Citi 2025 Global Property CEO Conference. I'm Michael Griffin with Citi Research, and we're pleased to have with us Douglas Emmett and CEO Jordan Kaplan. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to Live Q&A and enter code GPC25 to submit questions. Jordan, I'll turn it over to you to introduce Emmett and the team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today, and then we'll get into Q&A.
Okay. Thank you. So to my right is Peter Seymour. He's our Chief Financial Officer. And to my left is Stuart McElhinney, and he is our Vice President in Charge of Investor Relations. So I'm happy to say the top reasons to buy our stock. I do feel a little bad that it seemed like more people were here for Macerich than they're here for us. I mean, do we have a bad time slot?
We can go get more people in the lobby to come in.
Okay. I'm going to go get Jackson Hsieh to come back and just hang. So Douglas Emmett, about 18 million sq ft, around 5,000 apartment units, totally focused in West L.A., L.A. area, high-end markets in L.A., and then in Honolulu. And we obviously own residential and office, a little bit of retail. Why am I excited about our prospects and what's going on? The reason I am is that, and this is borrowing, there's a lot of action right now in the Federal government and a lot of activity. So when I left to come to this event, our leasing was really doing quite well and accelerating, and we felt great about it and what was happening. On the acquisition front, we're doing quite well. On the development front, we're doing quite well. We're in multiple construction situations now.
The last deal we did, we had a lot of buy-in from our sovereign partners. They came in a deal we were oversubscribed, and when I look around at our market, we stand very independently in terms of the size of our platform and our independence and ability to make deals, so I'm optimistic we'll be able to continue to make deals, and we have capital. We have a good balance sheet, a strong balance sheet, so those are all great reasons over a period of time, not the quarter, but a period of time why I'm very optimistic about us getting our income back up to where we want it, where I know y'all want it, which is back up above where we were going into COVID.
Great, Jordan. Really appreciate that overview. Let's just start with the leasing front. Obviously, for your portfolio, it wasn't really affected by work-from-home, return-to-office trends. It's more been a kind of business confidence issue I think you've alluded to in the past. So you seem optimistic for 2025. Maybe give us a sense of how the pipeline looks. I think some of those bigger tenants, the ones bigger than 10,000 sq ft, have started coming back. So then hopefully, I guess the goal would be to drive net absorption in 2025 and beyond.
Everything you just said, 100% correct. That's very good. So I don't really believe, I mean, obviously, during the depths of COVID, we were impacted by work-from-home, and we lost 600 basis points of occupancy. But since then, our recovery has been so strong that even when we were reporting early numbers in terms of utilization, you guys kept re-asking, like, "How are you getting that? How's that happening?" I mean, but it was happening. And now our utilization is essentially almost back to normal. So that has not been an issue. But we saw in 2022 a lot of good positive absorption, a lot of good leasing as we were coming out of COVID. And then in fourth quarter of 2022, which everyone can remember, the Fed said, "We're worried about inflation.
We're going to start raising rates." We saw our leasing pipeline completely drop off a cliff, and we suffered with that through this whole period when people were expecting a recession and higher interest rates, which happened, by the way, for us. I mean, our sector of real estate wasn't or isn't in a recession. So we went through that. I would say over the last half of 2024, we were back in recovery. Leasing, we had a couple of quarters where we were, what we had explained to you is it's not just about doing a lot of leasing. We were doing 800,000 sq ft- 1 million sq ft of leasing, but we needed to do 1/3 of that as new. We were not doing a third new.
You said, "Well, what are you missing?" We said, "Well, it's tenants over 10,000 ft." So we're not getting those big tenants back in because you lose a couple of tenants and you need to get a couple of big tenants. Big for us, full-floor tenants. That's big for us. I would say over the last couple of quarters, they were back, fulsomely back, maybe more than our historical average. Right? Why am I optimistic? Why was I optimistic? I got to say it that way because I'm really nervous about the news I'm reading here. I probably shouldn't have come to Florida. But why am I optimistic? Why was I optimistic coming here? It's because I saw everything from showings to deal pipeline to closings ramping up and continuing to ramp up. So of course, I felt very good about that.
And then when you look at what the things we need to do to get where we want to get, which is lease up Studio Plaza, get Barrington finished, get our acquisition pipeline going, get the stuff we're developing going, buy buildings at good cost basis that are accretive, all that stuff was happening. And for instance, we're leasing up Studio Plaza, which is in the Media District, faster than I ever expected. I expect that there's a reasonable chance of us actually collecting rent from some tenants in 2025, and remember, Warner Bros. just moved out at the end of last year, an entire building, and so Ken moved in, redid all the common areas. He's moving incredibly fast, and he's leasing, and now he's doing TIs at the same time. That's great, so we'll get that dealt with.
So I felt good about all those things, and that's why I've sounded so positive.
Thanks for that. I want to just go back to your comments. And obviously, the current macro situation is very in flux, but can maybe you expand on kind of this apprehension you've felt as a result of the past few days and the announcements about tariffs? Is that a worry to impact your business overall?
I don't want to preach or be political, but I will say this. Real estate, so I started in real estate in the 1980s, and that was a great time to start because we had the 1986 Tax Act, which brought in pension plans, foundations, endowments, all new buckets of capital. Right? And that was a huge boost because it used to just be life companies and little LPs and doctors that needed depreciation. That brought Wall Street in. The second thing that happened is, which people don't appreciate enough, all through the 1990s and the 2000s, first decade plus, we've been going through a giant process called globalization. And globalization has been like a five-factor, maybe more, in terms of capital, in terms of manufacturing, in terms of customer base, everything. And then lastly, we had declining interest rates. We had that.
But then lastly, we also had the advent of the internet and extraordinarily good information. And as a result of that information and the fact that someone in New York can look in Beverly Hills and maybe not know as much as me, but know enough to be confident and to deploy capital, that information itself de-risked our asset class and reduced cap rates rightfully because it wasn't as risky to invest. Okay. We still have the information. But if what we're going to do now is try and unravel globalization, like literally just unravel it, that's going to be super painful, like beyond painful. And every single industry will be impacted by that. I mean, not just real estate. So that's my opinion of that.
Maybe we can touch on Studio Plaza and the opportunity there.
You don't want to go back and forth on that issue?
I wanted to have that one and get something more skewed toward Emmett. So yeah, obviously, the Warner Brothers move out last year, but that was pretty well known for some time. I think there's probably been good traction on the multi-tenant front, multi-tenanting that property. So maybe talk about the demand and tenant interest you're seeing in that building. You've always talked about how that submarket, kind of Burbank area, has been effectively 100% leased for Emmett's history. So maybe talk about the opportunity you're seeing in Studio Plaza.
So in Studio Plaza, I have to tell you, I was more nervous about Studio Plaza than Ken was. So if you don't know this part of the company, Ken and I have been partners for 40 years. We actually take everything we make at the end of the year and split it, regardless of our titles. And Ken runs leasing, construction, property management, etc. I run the capital markets side. That's why you always see me here. But we're equal partners. We started the company together. And I mean, just every day, I light a candle towards Ken. I mean, I can't believe what he's pulling off there. He got in almost immediately. Right when they moved out, he was ready to go. He redid, did an extremely appealing plan on the common areas, put in a great set of amenities.
He went out and sent an army out to get tenants. And he's getting tenants, and he's signing leases faster than I expected. And he's doing deals for like 10,000 ft-50,000 ft, but he's doing a heck of a job. And I think I expect that Studio Plaza will be less of a drag on us for a shorter time than I originally expected.
How are the new rents that you're quoting at Studio Plaza compared to, I guess, the old rent that Warner Brothers is paying there?
I think that when we're done, we'll be close to, if not on top of the NOI that was being generated before. But it will be a much less risky asset. Remember, the whole time we've been public, every year you guys have asked me about that building because it was a 460,000 sq ft lease. Even if I just renewed them that year and then it was due in 10 years, do you think they're going to renew? Nine years to go. So that was our largest tenant. They're gone. It's now clearly going to be a multi-tenant building. It's going to be a much less risky asset with the same income, a little less, a little more. In the end, it'll add more because we were being leveraged by a giant tenant every time we did a deal.
This might not be the perfect market to lease up in, but it's multi-tenant. So guys will roll, and we'll get the income back to where it needs to be. It's an incredibly good market. It's where all the studios are.
We had a question come in from Live QA, kind of going back to our topic on sort of the macro and impacts that we've seen in the news recently, but given how you phrased it kind of cautiously, the potential impacts of unwinding globalization, how do you see decisions maybe getting delayed or the pipeline being reduced for your core tenant base if this really comes to fruition, as you were saying?
How do I see what?
How do you see how quickly would prospective tenants put their real estate needs on pause? Would deals get delayed?
Oh, the pipeline. That's what you asked me.
Yeah.
In 2022, in the fourth quarter, I'm not trying to be miserable or negative, but when the Fed announced rate increases, the pipeline dropped off in two weeks. I don't know what's going on now. I mean, I haven't called the office or seen what's going on there. And I don't know what will happen, and I don't know if this is something that's like going to be for one day or what's going on. But I don't know. I'm not even following this. The stock market must be reacting to all this.
We had another one come in. This is more an earnings-related question. Can you talk about the potential drag on AFFO from repricing on the balance sheet? I think you have some swaps burning off, lower interest rates going up to that north of 6% range, and will this mask the recovery of the organic growth in your business?
So you're talking about the impact of interest rates on us versus the organic growth of the portfolio and earnings. So though debt is front and center, we're not a high-leverage company. So movements in interest rate are super unpleasant and bad, but they're nothing compared to being leased up. So you'd much rather have a good economy and go, "Okay, I can deal with higher interest rates." I mean, most of my career was in a 6%-5% interest rate environment. Right? It's only been for the last bit of time that we've been talking about twos and threes. I mean, we had actually averaged down to three going into this. So if you say to me, "We're going to settle in in the 5%-6% range," for instance, maybe even 6.5%, okay, well, we can live with that. We lived with that. Right?
I can't live well without tenants leasing space. That doesn't work at all. Now, if you ask about floating versus fixed-rate environment, we're historically pretty much fixed everything. But as we've gotten into this really tough debt market, we do a five-year, we do a seven-year loan, swap for five, and then we have two-year floating. Why do we have two-year floating? So that at the five-year mark, I can refi, and it doesn't cost anything. And then I do my new loan, and then I have a lot of runway, so I'm never under pressure. We got into this environment, and I had to use some of those two years to deal with these loans, which I've been dealing with. Because we're in that period, you're seeing a lot of floating. But you just saw, we just finished a deal in December. That's fixed now.
Now we're working on the other deals that were up this quarter. Those are going to be fixed now. Right? So as we now roll this out and extend this debt, and we're working on 2026, and when that's done, that'll get fixed. We'll go back to what you used to see. But right now, we're floating because we don't have enough term left on a lot of these loans. And I have to make deals to extend them, and then I'll go back to fixed and swap them.
Has there been greater lender appetite to see more debt capital flow into the office market?
I think that everyone's having a different experience with their lenders. What I could tell right now, we're not in a CMBS market. I know the CMBS market has seen some real recovery around office because I'm pitched every day about it. I don't like borrowing from people I don't know. We don't issue debt, public debt from the company because I don't like putting the whole company at risk for one loan, and I don't like the covenants that come with it. It seems to me like those covenants are no problem when the market's up, and who cares? And when the market's down, those covenants beat you down worse. So I've tried to stay as a non-recourse first trustee borrower, and I've done that. And so that's a market I'm living in.
Today, for us, that's been good because we've worked very hard to have great relationships with our lenders. We know them all. I can go right to their office. "Hey, how are you, David? How are you?" And I know them. They've been with us for a long time. And it's not easy to refi them out right now. And I could say, "But you're good. We're going to take care of this." And I can make deals and extend these out. And that's what you're seeing me do. I'm not sure what someone going in the market today is facing, especially reputationally if they're a new borrower or maybe have more of a checkered past. It's going to be very hard to borrow on a major office project.
I think there was a question that came in. I think we wanted some clarification on an earlier question just around interest rate headwinds. I guess if you think about as these swaps burn off, like you said, you'll refix it, you'll reprice it. But ultimately, are we in this scenario where, because of those higher interest rates, at least over the next few years, any leasing success that you might have could be negatively offset by those interest rate headwinds? In other words, when are we going to see a return to earnings growth?
So that should be the case, but it's not. And the reason it's not is the stuff I'm redoing is already gone to floating. And floating, because of where LIBOR, not LIBOR, what is it now? SOFR. Because where SOFR is, it's not very far from where I'm going to be fixing it. So I don't think you're going to see much of a difference, unfortunately.
Maybe we can shift now to kind of the acquisition opportunity set. You announced the acquisition of 10900 Wilshire back in December. I mean, it seems right in your wheelhouse. Westwood, there's a residential development component. Can you maybe talk about how that transaction came to be, how you're underwriting it from a yield or an IRR perspective, and maybe the embedded upside, not just in potential markets on the office portfolio, but also the resi development component?
That building, so you're talking about a Westwood market where there were two, and now there's one building that we don't own. And we own everything else other than what's owned two buildings, owner-user of UCLA, and one medical building. Okay? So we own everything else. Other than this building we just bought and one other, which that guy still owns that building. So this building was a very easy building for us to understand, to buy. We know the tenants. We know the building. We've seen its history. We've seen what's been spent on it. We had all that information. So we were prepared to be very aggressive bidders to get that building. And we got it. Now, something else that happened there was I think we were bidding against people.
And most people didn't know this, although if you've really been listening to my quarterly calls, I've been saying it, which is that there was a change to state law. And under state law, they took away zoning from the cities along the major thoroughfares like Wilshire. And I've said in past calls, that was like the Douglas Emmett Empowerment Law because we own almost every major open lot, everything along Wilshire. We're super dominant. I suspect now we're somewhere near 80% of Westwood and maybe more. So what happened was when we went to buy it, we knew that the backlot, which was zoned for parking, was by right residential because of the state law, not because what you would have looked at pulling a report from the city. So we always knew we could build this building. We just didn't say anything till we already closed.
And then we said, "Hey, by the way, we could build this building." Interestingly, our investors, which it was oversubscribed, came in initially not knowing we could build that building. So we gave you the numbers. We've been asked probably reasonably not to disclose the sale price, but we knew we had to give you guys some information on the deal. So we gave you three good data points. One, even after we've built the apartment building, we're going to be into this thing between $150 million and $200 million. Okay? And two, we're going into this thing today at a 10% cap rate. And three, because you might think, "Well, the building's going to be expensive to build, so what kind of cap rate is it?" And so three is when we're done, the entire project will be a 10% cap rate.
So that's a lot of info on that deal.
Thank you for that. Maybe just switching over to the regulatory environment within L.A. Obviously, there was impact with kind of the wildfires and the follow-on effects of the economy there. But how have you seen the response from kind of key public stakeholders and engendering confidence that the market can recover and address additionally lingering quality of life issues?
The fire primarily impacted two areas, Pacific Palisades and Eaton. Eaton needs more than what's been done. They need a significant financial response from city and state government because they weren't in the same financial position as the people in the Palisades. Okay? Now, I don't know if they're going to get that. I know that Rick Caruso has set up a fund to do a version of that for them. He seems to be doing it. I don't know where the state and the city is on that front, but he seems to be doing it. Okay. Now go towards the Palisades, which is actually the market that vibes with our portfolio, which I think you guys all know. In the Palisades, what you see, the state and the city response have been nothing short of extraordinary. Extraordinary understates what it's been.
Understates what it's been. In my life, I would have never said that these things would have happened. So let me give you some highlights. Our governor, Gavin Newsom, has completely eliminated the Coastal Commission under executive emergency order and said, "By the way, the Palisades is within Coastal Commission's purview." And it said, "There's no more Coastal Commission review of anything. Done. Gone. Don't even talk to them. Don't do it." The next thing he said was, "And by the way, I told you this is the same guy that rezoned all the thoroughfares and just said, 'Cities, I'm done listening to you. You now can build residential regardless of the zoning along these major thoroughfares.'" Okay? Then he said, "I know the CEQA gets in the way." CEQA is a favorite law of the unions to sue under CEQA and stall a project. It's California Environmental Quality Act.
They stall a project with it if you're non-union to kind of force you to go union. And they tie up in litigation. Okay? So no politician has had the guts to go against CEQA. CEQA was originally developed for a real environmental thing, but it's been completely destroyed and misused. Had to do with the nature of your Environmental Impact Report. He canceled CEQA. Like no CEQA. It's gone. I can't even believe he did it. There's no CEQA. So you could build and this guy goes, "I'm suing under CEQA." Oh no, there's no CEQA. You used to go to do something in the Coastal Commission district and wait forever for a review from the Coastal Commission. Remodel your freaking house, wait for a Coastal Commission review. There's no Coastal Commission.
The city came out right away and said, "We know we're getting in your way." So now, going forward, you turn in plans for your house, you get them back in five days, and if you don't, they're approved. You call for an inspection. The guy doesn't show up in three days. It's approved. You don't have time to turn in plans. Your architect can self-approve. Say, "They're approved. Start building." Under your architect saying you comply with code. That's crazy. I never thought they'd do anything like that. Right? So you might say to me, "Well, what's the impact of that?" Right? I'm going to give you a feel for the impact. We have a friend that we work out with. He's already got plans. He's going to get approval. This guy's going to start construction in a couple of months on his house. The fire was in January.
He doesn't have to wait for anything. There are now almost everyone I've talked to, when you ask them if they're going to rebuild, what they'll say is, "Yeah, I'm rebuilding, and I'm seeing if I can buy the lot next to me. Buy the lot next to me." Not, "I'm not rebuilding." Not, "I'm rebuilding on my lot. I'm always going to try and buy the lot next to me." I think they put in a rule that you can't buy more than six lots.
I think it's not more than six. And you're not supposed to make unsolicited offers.
You're not allowed to make unsolicited offers for lots. So what's the market done? There's a lot that came for sale. First one, this is covered with construction debris. A normal lot. Not a big lot. A normal lot in the area burned out. And it sold at the same price that it would have sold at before the fire. More lots came on the market. They're now getting bids above the price lots were trading for before the fire. Now you'd say, "Well, that's crazy. Why would someone do that?" I just told you why. It's because if you were a spec guy and you bought a lot, you were dealing with a nightmare to get your plans approved, to get inspections, and it would all burn up time. And you'd go, "I bought the lot, and now the time's clicking, and I've got a couple of years.
I got to get plans in. It's going to take them six months to get back to me. Then I got to get all these different inspections. I got to get through fire, etc." Now you buy a lot. A month later, if you got a set of plans you like for that size lot, you're building. So that's an incredible shift. I know this is like over answering a question on politics, but that's what's going on right now.
No, that was very helpful. Maybe just to piggyback on that real quick, do you think that these changes could be a microcosm for greater reform from a getting rid of red tape scenario within the L.A. city, L.A. county overall? And then are there any implications for maybe potential rent controls on the multifamily portfolio as a result of the fires?
So there's a chance of that. But here's what I can tell you is happening. Gavin Newsom, a committed Democrat, but to be fair to him, in the modern world of Democrat, not the 20-year-ago world of Democrat, he would be a guy in the middle in the modern world. In the 20-year-ago, he'd be like an extreme nut on the left. Okay? And he came out in a speech and said, "We've had enough. We got to get out of our own way. We got to lower taxes." Whoa. I had never heard him say that. We got to lower taxes? This guy's been on the side of raising taxes for like as long as I can tell you. Okay? We've got to lower taxes. We've got to become more business-friendly. And the MAGA right is part of our community, and we need to understand them.
And I'm now going to hold a podcast with MAGA representatives. And I'm not being political. I'm not a MAGA guy. I'm not being political. But that is more extreme than the platypus. The platypus would be like a normal-looking animal compared to that. That's crazy that he's saying that. But he's a very good politician, and he's good at reading the market, reading the room. And that's what he's saying now. These are incredible changes that are happening super rapidly. He also, when that Supreme Court decision came down that said people cannot go on public rights-of-way, of homeless people cannot hang out on public rights-of-way, he came out and said to the cities, "Clear now all public rights-of-way. On all state public rights-of-way." He sent in the state police and cleared them.
And he said to the cities, "If you don't clear the public rights away, I'm going to cut off all your homeless funding from the state." Every city said, "You got it. We're doing it." Except Los Angeles. Karen Bass said, "I'm still not doing it." And then she said, "Well, I'm not really talking about it." And then she went totally silent because people just went after her. She's doing it to some degree, not as fast as she should. But CD11, where you guys, if you know our portfolio, know where most of our portfolio is in CD11, CD5, most of the power sits with the council. We're kind of a weak mayor, strong council system. And the council representatives are clearing the decks. Come and visit. You'll see. It's cleaned up a huge amount. By the way, same for Hawaii.
Hawaii's cleaned. Downtown Honolulu's cleaned up, so yeah, I'm super positive on what's happening politically.
That's great. Maybe just one real estate question to end. Appreciate it.
It's just stay on politics. It's just so much more interesting.
Jordan, you've obviously been through a number of cycles in your career, both up and down. As you see the current real estate cycle we're in, how do you think Emmett is best capitalized or best positioned to capitalize on a potential recovery in this cycle?
So Ken and I have been together since 1986. And I was talking to him a couple of weeks ago. And Ken made the comment, because I'm going to be 64 years in a couple of weeks, Ken's going to be 65 years. Our birthday's a week apart. And Ken said, "If we had 20 years, we would make bank." I mean, this is an incredible environment to make money in. It's an incredibly good environment to make money in. I mean, and we're doing a lot to make money. That's going to like, you're going to see the company. It's going to be slow rolling. There's still stuff in our way. I don't know what the federal government's doing, but we're super set up to make money. But if I had a long trajectory, I'd even do more. All right? What recession is this like?
It's like the one in the early '90s. You don't have a low interest rate, cheap and quick exit, the way we did in the Great Recession, whatever that thing was called, or the one in the dot-com one or whatever. You don't have an overwhelming amount of capital trying to get into office. You have a hugely negative view on office and more supply coming out, but you still have incredible supply constraints, but more deals are going to come out than have come out in the past, other than when Blackstone sold all that stuff. So how would you not do what we're doing, which is get our debt all dialed in, which is what I've been totally focused on? I'll get that dealt with and just have the capital to go to town and do deals with your partners.
Thank you for that, Jordan. Just real quick, two rapid fires. First one.
The music's already on.
All right. What is net effective rent growth for the office sector overall in 2026?
You know, I don't know. All these markets are different, and I don't know what net rent growth's going to be for this guy and that guy. Us, you compare deals we're doing today to the deal they're replacing, we're up about 4%.
Okay, and will there be more, fewer, or the same number of publicly traded office REITs a year from now?
Do you need to ask me that?
Yeah, it's part of the question.
You have Paul Ingrassia here trying to get me to buy every company, every office company that exists, maybe with the exception of Blackstone or Brookfield. I mean, if it's up to investment bankers, it's going to be like a colossal consolidation. There's going to be one office company out there.
Sounds good. All right. Thank you guys so much.