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. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
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. Thank you. I will now turn the call over to Jordan.
Good morning, everyone. Thank you for joining us. We continue to recover from the impacts of the pandemic. In 2021, we leased more office space than in any prior year, with strong tenant retention above 70%. In addition, we kept our lease transaction costs meaningfully below our pre-pandemic averages. Our multi-family properties are fully leased, with average rent roll up this quarter in excess of 8% across our portfolio. We completed construction of our 376-unit residential high rise in Brentwood and delivered 101 new apartment units last year at our conversion project in Honolulu. Leasing at each project has exceeded our expectations. In 2021, we completed over $1.3 billion in financing transactions. Our average interest rate is now only 2.89%, and our next maturity is not until December 2024.
We continue to convert non-cash to cash revenue. During 2021, our cash revenue represented over 99% of our total revenue. We estimate our office utilization at 70%. Despite lingering uncertainty around COVID, I remain optimistic about our improving fundamentals and our development pipeline that Kevin will discuss in more detail. Kevin.
Thanks, Jordan, and good morning, everyone. As Jordan mentioned, we are excited to report that we have completed construction of Landmark Los Angeles, our 376 unit Brentwood residential tower. This is the first new residential high-rise development west of the 405 freeway in more than 40 years, offering stunning ocean views and luxury amenities. We have already pre-leased just under 100 units and expect tenants to move in over the next month. At 1132 Bishop, our downtown Honolulu office to residential conversion, we have completed all our common areas and amenities and approximately half of our planned 493 units. The remainder of the units will be constructed in phases as office tenants move out. Given our progress at these two properties, we are focused on our next development projects.
As we have mentioned in the past, we own a number of sites in Los Angeles and Honolulu that accommodate new ground-up residential development, and we would expect to continue to finance our new development primarily through our excess operating cash flow. In addition, we continue to modernize and upgrade our portfolio through asset repositionings. In 2021, our repositioning program focused on two office buildings and two residential properties. In 2022, we plan to start repositioning an additional three office buildings. During the fourth quarter, we refinanced another $300 million of debt. The new secured non-recourse interest-only term loan matures in January 2029, with interest effectively fixed at 2.66%. Our overall portfolio weighted average interest rate is fixed at only 2.89%, and we have no outstanding debt maturing for nearly three years.
Although property sales in our markets remain slow, I am hopeful that 2022 will bring more transactions to the market. Our access to liquidity remains excellent, with over $330 million of cash on our balance sheet, nothing drawn on our credit line, good cash flow after dividends, strong JV relationships, low leverage, and approximately half of our office properties unencumbered. Stuart?
Thanks, Kevin. Good morning, everyone. We continue to see good leasing demand from the diverse set of industries in our markets. In Q4, we signed 216 office leases covering 858,000 sq ft, consisting of 254,000 sq ft of new leases and 604,000 sq ft of renewal leases. For all of 2021, we signed 910 office leases covering 3.7 million sq ft, including 1.2 million sq ft of new leases and 2.5 million sq ft of renewals. That is our highest leasing volume since becoming a public company. Our leasing spreads during the fourth quarter were +3.5% for straight line and -9.7% for cash.
We are focused on recovering occupancy at this point in the cycle and expect rent spreads to remain choppy until our lease rate climbs back near 90% with an upward trend. Our leasing costs this quarter were $5.03 per sq ft per year, in line with our recent trends and well below our benchmark group average. Turning to multifamily, our portfolio remains essentially full at 99.3% leased. We saw further strengthening in rents during Q4, with average rent roll-ups for new tenants over 8%. With that, I'll turn the call over to Peter to discuss our results.
Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the fourth quarter of 2020, revenues increased by 10.9%. FFO increased by 5.3% to $0.48 per share. AFFO increased 20.1% to $91.3 million. Same property cash NOI increased by 19.1%. Our G&A remains very low relative to our benchmark group at only 5% of revenues. As we see promising signs of the pandemic abating, we are resuming full year guidance. For 2022, we expect FFO to be between $2.01 and $2.07 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 acquisitions, dispositions, or financings.
I will now turn the call over to the operator, so we can take your questions.
Thank you. We will pause here briefly as questions are registered. Our first question comes from Alexander Goldfarb with Piper Sandler. Alexander, your line is now open.
Oh, great. Hey, morning out there.
Hey, Alex.
Hey, how are you? Sorry, I've been busy earnings day. So two questions. The first question, big picture is, if you look in Southern California, this apartment earnings season, the rent growth rebound has been phenomenal. All the apartment REITs have spoken about the amount of demand that's gotten to the apartments, the amount that content is driving, you know, employment in L.A. When we look at your leasing, you guys have been phenomenal on the leasing, but it's still like a treadmill. I guess the question is there a read-through between the strong apartment results and the strong, you know, employment that's driving that that we should start to see that translate to, you know, positive absorption in the next few quarters?
You would say, "Hey, while the two logically would seem to be tied in this case, there's not necessarily that direct correlation.
Population definitely correlates to more multifamily real estate, so that's simply said. I think we are seeing, you know, you've seen our leasing has been recovering for a while now. I mean, if you think about it, we lost 6%, 600 basis points during this entire sort of COVID recession. 500 basis points of it was in 2020 basis points. Over 80 basis points, you know, 86 basis points or 90 basis point of it was in the first quarter. Then the following three quarters of last year, we pretty much broke even with the last two quarters being positive. I think we're already seeing that office, at least on the leasing front recovery. Now, you already know that we've told you that we think the utilization's way up.
I mean, maybe it's 'cause of the if you're around the residential leasing, it certainly has been spectacular.
Okay. It sounds like that what you just described sounds like we should expect this trend to continue and we should see you guys gain traction. You know, that positive absorption on the lease rate translates to occupancy growing, as we go on over the course of this year.
Yeah. I mean, when you're talking about a subject like this, should and hope kind of go together, but yeah, I probably agree with you.
The next question is, you announced in the press release about starting next three batch of buildings on the rehab program. Historically, you know, you've discussed that you only do that when you view that you can get rent that's commensurate with the spending. You know, you guys don't really have competitive supply that's, you know, there's probably less defensive CapEx. Is the read-through from that that you think that rent growth is coming, so by the time that these upgrades deliver, rents will be, you know, higher?
Is part of this just defensive just to encourage tenants to come back to the office and make sure that they aren't relocating to other parts of the West Side? I don't know, maybe down to Marina del Rey or Playa Vista or other places?
Well, there are two things there. Number one, let me just say, I definitely think we'll recover our occupancy, get back in the 90s, and you'll see meaningful rent growth. That, that's 100% I think that's happening. Now, separately, when you say, "Does redoing the buildings, does that mean we think we'll get rent growth?" It's not rent growth, it's that I think we'll get a marginal as compared to them not being done. I think we'll get higher rent in that building as a result of redoing that building. That's not a statement about rent growth across the whole community. That's just a statement that I think that when we spend this money to redo the building, we're gonna get such and such more per foot in rent, and that justifies that money being spent. I definitely still feel that way.
I think that the you know, the segregation of the nicer to medium to low-end buildings and the difference in rents that you get is just getting. That gap's just even gapping out more. So it's really well-spent money, and we're experiencing that we're getting much higher returns when we do that. Just putting that aside, I have absolutely no doubt in my mind that we will recover the occupancy that we lost during the pandemic and that we will see rent recover with that process, especially once, as Stuart said, once we get back to approaching that 90% number, I think it'll recover smartly.
Okay. Thank you, Jordan.
Thanks.
Thank you, Alexander. Our next question comes from Craig Mailman with KeyBanc Capital Markets. Craig, your line is now open.
Hey, guys. Maybe just to follow up on the occupancy and ask it a different way. Jordan, I appreciate your commentary, but if you look at guidance, you guys are kind of flat on occupancy for the year from where you ended. You know, you had an easier fourth quarter from an expiration schedule, and then it kind of ramps up again in 2022 and accelerates in 2023 and 2024. I'm just you know, kind of curious, what on the demand side do you see accelerating further for you guys to keep retention high here, get back that 500 basis points? Kind of when do you see rent growth pick back up in that context?
I know it's a proxy, it's not a perfect proxy. I know you're using occupancy instead of lease rate. When I'm trying to predict where we're headed, I look more at lease rate than occupancy because as you've already seen in the past, lease rate and occupancy can gap out, which is, that's always positive because when you're doing a lot of leasing, you'll gap out against occupancy, right? 'Cause you got more leases done and it takes time for them to move in. When you ask, you know, about the next two years or the next year, I don't think the role. It might be slightly higher. It's not meaningfully higher. It's
If you look at our historical of the next two years that we're facing, they don't look very different than the two years we're about to face. Separate from that, I do think, when you ask this, the separate question, why would I from that think that we're gonna recover or regain? I'm seeing us average over 800,000 feet a quarter now, with very strong renewal. And we've been doing that now for, I guess, three quarters. And I know that when we get into those kind of numbers, we start gaining on leasing. And so I know if we do the leasing, the occupancy will catch up and catch us as people are moving in. That's what makes me optimistic about what's coming.
Okay. Stuart, I guess so the commentary is once you get to that 90% lease rate, you guys feel better about spreads picking back up, not necessarily getting the spread to narrow to occupancy. I just wanna try to be clear.
Well, certainly when you get over 90%, first of all, it's hard to make meaningful gains, right? I mean, you saw we were up at like 93.7% or something, and so we were still inching up. I think we felt like 95% was kind of where we would end up until we hit this recession. But at that time, you saw the leased occupancy had crunched way down because your churn on the amount of new people moving in shrunk way down. So then you're not gonna have as big of a spread as we have right now, where we're doing a lot of leasing and filling space that was vacated to catch up from 86% to the 87% to the 88%, whatever.
Okay. Just one quick one.
Yeah, Craig,
As you guys restart
Just to make it-
Oh.
I was just gonna agree.
Go ahead.
Craig, that you're right. I was speaking about the lease, the lease rate moving over 90 where we think we'll be able to push on rate.
Rental rate.
On rental rate.
Rental rate.
Yeah.
Right.
Okay. Just one quick one on, as you guys restart the redevelopment program, kind of, how quickly do you get back to that kind of maybe $200 million of annual spend you guys had talked about pre-COVID?
Immediately. Now. We're there.
Okay.
We're doing it.
Okay, perfect. Okay, great. Appreciate it.
Thanks.
Thanks, Craig.
Thank you, Craig. Our next question comes from Elvis Rodriguez with Bank of America. Elvis, your line is now open.
Thank you. Good morning, guys. Quick question. I think you mentioned that rental rates are kind of back, or rents are kind of back to pre-COVID levels, but, you know, that cash spread was negative in 4Q. Can you help us sort of think about the two statements, the statement you made relative to the actual leasing spread?
I think we may have been speaking about residential if you're thinking of rents being back to pre-pandemic levels. We're seeing that for sure on our multifamily business. On the office side, our rental rates are down, as you'd expect, from pre-pandemic levels.
Which gap were you talking about? I didn't know that. What's the gap? Elvis?
Yeah. No. Well, the cap spreads were positive in 4 Q, but I thought I heard a comment that, you know, on a cap basis or maybe rents were sort of back to pre-COVID level from that perspective. I was just trying to
Oh, gap-
to make the correlation between the two. Yeah.
Oh. Yeah. No, we didn't make that comment. I mean, as tenants are paying and there might. Go ahead. Give that answer. I'm not sure. I mean, if you're just looking at the same store growth, the huge same store growth, it's because it's a great comparison period. Because, you know, you look at the fourth quarter of 2021, and you compare it to the fourth quarter of 2020, like, that's such an easy comparison. That number's way up. That has more to do with comparison than something of saying.
Yeah.
Rents have risen.
Sounds like you misheard us, Elvis, on the office side.
All right. Sorry about that. Sure. In terms of Stuart, you mentioned the volatility and rents, you know, are gonna be choppy until you get, you know, some sort of high into the higher occupancy levels and the market sort of stabilizes. Can you talk about what we should be seeing quarter to quarter throughout the year or what your expectations are?
Very hard to predict because we have. You know, we do a lot of leases. We do over 200 leases a quarter, and we're still having plenty of leases that are rolling up. But on average, you know, on a cash basis, they've been rolling down. You can see quarters where depending on, you know, what sub-market you're doing more leases in or what leases actually get signed, that move, you know, that number can move around a lot. We've seen that through the cycles where this number's really hard to predict. We've spent a lot of time unsuccessfully trying to predict it. That was my comment about it being choppy.
You know, hopefully we see this moving back in the right direction as it, you know, rents will follow occupancy up. You know, at this point, to see the cash spreads negative now is not surprising. Glad that the overall economics, you know, with our strong rent bumps and the leases that we're still getting keeps those gap spreads positive at this point.
Thank you.
Thank you, Elvis. Our next question comes from Steve Sakwa with Evercore. Steve, your line is now open.
Yeah. Thanks. Good morning. Jordan, I guess, you know, as we sort of think about the model and the numbers, you know, one of the big swing factors to me seems to be the retention rate. I know in your press release you mentioned that you were 70% in 2021, which if memory serves me, I thought long-term, the longer term average was probably closer to 60%. I'm just curious, you know, what are you embedding in your 84%-86% range? 'Cause that just seems to be the big swing factor in terms of how quickly you can regain the occupancy.
In terms of retention, our historical retention is like 69.8%, some number like that. That's our normal retention. I said it was above 70%, and my recollection is, but Peter can correct me, I think it's 72% was last year.
Yeah, something like that. Yeah.
Which makes a big difference. I mean, I know that I will tell you that number loves to be, like between 69.5% and 70%. It's almost odd that we got so far above 70% last year, and we mentioned it. Now, your next question was, I think, how do we get from, what, 87% back to 93% in terms of our lease rate? Is that what it is?
Well-
You went ahead and said what our assumption was for retention in our guidance for 2020.
It's pretty much typically right there at the, you know, high 60s%. It always is. We might have a little bit of info about what some tenants are doing, but statistically, there's so many tenants moving in and out all the time that the averages tend to dominate. You can have quarters that are way off. You can have a quarter that's very low, and then you have a quarter that's very high. But whenever you look at a block of quarters, say four quarters, whatever, it's just extremely hard to get free of that number of, say, call it 69.5.
Okay. It sounds like for modeling purposes, you generally use 70% kind of as a placeholder for kind of retention and then you've got obviously backfill the 30% that's obviously not renewing.
Well, our model is very complicated, but I probably, if I was you, that's what I would do.
Yeah.
I'm sure we spent.
Yeah
a lot of time trying to guess what everyone's doing, but I suspect it comes out, like I said, like it's 69.8% or something. It's an odd number.
Okay. Second question. You sort of mentioned the other development sites that you have for residential with the Brentwood project sort of completed here. What are your thoughts on starting a new ground-up development, whether it's something in Hawaii or on maybe a redevelopment or knockdown type opportunity in L.A.?
My thoughts are, we're doing it and we're working on it. We've got politicians coming back in the office. We're talking to them. We're putting together all the pictures and all the stuff to show to them. We're saying, "This is what we want to do next, and we hope you're behind it," since like all the—both Hawaii and in L.A., people are talking about housing. We're fully working on it.
Steve, I think we'd like to have projects going in both Hawaii and in L.A.
Correct
-concurrently.
Yep.
You think it's likely that you could have actual announcements this year, or is it just the gestation period of getting these to the finish line sort of longer than, you know, say the, you know, next calendar year here?
I would say, I mean, I'm hopeful of some. I mean, when we announce it, I mean, technically I've announced it right now because I know I'm working on trying to make that happen. I think we will make it happen in both places. Now, it's such a long process, and it's a process going. I mean, I'm doing it right now. You know, maybe we announce, you know, breaking ground or something. I don't know if that. It would have to be near the end of the year. We're doing it right now. The basics of your question is, are you guys working as quickly as possible to start construction on new projects in L.A. and in Hawaii? The answer is yes.
Talking to cities and contractors and architects and the whole thing.
Got it. Thank you.
Thanks.
Thank you, Steve. Our next question comes from John Kim with BMO Capital Markets. John, your line is now open.
Thank you. You guys talked about the importance of the lease rate, just given that you get the pricing power at 90%. Can you give any indication of where you think that lease rate is by the end of the year?
Where are we?
John, no. You know, we give guidance on occupancy. We're not gonna give guidance on lease rate as well. Obviously, we're hopeful that it continues to go up. We've been doing a lot of leasing. Demand has been really good. But you know, we gave you the guidance that we're gonna give, which is on occupancy.
Wait, did he ask that at the end of last year?
No, at the end of this year.
Oh, you're asking at the end of this year? John?
Mm-hmm. Yes.
I thought you were asking me about last year, but okay.
Well, put another way, it took you six quarters at the last recession to get from trough lease rate to 90%. I'm assuming it's gonna take a little bit longer this year because that would take you to the end of this year to get from trough to 90%. Is that a fair assumption, just given uncertainty in the market and you're starting off at a lower lease rate than you did last recession?
You're trying to figure out when we're gonna be able to put pressure on rent?
Pretty much.
Yeah, I mean, I don't know. You know what? I think things are really opening up. I don't wanna like be overly optimistic and then be wrong, but I'm optimistic that the economy is opening up and I see it opening here. I see the state saying masks are going off in like next week, and kids are in school. I mean, all this stuff's happening and things are getting going. Now, all of that bodes extremely well. I mean, I was riding up in the elevator this morning with a girl that I watched her. She was getting a new parking card.
I go, "Did you get your parking card?" She said, "Well, you know, we're all back in the office now, and I lost my parking card for being home so long, and we're all back in." That's going on everywhere, okay? With all that going on, I'm pretty positive that we should have a good year, but I don't know where we'll really play out. I mean, we have a whole year ahead of us, and we've been through like, the paddle, you know, the paddle whacking over the last, you know, seven quarters. We got to see it play out.
Okay. The second question's on Landmark. You gave the lease percentage, which is roughly 25%. Where does occupancy trend for the year? Just so we can model what the contribution is for this year versus next. Also, what ended up being your yield on the development versus your initial expectations?
We already have said that we think we build it for a cap rate that's above 7%. We'll have the answer when we finish leasing it. I'm extremely confident that it's above 7%. I like to wait and see as that plays out where we end up, but having only leased a quarter of it, I can say it's well above 7%, but I don't wanna say where it's at because we got to finish leasing it. How does that trend up? That's a tougher one. I mean, I don't know. Do you guys have any type of anything for that or-
Hey, it's Kevin. You know, we're thinking that it's probably gonna be a two-year lease up on this. You know, we're just opening up, so by the end of the year, you should have about half leased if things go as we're hoping.
That's great. Thank you so much.
Did that answer it for you? Thanks.
Yep.
Manny.
Thank you.
Operator. Yeah.
Thank you, John. Our next question comes from Manny Korchman with Citi. Manny, your line is now open.
Jordan, you jumped ahead there. I thought that I'd missed something.
Well, yeah, I mean, I was ready to start talking to you.
Given everything we've talked about with, you know, whether it be the fact that it might be a tenant's, you know, the pricing power might be with a tenant right now or that people are confident making their decisions, are you seeing tenants come to you to renew early? How are you thinking about those, given the fact that you'll have better pricing power if you get to 90%, but if you can lock them in now, then you've got the surety of that tenant renewing.
For sure, tenants are coming to us that owe us money and saying, "Hey, can I renew at the same time to spread this out?" Yes, that's definitely happening. You've seen our collections just keep rising, and that's one of the ways that they're rising, right? Now, the second thing is since we have a pretty positive view on where things are going, do we want to game the system and hold off or press for, you know, do shorter deals and press for higher rates? There's never been a market where we've done that. We always meet the market. We sign along the longer leases, and we have so much, you know, churn that we're always able to pick up.
When there's gains in rate, we pick it up, but we just lease to the market. I think actually probably, on a cash basis at the bottom line, I think we actually do better that way than trying to top tick rates or game our leasing program for rate.
Hey, Jordan, it's Michael Bilerman here with Manny. Just as a follow-up, just thinking about sources and uses of capital as you ramp up the desire for redevelopment and development opportunities, as well as continuing to scour the acquisition market, how are you thinking about funding those capital needs? Do you sort of have some goalposts in mind in terms of how much capital you're looking to deploy, let's say, over the next two to three years, and where that's gonna come from? I suspect your stock is not gonna be high on your list, given it's a large discount to its inherent value, but I'm not sure if you're actively seeking to sell assets or enter into joint ventures in order to fund this increased spend and not take leverage up.
Okay. First, Michael . We hope to put out $200 million-$400 million a year of new capital. The company itself actually generates a significant amount of free cash flow even after the dividend, you know, somewhere in the $150 million range. Okay? You're saying beyond that number, where does the rest of the money come from? I mean, we're obviously sitting on a lot of cash right now, and we have credit lines, and we have low leverage, and we have joint venture partners that are anxious to get into stuff. That would be all the methods. You correctly stated that considering where stock prices are, that would not be. That would be extremely low on the list.
Do you have dispositions that you're working on? I mean, are you trying to generate more capital at this point? Look, I know it's harder to buy, which means maybe it could be a good time to sell some things.
I don't, I mean, if you're saying, do we have any buildings we're selling, we sold the one building I wanted to sell, and that was Honolulu, beginning of last year. Maybe it was the end of 2020.
End of 2020.
Yeah, the end of 2020.
Well, they all blend into each other these days. Okay. All right. Thanks for the time. See you in Florida.
See you.
Thank you, Manny. Our next question comes from Blaine Heck with Wells Fargo. Blaine, your line is now open.
Great. Thanks. Just to follow up on that and maybe take the other side of that question. You know, given your low leverage profile and meaningful discount to NAV, your high implied cap rate, however you wanna look at it, and kind of the lack of acquisitions that you've seen to bid on recently, I know you've addressed this, Jordan, on prior calls, but just for an update, does it make sense to get active on share buybacks here? Or do you think you wanna keep that dry powder for developments and other opportunistic acquisitions that might come about in the future?
Well, obviously I'll say, I mean, I know you're right. I've said this in the past. I mean, I've been buying our stock. I've personally been buying our stock. I believe our stock is a very good buy. I don't. When you talk about the company, it's a much more complicated decision because the company, our business isn't to be participating in the stock market and guessing of ups and downs of the stock market and where the stock's going. Our business is to run the real estate and let the stock market, you know, run itself. Frankly, I'm wrong a lot by what I think the stock is. A lot of times when I think, wow, we're killing it, and then the stock goes down, and other times it goes up. I don't think I'm that good at predicting that.
Let's start with that. Secondly, it's not that you would never buy back your stock because I have bought back our stock, but it's a complicated decision because unless you're selling something, it means you're de facto, you're increasing leverage, and you're taking away the opportunity to do some of these other things, whether it be development or an acquisition or whatever that may be. That's, you know. You have to really be not just a little, think it's a good idea. You got to be wildly, you know, in an extreme position to choose to raise your leverage, buy back your stock when you're not an expert in the stock market, and then obviously reduce the range of things that you can now do vis-à-vis acquisitions or development projects or redevelopment projects. That's why you don't see us really.
That's why you see it being a very rare activity for us.
Okay, that's helpful. Then for my second question, can you just talk about kind of the underlying health of your smaller tenants? We saw small business optimism numbers erode in January, and some of the commentary we heard around that release was that these small businesses were struggling to handle the increase in inflation and associated increase in costs for their businesses. I know your tenant base is probably a lot different than the average business that's included in these studies. You know, when you talk to your tenants, are you hearing any rumors that they're having trouble keeping up with rising costs or even wage inflation?
I think probably in small retailers that's the case. Although I actually think even our retail is pretty healthy at this point. If now you're saying our office tenants, I think they should be embarrassed of how much money they're making off anybody that hasn't paid us their rent. That definitely is not the case. These people, this colossal majority of the cost to run their company is in their people that they employ, and they're employing people that live in expensive housing all in around this area. To not pay their rent is absolutely absurd with how much money they've been making. A lot of them have been having some of their best years, whether it be law firms, accounting firms, you know, hedge fund managers and, you know, wealth managers. I mean, the list goes on.
You know, these small companies that feed the entertainment industry and tech industry, it's almost laughable that they would have thought of, you know, to take advantage of not paying with the money they've been making. I know that's not the question you asked, but I'm still pissed off about that.
Fair enough. Thanks, Jordan.
Thank you, Blaine. Our next question comes from Rich Anderson with SMBC. Rich, your line is now open.
Thanks. Good morning out there. For the guidance range, do you allow for any sort of hiccup in occupancy? I know you're expecting a ramp in lease rate, but as you know, now I think with the statewide eviction moratorium burned off but still some county level stuff continuing, I'm wondering what you're thinking about the behaviors of some of your tenants that might actually, despite what you said about the money they're making and some not paying, would they perhaps vacate when that time comes? Are you allowing for any of that in your range for this year?
Well, certainly the width of the range could allow for a lot of things to happen, and that could be on the list. Some of that might happen. I mean, but I don't. Right now, looking at the office side, I think that's more likely to happen on the residential side. On the office side, I don't see that necessarily being that meaningful, but we'll see as it plays out.
Okay. Then, you know, a big picture question. I don't know if you've ever, you know, talked about expansion markets to any specific detail. A lot of dislocation going on in San Francisco these days. Is there anything about that market that's got any amount of your attention these days, or are you sticking, you know, where you're at right now and expanding from within?
I mean, I know that downtown San Francisco is taking a licking right now for a number of reasons. In my opinion, a lot of it's self-inflicted. I still think that is gonna be a good market in the end because it's surrounded by, like, colossal incubator institutions like Stanford and Berkeley, you know, and Cal, and whatever, all the rest of them. That's actually separate from the issue of would we put money up there versus putting money here, whether it be an acquisition or into additional development.
I think that our kind of local edge that we have here and the returns we're able to get with our money probably would argue at the moment just to stay here, in comparison to kind of what we'd have to set up in San Francisco to be effective. I'm also not so sure that values are. Even though I know the fundamentals in San Francisco are way off, I'm not sure how far off values are in terms of what stuff's trading for. I don't think it's like some type of grave dancing market or anything.
Okay. Good enough. Thanks very much.
Thanks.
Thank you, Rich. Our next question comes from Bill Crow with Raymond James. Bill, your line is now open.
Thanks. Good morning, guys. Similar to Rich's question, but keeping it local, I guess. It struck me as I was out in L.A. not too long ago, but the focus on the news about all the crime that's going on and it seems to be expanding its area. So I guess my question is: What's going on from a sub-market perspective? How much change are you seeing in borders of good sub-markets versus challenging sub-markets, et cetera? I guess, how do you play the evolution of the market?
Well, your lead in would cause me to want to answer you that the borders have tightened up, but actually I think the borders have expanded. Certainly I always considered the border, so it's contiguous to the east or whatever, all the way out to West Hollywood, and in that area to be very good. I would say the border to the south of us, where I may not have included Culver City, or certainly if you go a decade ago, Playa Vista. Now I would go down that deep. These are all great markets, and I think Playa Vista for the most part is built out, and it's now maturing as a market.
Culver City certainly has some development, but it's also a very hot market, and it's a classic sub-market where you have a lot of amenities and people that are kind of living near where they're working. That's also very strong sub-market. I think as you get up into like, I don't know what you would call east of Westwood, I think that market has also expanded. I think what Victor did over on Pico is gonna like kind of incubate a lot around it, the big deal that he did with Google. I actually think what's considered like good West L.A. sub-markets has expanded instead of contracted. Now, look, that's not to say everyone's not very aggravated about the crime and what's happening, but when I see what's going on, the recall of Gascón.
Even the extremely far left politicians that are running now in our markets are talking about law and order and crime and dealing with it. The state legislature is talking about repealing some of the things that made the thefts and misdemeanors, smash and grab, which will probably be on the ballot this year. I mean, there's just a lot going on to shift back to a law and order kind of structure. That was a moment in time that I hope is way behind us and I'll never see again. I'm pretty optimistic about where all those things are going.
In California, and specifically here, when you look at people running for the council, county, and mayor across the board are all sort of now talking, clean it up, you know, clean up the homeless, clean up the crime. They're all going in that direction.
Yeah.
I think they got the message from the voters.
I always appreciate your views on the city. Just as a follow-up, you were talking about capital sources and uses before, and I know it's been several years, but there was talk before that you might look at a Hawaii joint venture and kind of bring in some of the money back into L.A. I'm just wondering, is that off the table altogether at this point, or what are your updated thoughts on doing a big JV in Hawaii?
My thoughts are that, you know, with the right opportunity to bring some money back, I would do it. I also, like, I still obviously believe in Hawaii. I'm talking about investing more capital there and building there. Hawaii's been, you know, I actually think you can remember going back to a time when I was making excuses for Hawaii, and now Hawaii is like a complete stud. I mean, it's cranking out the money, and our office leasing's doing great and residential's doing great. You know, I love Hawaii.
Okay. All right. Listen, thanks, guys. Appreciate it.
All right. Thank you.
Thank you, Bill.
Thank you. See you.
Our next question comes from Daniel Ismail with Green Street. Daniel, your line is now open.
Great. Thank you. I'm curious if you can share what kind of recovery in parking revenue is embedded in 2022 guidance.
Our parking revenue, which is one of the reasons why we're comfortable telling you that we're over 70% utilized, is over 70% of what it, you know, what it would be if we were at full boat.
Is that-
Does that answer your question?
Well, I mean, can you give a percentage? Is it anticipated to be up with 70% utilization throughout the year? Or-
Actually, I think the last time we looked at it was almost 75%. Do you remember, Peter?
Yeah, it's over 70% of, you know, adjusted for occupancy, what it was before the pandemic. You know, you're asking how we think it's gonna recover over the course of the year. I mean, you know, it's
You mean the 70% to the 100%? Is that what you're asking?
That's what he's asking, yes. It, you know, and then how fast. I mean, look, I think that's gonna fall-
The utilization.
I mean, it's based on, you know, people coming back to the office, and when they're back to 100% utilization of, you know, the existing occupancy and then and how fast that happens. You know, we're optimistic, but.
I mean, I apologize. I just meant the, you know, total parking revenue relative to 2019 levels was my question.
Right. I mean, you have to adjust for the occupancy that we've lost since 2019. What we're saying is we're, you know, somewhere over 70% now adjusted for occupancy. You know, you expect that to improve, but it's all based on attendance, you know, coming back to the office at the existing occupancy levels. It's, you know, hard to predict exactly how that's gonna play out over the course of the next year. You know, we expect it to get better.
Just last one for me, Jordan. You know, 2022 is an election year, and so we caught wind of another potential Prop 13 challenge. I'm curious if that's something you guys are expecting in the November ballots and any thoughts you guys might have on any potential challenges to Prop 13 in November.
You're talking about the nurses union up in Northern California?
It's not exactly split roll, but properties over $5 million subject to a surtax of about 1% or so.
Yeah, I don't know what's gonna happen with that. I know that they've discussed it. That's kind of, you know, where that's at right now. I mean, does that answer your question? I mean, it's not. I haven't seen it go much farther than that.
Okay. That's helpful. Appreciate it.
Mm-hmm.
Thank you, Daniel. Our next question comes from Elvis Rodriguez with Bank of America. Elvis, your line is now open.
Jordan, just a quick follow-up. I'm just curious on your thoughts on WeWork and co-working, and are you finding them to be competition as you go lease up space today? They've obviously had some good success in growing occupancy this last year, so just curious on your thoughts there. Thank you.
You know, I don't think we have. First of all, there's not a ton of WeWork in the markets we're in. Secondly, I forgot what that part of their business is. What's it called? Their enterprise business that takes entire leases and sort of they act as if they build out the space, and it's just the sublease to them. I think most of our tenants that maybe whether they want 2,500 sq ft or 3,000 sq ft or whatever sq ft, they want their own space, and they're you know, just as easy for them to go direct than to pay the extra money. We haven't seen that at all. No.
Elvis, we think co-working's only about 1% of the space on the west side in our markets. It's not a huge chunk of space.
Yeah, it's not a big piece of it.
Thanks, guys.
All righty. Anything else? Anyone else? Operator?
I don't know. Let me just wrap it up.
All right. I guess we lost our operator. She didn't like the last answer. Well, it's good speaking with all of you, and I don't believe we have any further questions, so we look forward to speaking with you again in next quarter. Thank you.