Welcome to day 2 of Citi's 2026 global property CEO Conference. I'm Seth Bergey 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 liveqa.com and enter code GPC26 to submit questions. With that, Jordan, we'll turn it over to you to introduce your company and the team, provide any opening remarks, and then tell the audience the top reasons an investor should buy your stock today, and then we can dive into some Q&A.
Okay. Thank you. Seth. Let's see, to my right is Peter Seymour and Peter Serantoni on my left, who are not only managing I'm sorry, on the capital markets team. Douglas Emmett is a office and, for rent residential REIT. We're mostly focused on the high-end markets in Los Angeles and in Honolulu. Our portfolio is around 18 million sq ft of office and 5,000 apartment units with a big apartment unit pipeline. From there, I think most people know most of that, so I'll let you just start asking questions.
Sounds good. You know, maybe you noted on the fourth quarter call just an uptick in interest. I think there had been some slowness kind of in the third quarter. You know, what industries or tenant types are driving that uptick? You know, and your focus is obviously kind of on smaller tenants. You know, just within the context of L.A., you know, what are you seeing in terms of leasing activity in the first quarter so far?
We went a bunch of quarters where we were, like, a little bit positive. Kinda felt like we were near, you know, at the bottom. We had a negative quarter in the third quarter. We have at a very positive quarter in the fourth quarter. You're talking about net absorption, right? Fourth quarter was over 100,000 ft, so that was very positive. That's where we kinda need to get to to really make substantial gains. Now, I mean, we're in the middle of... I have told people, and I'll say again, the pipeline at this time looks just as strong as it looked in the fourth quarter. You know, in the end, we'll have our results at the end of the quarter, and we'll certainly publish them.
You know, just as you think about the pipeline and tour activity, you know, are you seeing kind of any uptick in terms of, you know, tours to conversions? Is that changing at all? Just any kind of different industries that are growing or shrinking. Just, you know, as tenants kind of evaluate their space needs, are they, you know, expanding? Are they keeping their existing footprint on the renewal side? Just any comments you can make around that.
First of all, in terms of the types of tenants that are coming in, it's pretty well distributed, exactly like the pie chart we have on our thing. I mean, there's no one group that represents more than 20% of the growth. The renewal rate has actually been abnormally high. I think last quarter was over 80%. It historically and very reliably zeroes in on 69%-70%. That's what people should expect. In terms of the, you know, understanding and knowing the pipeline, there are two things that we look at. One is, like, leases in, like, fully in negotiation that have gone to our lawyers. The other is showings, letters of intent, a bunch of other stuff, right?
When I say the pipeline looks strong, that's the stuff we're looking at to say to you it looks strong, like our results are gonna be strong, like they were last quarter. That doesn't always mean that's gonna happen because it's a view of, like an assembly line from literally the beginning of how many showings there've been to the end of how much has been signed. It's as good an indicator as you can have during the quarter.
You know, one of the topics within office, you know, at least with the headlines, has been on AI, you know. In your conversations with tenants, is that coming up at all as they kind of talk about needing space?
Well, to answer one part of your last question that I guess I didn't get to answer, we track expansions over contractions, and our expansions have been greater than our contractions. That might refer a little bit to this question. I don't have a lot of information about where tenants are saying to us, "We need more or less space because of AI." We do, as most people here do, have experience with new technologies that, you know, I actually started in computers in 1986, and introduced our first microcomputers at UCLA and a lot other places. I have not seen a new technology, especially a new technology that empowered individuals to be more productive, that didn't result in more people being hired, that are able to be productive that way.
Another thing that strikes me is that this particular technology, not unlike websites, this particular technology allows a very small group of people, three to five to 10, to form a company, entrepreneurial, literally create apps, do all kinds of things they didn't use to be able to do without having the money to hire programmers and all the rest of it, and start a business. The thing that Los Angeles is most known for is being a small company incubator market. My expectation is that as a result of that empowerment, you will see more people in offices just like you did with the internet, microcomputers, and all the rest of those things, not less, 'cause when someone is very productive, you want more of them 'cause you make more money with more of them.
I suspect that we'll have more small business formation because a small group of people have the ability to have greater outreach and use technology to create their own website or their own app without hiring a bunch of programmers. We'll see, though.
Thinking about kind of the overall demand drivers for your market, you know, you sounds like you're pretty positive on AI and business formation. How are you kind of thinking about, you know, kind of any effects for L.A. with some of the, you know, large media consolidation that's been in the headlines? Just any kind of incremental demand, you know, from the Olympics in 2028.
Obviously the demand is up because we're leasing a lot lately. Okay. I'm not sure the Olympics I don't know if the Olympics are gonna create any kind of meaningful additional office demand, to be perfectly frank. I think they're kinda putting their headquarters downtown for, like, all those people. I do believe the Olympics is gonna have one very good impact on us, which is, we're a primary owner in Westwood. UCLA is the Olympic Village for the athletes. The city, the state, and the federal government are focused on putting our best foot forward in Westwood. I think there's gonna be a lot of capital to go in there to get Westwood, the village in Westwood looking good, and that's the primary amenity for our buildings. We might have a little boost for a short time.
Not sure how meaningful it'll be. I mean, I'm sure all our venues at our buildings, will be full. The only lasting effect, I think, will be that Westwood will be in much better shape after they leave because they're gonna spend capital on it.
On the technology side with some of the headlines around consolidation, do you think that changes anything with the office market in L.A.?
Well, when you say technology, you mean the movie industry or technology? What?
You meant media, right?
You meant media, right?
Yeah, media.
The merger of media?
Yeah.
Yeah. That merger, which now has been decided, which is going to be Paramount and the Ellison family with Warner Bros., I think there's a few aspects to it. One is just going back. There's been some concern about that industry revolving around, like, are they not making movies anymore in California? Are they making it in other places? I think that's been going on for a long time. Frankly, the tax structure and some other things, I think, make it kind of hard to make movies in California, right? The employment laws and all the rest of it. Now they aren't even necessarily staying in the United States on some of these things. They're looking for most favorable, literally, countries where they can make some of this stuff.
At the same time, kinda the heart of creativity for movies is in L.A., and it's actually in West L.A. A lot of those people are powerful, and they'll say, "Hey, yeah, I got it. You saved some money by sending me to, like, Georgia outside of Russia, but I don't feel like living there for a year, and so you're gonna make it here." Okay? That's happening a lot, and it's happening a lot with TV series and some movies and the rest of it, right? so that's one thing. Another thing is the industry just slowed down in terms of content production, okay? I think that this merger is going to significantly increase content production. David Ellison has said, "I'm gonna make more movies." I think he will make more movies.
He said it when he bought Paramount, I think he's gonna even make more with the series and the control he has over some of the things that are at Warner Bros. I think him kind of winning this battle is gonna be very, very good for L.A. and our market because I think he's gonna produce a lot more product, okay? I know people are talking about layoffs, and I am sure there will be layoffs because there's a lot of duplicated jobs. I think a lot of those layoffs, not that I'm saying layoffs are good or I wanna have them or anything, but I think they're gonna happen on the studio lots. A lot of those jobs are on the lots. They're not renting space for it anyway.
I think it'll happen on the lots, I don't know how they'll reuse those lots, whether it's for production or other uses, but I think it's gonna happen on the lots, right? 'Cause he has two whole, now, big studios, not even to mention Skydance. That's where I think that's gonna happen. I also think, as a final thing, that the whether it be Netflix or otherwise, I think because David Ellison and that family is so committed to like literally the movie industry. It's not just the business of movies, it's the movie. I think that he's gonna force a response from them, and I think they will respond by having to make more content too. I think that this merger will be good for L.A., and I think it'll be very good for the industry.
Then on that, you know, there's been some tax credits to kind of incentivize movie production in L.A. Then maybe just on the regulatory piece, you know, I think in some of your GNA, you mentioned it's an upcoming election year. Can you just kinda walk us through kind of, you know, maybe any impact you're seeing from the tax credits for kind of studio production and movie production in L.A., and then, you know, the other kind of ballot initiatives that you're focused on and think can impact demand, whether that's in L.A. specifically or just for California overall?
We're not impacted by tax initiatives for making movies. We don't own any sound stages. We're not any even close to that business. I'm just giving commentary on it gratuitously 'cause you asked. In terms of the politics in California and Los Angeles, we are extremely involved. Extremely understates it. We're spending real money on it. We're engaging our partner companies and other REITs and other companies outside the real estate industry in it, raising money for it, promoting candidates. We're one of the large sponsors of a proposition that was just submitted last week, called the Local Taxpayer Protection Act. It was submitted to the state so they could count our signatures. We collected enough signatures to have it on the ballot.
I hope, you know, you'll all see that there. You can read about it. It's not hard to learn about. Effectively, if it passed, it would wipe out all the transfer taxes in the state. It does a couple of other things. We're involved in city council races. I mean, we're kind of across the board in the cities that we're in.
You know, Maybe staying with the regulatory side. You know, there's been some state municipal zoning changes that'll kind of, you know, incentivize or allow for additional multifamily development. You know, kind of what does that mean for Douglas Emmett, in kind of the multifamily development opportunity?
Well, it has been incredible. I mean, that has to be the right word. We own most of the meaningful developable sites along Wilshire, all the way from Santa Monica, all the way down to the end of Beverly Hills. It's on corridors like that that they were up zoned primarily by the state, secondarily through a couple of different things that happened at the city level to force new housing, which has allowed sites that we had that I never thought we would be able to even build on because it would've been such a battle to be kind of by-right development sites. We're right now in the process of building, we're in construction on about 1,000 units.
700 plus of them is in The Landmark Residences, which is at Barrington and Wilshire, which we've had to rebuild that whole thing due to a fire some years ago. There's another 300 plus in Westwood in an office tower that we're converting that we purchased with partners. We also have sites all through the west side where we can build an additional more than 1,000 units. We have a total across our portfolio of probably 8,000-10,000 units that the state action enabled, including in some other key locations where we were going through the process of trying to get the entitlements, which now we have by-right construction. It's expensive to build, so it hasn't launched as much building as you might expect just because it's so expensive.
We happen to have sites that are so valuable that it's worthwhile for us, and therefore, we're focused on it. I said on our last call, we're actually working on the architectural drawings for another 1,000 units. They need to get control over the cost. They need to loosen up on rent regulations and things like that if they really wanna launch off a lot more units.
Then just with that opportunity set, the 8,000-10,000, you know, how much of your portfolio can kind of be multifamily, kind of, you know, as you look out in the forward years, just with that opportunity set?
Right now in revenue, we're about a 22, 78 split, 22% multifamily. I think that we obviously can build a lot. I don't have on our list of buying multifamily. I think we can build for much better cap rates, 8+. Of course, I'm not including the value of the land, but we already own the land. You can buy for multifamily. Quality multifamily in our markets is still trading in the 4s, call it mid 4.5, something of that range, right? I know people are saying 5, but it's not trading there. It's trading around 4.5. We're much better off putting capital into building than we are to buying on multifamily.
I think the opportunity is in office, but to buy office, I need a seller. Kind of the quality, the scarcity of new product, the quality of the tenants, the industries that are there, while I feel like we're always defending that it's a good market and it's gonna come back, it's not lost on the owners, and they know the value of what they have. It's very hard to get the remaining good quality office buildings to trade. There's probably some fatigue there. I mean, we've been through COVID, we've been through a potential recession. There's a whole number of things that have happened, but they're, you know, they're also tough. You know, making a deal has not been particularly easy. I am seeing more off-market stuff than on-market, which is a good sign.
They're coming to us saying, "Well, maybe we'd make a deal. Here's kind of where we would be." That's a long-winded answer to your question because if I'm able to make a few big office deals, then, you know, the ratio could float back down to 20, right? If most of our capital ends up in just building apartments, it's resi's gonna float up to 30, right? I don't know. It depends on how, you know, what comes available and what we're able to do.
You know, as you kind of think about the opportunity to kind of recycle, you know, maybe out of some office and purchase additional office, you know, what kind of qualities would you look for in a new acquisitions in terms of location or, you know, how old the asset is that you don't already have? You know, if you look to kind of fund that through recycling some of your existing assets, you know, can you talk a little bit about, you know, what the bid for that office is and pricing that you could potentially get?
I think when I hear people talk about recycling, I think they're thinking about one of two things. One is, like, you built a building, maybe you leased it for 20 years to a credit company and go, "Well, I'm gonna sell it 'cause it's worth the most it's gonna be worth, and I'm gonna go do something else because now, you know, the return profile of this is gonna be some fixed number," whatever it is. We don't have a lot of single tenant buildings like that, so we don't have that. The other connotation of recycling is I'm taking some old and garbagey, my empty aluminum cans, I'm turning to something bitchin' like a pillow or whatever, right? We own the best buildings right now, so why would I sell the best building to buy maybe another building that maybe could be equal or less?
I'm probably not a guy that's running around trying to do a lot of, quote-unquote, "recycling," right? We're in the best markets, and we dominate those markets with the buildings we have, and we own the best buildings in those markets. I think that's literally undisputed, okay. There are other buildings that would be in the top quartile of our portfolio that are office buildings, and I'd very much like to get them. Those owners have their own opinion about that. We already talked about that. What was the second part of your question?
I guess just, you know, you talked about maybe looking at some of those buildings that are in the top quartile.
Yeah.
I guess, you know, how would you think about funding if it is with disposition?
The capital for it.
The capital for it.
Yeah. Okay. We have always-- and we've had these discuss-- actually, in this room, I've had these discussions many times where I've said even when we were extremely flush with cash, we were paying down debt. We had so much cash. We were building buildings through pure cash flow. I mean, all the construction from 1996 to the point where we're now doing that Landmark Residences project was done pure cash flow, no construction loan. My last construction loan was in 1996, okay. Our cash is tighter. We still have a lot of excess cash. You're able to see that because you can see it from our AFFO and what % our dividend is of our AFFO, but we don't have as much as we used to have.
During that time when we even had a, like, overwhelming amount of cash and we were paying off buildings. Remember, we went public with a loan on everything, and we went into COVID with a loan on roughly half the value of our apartment portfolio, and half of our office buildings did not even have loans on them. All of our debt is non-recourse first trust deed debt. We didn't even, we just paid the buildings off, right? Those have been held as reserve. They were just holding equity. We were just storing it in there, right? All that time, I was also doing deals with sovereign partners and building our sovereign equity platform.
I kept saying, people would say to me, Bilerman said to me, "Hey, if it's such a good deal, why don't you take the whole thing?" I said, "Because if I don't give them deals now of the stuff they want, they're not gonna be there for me when, like, there's no capital in the market and you have to be very contrarian to do deals. They're not gonna be there for me 'cause they're gonna say you're a cherry picker, right?" That has played out to be extremely true. Okay. You know we're not big fans of issuing equity. We don't use public equity to really raise money. I don't like diluting ownership across our shareholder base or effectively selling pieces of our buildings. Also, I think any deal I do, right?
You never know for sure, market timing, if it's gonna be a good deal. It's always good to diversify your risk on the equity, especially when it's a very big check. With all that said, they have been with us, and while today we have less cash and have been forced to take a smaller piece of the deals, we used to take 30%+, now we're down 20% of the deals. They're there. They're doing deals with us. We have enough equity with our partners to just continue buying. There's nothing that's out of our reach. We're still able to be active when it's not super popular to, let's say, buy office buildings in West L.A. That's extremely valuable asset that doesn't get counted on your balance sheet, but it's a, it's a optionality that's very valuable.
You know, how would you think about kind of the funding needs for some of the multi-development that we talked on earlier? Would you kind of look to the similar kind of JV partners there or look to fund that in a different way?
You saw the choice I made on Landmark Residences. We needed not a large amount of money for that project. It's extremely valuable project when it's done, like multiples of the loan. We went and got a $375 million construction loan because I thought in the market today, you know, the market moves around. Oddly, I thought residential construction was strangely cheap. Those loans, there's a lot of people that wanted to make it. We had a lot of bidding for that loan. I went that construction loan route to build that. We already owned it, right? We'd already spent a lot of money on getting it ready. We'd already started construction. You know, it didn't take a lot left to finish it, and I didn't wanna stress our cash position or our balance sheet.
If we were to take on some of our sites a lot of new resi construction that was a drain, my guess is, 'cause I don't have a high tolerance for debt, my guess is I would move over and diversify that risk. I don't think that the one construction loan that I got is very risky considering the value of the project and where it's at today and the income coming off it. I mean, we can miss by 50%, still a good deal. That's an easy one. We're not big consumers of debt. My guess is another big draw on capital would come with some partners.
You know, at what stage in kind of the development process do you look to engage a JV partner, just in the construction phase?
Oh, if I were to do that with a resi construction deal?
Yeah.
We usually like to have it totally baked so that when they come in the deal, kinda the only risk is maybe we screw up on construction, although we even have signed construction contracts. Or that maybe I got the rental rates wrong or something like that. Usually, we own buildings right there, and the rental rate's pretty easy to see 'cause we're already renting. You know, we're doing those deals. I like to make it as low risk a project as possible so that the cost of the equity is not exorbitant because they feel there's a lot of risk associated with the construction project.
Then you mentioned being debt kind of adverse. You know, where do you think the right kind of leverage level is for the balance sheet, as you think about kind of just over the long term?
The right leverage for our balance sheet?
Yep.
When we went public, we were running the company at around, like in the 40s, the low 40s. When we went into COVID, we were in the high 20s. Some of that was a function of just we had just, like, a lot of extra cash, and I need to put it somewhere, so I was paying off debt. Some of that was a function of how cheap debt was for a long time. We're not very aggressive users of debt. I mean, if I don't have something I really like to use the cash flow, my go-to move is to just pay down debt.
I've done that for most of the 20 years we've been public, and I did it when we started the company in 1991, and we had funds, and we started making cash flow. We were just reducing our leverage in those funds. Kinda that's the trajectory I tend to follow.
Great. One of the questions we're asking all the companies is, you know, how is Douglas Emmett using AI? You know, we talked a little bit about the impact on company formation and office demand. How are you guys specifically using it within your company? Are you looking to build anything proprietary with respect to leasing or just look to use it in a third-party manner?
We're not a creator of new software. You know, How's it on the cloud? We try and use, you know, big SaaS companies. We have a number of programmers, but they're really, like, more focused on taking established software and the adjustments that they let you make for the type of reports you want to draw data out of that software, whether it be accounting software or we have some database software that's used, does a lot of functions in the company. I don't think we'll create using AI any kind of new softwares or not that I know of. I do know that we're testing AI solutions for lease abstracting and a couple of other things. I think we hope to have the lease abstracting completely operating by the end of the year. We're not innovators around software.
I mean, we're users of established working products.
That makes sense. Maybe just, you know, an overarching kind of question, and we've talked a little bit about it. Why is kind of the multi-tenant, you know, smaller tenant space kind of been the right business strategy for Douglas Emmett over the years versus going over kind of larger tenant spaces?
Well, that's actually a good question, which I have an answer to, but that's a good question. At its core, we're a small tenant market. If we wanted to ignore small tenants, we probably shouldn't be buying buildings in West L.A. or in the markets that we're in. It's come with this really great benefit, which is that it takes a very robust and encompassing platform to be effective with small tenants and to make it as effective as, let's say, a residential platform where the tenant doesn't expect to overly negotiate the lease or do big TIs or big commissions need to be involved. Because we've spent the money to train and build our platform, we get a lot more bang out of small tenants than most companies get out of large tenants. We...
We have these depicted in some of the stuff on our website. Our cost of leasing or, you know, our leasing costs, commissions, downtime, et cetera, are about a third less than our comp set. I think most of that is because they're using large tenants who have a lot of leverage and demand a lt of TIs and free rent and all the rest of it. We don't tend to have to give that. We provide a more of a full service structure. A tenant comes in, we can quickly say to them, "You know, if you need this one wall changed, we'll do it. Don't worry about the cost," 'cause we have 100 people in our construction company.
We can take them to a design room with designers and they will sit right there and they'll go, "Here's carpet, paint, mullion, colors that go together. You can choose them if you like cool colors, warm colors, et cetera." We buy huge amounts of this stuff, and we also are able to control the build-outs of our tenants because they're smaller and make them very useful for future tenants instead of something odd with like circular conference rooms in the middle and stuff like that. It's really brought down our releasing costs, and that's depicted in the how much AFFO we tend to have, how much cash flow. We've used that cash flow, as I already mentioned, to pay down debt. We've used it to build new buildings.
We've used it to take our position with joint venture partners to buy buildings and funds. That's been a very valuable process. Having small tenants has been good in more than one way. 10 minutes. All right.
Thank you so much.
Thank you.