adjusting for those items, residential cash same-property NOI would have been positive 3.3% and overall cash NOI growth would have been negative 0.6%. Our G&A remains very low relative to our benchmark group at only 5.6% of revenue. Turning to guidance, for 2024, we expect FFO per share to be between $1.64 and $1.70, reflecting the expected move out of one large tenant in Burbank, the removal of Barrington Plaza from the rental market, higher interest costs and modest leasing assumptions. 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 acquisitions, dispositions or financings. 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. [Operator Instructions] The first question comes from Blaine Heck with Wells Fargo. Please go ahead.
