Douglas Emmett - Q2 2023
August 2, 2023
Transcript
Operator (participant)
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 McElhaney, Vice President of Investor Relations for Douglas Emmett.
Stuart McElhaney (VP of Investor Relations)
Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO, Kevin Crummy, our CIO, and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the investor relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.
Jordan Kaplan (CEO)
Good morning, and thank you for joining us. Since we last spoke, we took 2 very positive strategic steps toward enhancing the long-term health of the company and ensuring meaningful growth. First, we have formally begun the process of reconstructing our Barrington Plaza apartment community to install modern fire/life safety systems and otherwise bring the asset up to date. Tenants have been notified that they are required to vacate the property, and approximately half have already done so. This is having a current impact on our earnings, but we have waited 3 years to begin this process, and I am very happy that it has started. Second, in July, we closed a new 10-year, $350 million non-recourse, interest-only loan secured by 2 recently completed residential projects. The loan is floating at 137 over SOFR, which we feel is a very good rate.
Both properties were built using our free cash flow, so they were completely unencumbered. In a difficult loan environment, we are pleased to have this additional source of cash to take advantage of future opportunities. While new leasing from larger tenants has been slow, tenants over 10,000 sq ft did account for nearly half our renewals in the second quarter. Overall, we signed 210 office leases covering nearly 1 million sq ft. We are seeing tenants renew further ahead of their expirations and for longer lease terms. This returns us to a more typical lease expiration pattern, reversing the short-term mentality we saw during the pandemic. I am also pleased that we have been successfully maintaining rental rates and controlling leasing costs. The overall value of leases we signed during the second quarter was higher than the prior lease value for the same space.
At the same time, our focus on smaller tenants and simplifying the office leasing process has kept our leasing costs below our long-term pre-pandemic average and well below other office REITs. While Barrington Plaza reconstruction and the new loan are very positive for the long term, we are reducing our 2023 guidance to reflect their short-term impacts. We have significant cash on hand, strong cash flow after dividends, no corporate level debt, and almost half our office properties remain unencumbered. I am very happy to report that over the past two quarters, we repurchased 9.1 million shares at an average price of just over $12 per share. I am confident that our buildings and markets will perform extremely well over the long term, which is supported by our substantial leasing activity during this downturn and the long-term supply-demand metrics of our markets.
With that, I will turn the call over to Kevin.
Kevin Crummy (CIO)
Thanks, Jordan, and good morning, everyone. Leasing remains strong in our two new multifamily development projects. At the Landmark LA in Brentwood, we have now leased almost 85% of our 376 new units. At Bishop Place in Honolulu, our office-to-residential conversion project, units continue to lease as quickly as we can deliver them. In July, we closed a new $350 million non-recourse, interest-only loan secured by these properties. Both properties were built using our free cash flow and were formerly unencumbered. The new loan bears interest at SOFR plus 1.37% and matures in August 2033. The new loan proceeds add to our liquidity so that moving forward, we can take advantage of new investment opportunities. As Jordan mentioned, we have begun to vacate Barrington Plaza because of a requirement to install new fire/life safety systems.
Barrington Plaza is a 712-unit apartment complex spread across three high-rise towers in Brentwood. About half of the units have already been vacated.
most of the remaining units are scheduled to be vacated this fall, with some tenants having a right to remain until next May. With that, I will turn the call over to Stuart.
Stuart McElhaney (VP of Investor Relations)
Thanks, Kevin. Good morning, everyone. During the second quarter, we signed 210 office leases covering 957,000 sq ft, consisting of 188,000 sq ft of new leases and 769,000 sq ft of renewal leases. While we were pleased to see an overall increase in leasing activity, our leasing did not include many new tenants over 10,000 sq ft and remains below levels needed to create positive absorption. As Jordan mentioned, our leasing activity was characterized by tenants renewing further ahead of their expirations and for longer lease terms. Nearly half of our renewals came from tenants over 10,000 sq ft.
Our office leasing spreads during the second quarter were positive 4.1% for straight-line and negative 6.6% for cash, reflecting the strong annual rent growth built into our office leases. At only $5.23 per sq ft per year, our leasing costs during the second quarter remained well below the average for other office REITs in our benchmark group. Turning to multifamily, our portfolio was 99.2% leased at quarter end, and rent roll-up remained healthy across our portfolio. With that, I'll turn the call over to Peter to discuss our results.
Peter Seymour (CFO)
Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the second quarter of 2022, revenue increased by 2.6%, primarily as a result of our multifamily portfolio, which now represents approximately 20% of our annual revenue. FFO decreased by 8.4% to $0.48 per share, primarily as a result of higher interest expense on our floating rate debt. AFFO decreased 16.5% to $74.9 million. The construction costs impacting AFFO this quarter related to our significant leasing last year. Same-property cash NOI decreased by 0.9%, with higher rental revenue and parking revenue offset by higher insurance, janitorial, and parking expenses. Our G&A remains very low relative to our benchmark group at only 4.3% of revenue.
Over the last two quarters, we have repurchased 9.1 million shares at an average price of $12.03 per share. These repurchases were accretive for both our FFO and our cash flow. Turning to guidance, we are adjusting our FFO guidance to reflect our Barrington Plaza move-outs and our new loan, offset by a number of positive developments, including the impact of the share buyback. Collectively, we expect those items to reduce FFO by about $0.07 per share. As a result, we now expect FFO per share to be between $1.81 and $1.85 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.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Again, in consideration of other participants, please limit your queries to one question and one follow-up. Thank you. At this time, we will pause momentarily to assemble our roster. Our first question today is from Steve Sakwa of Evercore. Please go ahead.
Steve Sakwa (Senior Managing Director)
Great, thanks. I guess good morning, Jordan. I just wanted to start on leasing, and, you know, it's nice to see, I guess, the renewal activity pick up. But, you know, as you mentioned, you know, you really need more new activity in order to, to drive net absorption and ultimately occupancy. I'm just curious sort of if the pipeline is changing or what you think ultimately gets, you know, folks off the sidelines to, to sign new deals. Do you feel like the writers' strike and actors' strike is, is keeping any lid on that new activity?
Peter Seymour (CFO)
I, I mean, I can answer some of that, but I'm gonna let Stuart generally answer it.
Stuart McElhaney (VP of Investor Relations)
Yeah. Hey, Steve. How are you doing? Yeah, I think, you know, very encouraged to see larger tenants very active on the renewal side, so I think that's a really good sign. Hopefully, that translates over to kinda new business soon, and we, we see more new tenants coming through of a larger size. I, I can't say yet that we've seen that in the pipeline. No, you know, no real trend there to speak of yet, but, you know, we're, we're encouraged by the renewal activity that we saw. I think as far as the writers' strike and the actors' strike, I think that maybe on the margin, a tiny bit, I don't think it's gonna be something that's real material for our business.
We do a little bit of that type of leasing, but it's, it's not a huge part of the business.
Steve Sakwa (Senior Managing Director)
Okay. Then... Oh, go ahead.
Stuart McElhaney (VP of Investor Relations)
I was just gonna mention, when we're talking about leasing, I was just gonna mention that, you know, if you look at expirations for next quarter, Q3 expirations, they're elevated. We've got one very large tenant that, that is expiring next quarter. We're expecting that tenant to renew, but give back a, a large amount of space.
Jordan Kaplan (CEO)
... just wanted to kind of give you guys a heads up that that's coming next quarter. Expirations look more normal in Q4.
Steve Sakwa (Senior Managing Director)
Okay. Then, Jordan, as it relates to Barrington, I know that there's been a lot of discussion with, you know, the insurance proceeds and, you know, what might be covered and not covered. Do you have any kind of update on the timeline as to kind of when you might have an idea of what % of the costs are covered by insurance and what is out-of-pocket from Douglas Emmett?
Jordan Kaplan (CEO)
I mean, I wish I did. I don't. It's been very difficult with the insurance company, and we're going through it with them. We've obviously just started the work and said, "Well, we're, you know, we're starting it." I mean, I'm gonna say, I mean, we feel it's covered, and we've had a hard... It's been very complicated to work with them. So I, I wish I had a better answer for you than that, but I don't. In terms of the... Something I wanted to mention, if I was asked about Barrington, that I wanted to also get out, was the impact of Barrington coming out of our earnings.
While we don't want to give kind of some future guidance about it, I wanted to kind of give you some guardrails to make those estimates, so I can maybe do that now with you. In 2019, before the fire and the pandemic, Barrington was contributing about $0.09 to our FFO. In 2022, following the fire and the pandemic, you gotta remember, we had some, you know, units burned out, a lot of issues, it dropped down, and it was contributing about $0.07. This year, 2023, this expectation, now that we have the move-outs moving, we only expect the property to contribute about $0.04 to FFO.
I know that's been, like, a question we've been asked in the past, and we haven't really felt like it was time to answer it, but I wanted to give you guys this info, you know, because I think it's something you wanted to know.
Steve Sakwa (Senior Managing Director)
Great, thanks.
Jordan Kaplan (CEO)
I know that wasn't a direct answer to what you asked. What?
Steve Sakwa (Senior Managing Director)
I appreciate the color there. It sounds like we'll have to wait a few more quarters perhaps to get, I guess, to get a finalization on that, but.
Jordan Kaplan (CEO)
Yeah.
Steve Sakwa (Senior Managing Director)
I'm good for now. Thanks.
Jordan Kaplan (CEO)
That's right. Okay. Thanks, Steve.
Operator (participant)
Our next question today will come from Alexander Goldfarb of Piper Sandler. Please go ahead.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Hey, good morning out there, Jordan and team. Jordan, maybe sticking with the Barrington, the other item has, has been the news articles about the tenant litigation, and I'm guessing they're not suing, being upset that you're trying to make the building safer and less fire prone. I'm guessing this is more just trying for them to extract a financial settlement, but maybe you could just provide an update of what you can discuss and, you know, if this is just a standard sort of shakedown or if this is something that, you know, the city could decide to, you know, hold, you know, pull your permits or your approvals to do this, and if it could complicate your plans to, you know, make the building safer?
Jordan Kaplan (CEO)
So this is not the This, this litigation has, is not really have anything to do with the city. This is a couple of tenants, and we're having trouble figuring out exactly who or how many, you know, have engaged in this litigation. I can't speculate to what their purpose is. I know, I know that I mean, at least we believe that a few of them have already left the building, but we don't really have a lot of answers. With that said, our position, we're very confident in our position. It's very strong. You know, litigation's always disruptive, but we're confident in our position, and that's kind of where I have to leave it until this thing finishes playing out.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay, your view is, though, as far as the city goes and this litigation from the tenants, I understand separate related, but you don't think that they would be able to win over any of the city people who would suspend your ability to undertake the work?
Jordan Kaplan (CEO)
I don't want to. I mean, I guess in litigation, anything can happen. You know, as I said, I don't want to speculate too much about what can or can't happen in litigation. As I said, I think our position is inordinately strong in terms of what we're doing and the processes that we're following, and we're following the law perfectly.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay. The second question is, on the, on the, mortgaging of Landmark and Bishop Place, you know, you guys have had a strong capital position. You said you built both of those with free cash flow. I don't recall you guys using a corporate line of credit that often. Just sort of curious, the use of the proceeds, the decision to encumber the assets, and then I'm assuming this isn't just to buy back stock. I'm guessing that maybe this is either to help fund, you know, the rehab of Barrington until you get the insurance proceeds or maybe start another apartment or residential conversion. Just sort of the thoughts behind the mortgage, the mortgaging of those two assets and then the use of the proceeds?
Jordan Kaplan (CEO)
To, to take the beginning of the question, which is that we felt like the kind of best, least expensive debt we could get were on those two assets, and we think we did get the least expensive debt we could get. I think 137 over is very good debt, right? 10-year, 137 over. Now, rates are high, and I understand that it's still punishing to pay the interest on that loan. Without, you know... making specific allocations, I could tell you the reason we did it was because I thought it was really important to have a lot of liquidity. I think that this recession is not substantially dissimilar from the one in the early 1990s.
Unlike everybody sitting around in 2000 or the dot-com bust, thinking they're gonna be grave dancing, taking advantage, or the one in 2008 and 2009, and really, no real product came out, and the opportunities were more around buying debt, which isn't even, you know, a core business for us. I think in this one, there might be some stuff that we'll wanna buy, and obviously, I felt like the stock presented a good opportunity, and we did buy stock. So I just thought it was worth it to take the pain right now of paying the interest on that loan to have that, you know, on our-- in terms of our current earnings, because I think there's gonna be some good opportunities coming up, and I, I don't wanna miss on.
I wanna take advantage of them.
Alexander Goldfarb (Managing Director and Senior Research Analyst)
Okay. Thank you, George.
Jordan Kaplan (CEO)
Thanks.
Operator (participant)
Our next question will come from Blaine Heck of Wells Fargo. Please go ahead.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great, thanks. Jordan, can you talk about the zoning changes that were made at the state level late last year, that gave multifamily, multifamily zoning to certain parcels on major thoroughfares? I think you were expecting to get guidance on that in July. Any update there, and do you think it could result in more development opportunities for you guys in the next year or two?
Jordan Kaplan (CEO)
To answer the last part of your question first is, is I, I'm sure it will result in that. I mean, we have sites that, that, that, those state-level changes, we know directly impact. I mean, an impact in a way where I thought, "Oh, this is gonna be a long process," and they completely shortcut it, okay? We think-- I think we have many sites that will benefit from, from, from that. Now, going to the beginning of your question, this thing's super complicated. The city is not famous for moving fast, and we still have not gotten guidance, and here we sit. But you're right. I'm anxious to see the guidance. I'm anxious to make sure the guidance complies with what the state is requiring. And, and I do think...
I mean, we, we have the set of opportunities we always had, that I felt we had, but to talk, you know, like, in terms of zoning and what type of changes do you need to make to, to achieve what we want to achieve on the site? I mean, with the things that the state passed are just very beneficial to us, but we need everybody to be rowing in the same direction, including the people that really sign off on our, our approvals to do the construction. That happens at the building safety and in the city. So then, and then those people need guidance, and the city hasn't developed and issued that.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
All right. That's helpful. Just switching gears, can you guys talk about the increase you're seeing in property insurance that affected your same-store projection this year? And just give some color on that situation and maybe how long you expect that to be a headwind. If, if you could also touch on what you're seeing on the property tax side, and, and whether you might be in for some breaks there in the future.
Jordan Kaplan (CEO)
Okay. In terms of the insurance, you know, in the, you know, whatever it is, the 30, 30 plus, plus, plus years Ken and I have run this place, we've, but we've seen insurance go up and down. It's one of those odd expenses that actually doesn't just, you know, trajectory up. I mean, when the market's tight, it can spike way up, and then maybe those insurance companies fall away, new ones come, they're aggressive, and you can see your rates cut, cut, and cut for a number of years. We've seen both those happen.
Right now, what we're seeing, and I'm not sure it's totally peculiar to us, maybe some of it is, but I don't think it all is, is not at the lower level, not at the level of, like, first loss positions, but at the very high levels, the reinsurers that reinsure up in, you know, stratosphere numbers that never expect to pay anything. I think not necessarily here in our portfolio, but across the country, they've been getting claims that they didn't expect, whether it be flood, fire, and hurricane or whatever it is. They're getting claims, whether at Florida, all around, that are penetrating into levels that they didn't expect to pay on.
They've gone now a few years with that very high disaster, insurance actually not being sort of a freebie and just freebie and collecting a premium. As a result of that, what's impacting it, because we have to buy a lot of insurance. We have to be, you know, insured, like, all the way up the line. Those higher levels of insurance have just become much more expensive, and that's what's impacting us. Now, you know, the, you know, the forms change and things, things change, and guys that have losses, you know, deal with them, and then they shift back to focusing on being profitable. I'm not sure it'll stay that way, but we've seen the last two or three years, we've seen just monumental increases.
Really, aside from that Barrington fire with virtually no claims, at least on our part. I'm sure it'll eventually correct itself, but the increases are really stunning. That's on the insurance. In terms of property taxes, there is an opportunity, especially with what's going on in the city right now, to appeal what's called Proposition 8 appeal on your property taxes, if you feel that there's a period of time when the value of your property is has dropped below where it's being taxed at that moment. It still has a maximum tax equivalent to your Proposition 13 number that grows by 2% a year, but you can appeal to have it reduced, and then it'll be reduced, then when it goes back up, it goes back up. People do do that appeal.
That appeal is not necessarily perfectly connected to the, you know, third-party market value. It's a complicated formula that they use, where they lease up the entire building at the then current rates, and they have a different set of cap rates they use that eliminate the property taxes. With all of that said, there are opportunities there, and we're focused on them. I don't know how that much will come out of it, but there are opportunities there, and we are focused on them.
John Kim (Managing Director and Senior Equity Research Analyst)
Very helpful. Thanks, Jordan.
Jordan Kaplan (CEO)
Okay, thanks, Brian.
Operator (participant)
Our next question is from Michael Griffin of Citi. Please go ahead.
Michael Griffin (Director and Senior REIT Equity Research Analyst)
Great, thanks. Maybe going back to the leasing pipeline. I'm curious what you're seeing is the cause of driving these, these longer lease terms that you mentioned in the release. Is it more certainty about space requirement needs, maybe a shifting in people's kind of view of the macro? Anything else you could add on this would be helpful.
Stuart McElhaney (VP of Investor Relations)
Yeah, Michael, I think that kind of during the pandemic, we saw tenants have a shorter-term mentality, which is understandable. There was a lot more uncertainty in the market then, and so terms shortened up. So I think now we're, you know, we're certainly pleased to see that the average lease terms have gone back to five years, which is our historical average, you know, kind of pre-pandemic average and what we did this quarter. I think that tells you that tenants are starting to feel more confident and more willing to go, you know, longer term, rather than just kick the can down the road for a year or two. That should help kind of normalize this lease expiration schedule we've had that's been a little chunkier earlier, you know, in the process than we're used to.
That, so that's a good sign.
Jordan Kaplan (CEO)
I'd like to mention, I mean, that 1 million sq ft that were done last quarter, I am beyond happy about that. Of course, I wish there was more new in that. Once again, we're getting a ton of evidence of the strength of this market and the strength of the activity that's out there. While our existing larger tenants are renewing and renewing for longer, which is a great sign, certainly the next step for us is to get bigger tenants to come in to some of this space. The activity is just fantastic. I mean, if you look at, you know, doing 1 million sq ft and you look at our history, that's a great quarter. Holding rate and holding lease costs. I, you know, I really had the thought that...
I know many people did mention their notes, but I would put it in, like, double bold capitals in the top of my note. I just thought that was a really big point.
Michael Griffin (Director and Senior REIT Equity Research Analyst)
Great, thanks. That's helpful. Then just on the transaction market and opportunity you're seeing out there, you know, there are opportunities for office, multi. I mean, I know you've got ample dry powder. You've kind of talked about it, but where, if anything, are you seeing transaction activity across both of your, your property types?
Jordan Kaplan (CEO)
You know, I'm not seeing a lot of transactions in general, and, and I will tell you, it's not for lack of looking. I, we actually have called all our la- We always call our lenders during a time like this to tell them that we're the best debt in their portfolio and, and, and, and don't worry. We have been asking all of them: Do you have anything we can focus on that's in any of our markets, that is, is wobbly, it's on your watch list? I mean, it doesn't even have to be all the way down the line in terms of being in trouble. So far, I haven't heard anything. That's on that side.
Now, I do think the pandemic, combined with whatever is happening now, which is certainly targeting real estate in terms of the, you know, if you want to talk about, you know, maybe the country's not in a recession, but real estate is. I think that is going to maybe not generate opportunities that are related to someone, you know, necessarily debt, but I think people are going to finally do some things. If I was to guess at where the best opportunities will be, it's, it's gonna be in office. I think resi is still relatively strong. You saw our numbers are very strong, in, in these markets, but I think some office guys are hopefully just running out of breath, and that's where I, I, I, I'm the most hopeful.
Michael Griffin (Director and Senior REIT Equity Research Analyst)
Great. That's it for me. Thanks for the time.
Jordan Kaplan (CEO)
Thanks.
Operator (participant)
Our next question today is from John Kim of BMO. Please go ahead.
John Kim (Managing Director and Senior Equity Research Analyst)
Good morning. There's been seemingly some strong interest from global investors in multifamily and prime office. I'm wondering if you can comment on that as it pertains to your portfolio, both for West LA office and if you had considered going that route, the JV route, on multifamily.
Jordan Kaplan (CEO)
Yeah, you know, we did on our last purchase. Yes, we do. Yeah, I like the JV structure. Even when we have a lot of cash, I think it's smart to do the JV structure because they're great partners, and it. You know, you wanna if you don't keep coming up with good product that we're willing to do, that, that is their primary criteria, frankly, then you're going to lose their attention. I think the platform itself has value. The fact that, you know, they've been coming into our deals, my intention would be to continue, you know, to do, you know, high-quality institutional deals that are appealing to them and to us.
John Kim (Managing Director and Senior Equity Research Analyst)
Are you seeing that same level of interest, though, in West LA office? We see it in New York on a couple occasions, but just wanted to know about your region.
Jordan Kaplan (CEO)
You know, we haven't had an opportunity to present any, but, I mean, we did one large deal, which you saw us do last year, or, yeah, last year, that was a little over $300 million, and there was a lot of interest in that. We did that lickety-split with a partner. That was residential. I haven't had an opportunity to offer an office deal, though, I, you know, I think that if we found a great office deal, we'd have their attention. I don't know that answer. I haven't had an opportunity to offer it.
John Kim (Managing Director and Senior Equity Research Analyst)
Okay. My second question is on bad debt or uncollectible revenue, lease revenue. Can you comment on what that was in your multifamily and office portfolio this quarter, and how that's trended from last quarter?
Peter Seymour (CFO)
This is Peter. Our total past due balance just continues to decline. We've been working this now for, you know, for, for some time, and it keeps going down. It's somewhere under $17 million, all told. You know, we're continuing our collection efforts. We're continuing to pursue tenants who owe us money. We have a pretty high confidence we're gonna get it back.
John Kim (Managing Director and Senior Equity Research Analyst)
Great. Thank you.
Operator (participant)
Our next question today will come from Camille Bonnel of Bank of America. Please go ahead.
Camille Bonnel (REIT Analyst)
Hi. To ask an earlier question in another way, as the recurring theme these past few months have been around preserving liquidity, which has been reflected in your actions to rightsize your dividend, is when you're evaluating the best sources of capital, how do you balance deleveraging versus buybacks? Because I think everyone recognizes earnings will be under pressure, given the current environment. Instead of taking out that loan, could you have used the additional liquidity to address your needs?
Jordan Kaplan (CEO)
Well, for a number of reasons, what I'm happy to say right now, I don't feel we have any need to reduce our, our debt level. Our debt level is pretty low right now. Just as a reminder, we have beyond everything, beyond the dividend, beyond the, you know, beyond our debt service, beyond our operating costs of the company, which we keep very low anyway, we have a tremendous amount of cash flow. That's in terms of just, you know, the question about covering payments and covering the fact that interest rates have gone up and all the rest of it. In terms of repayment, you know, almost half of our office portfolio doesn't even have a loan on it. We have no corporate-level debt. We have a ton of extremely high-class buildings with no debt on them at all.
You just happen to see two residential deals that didn't have any debt. We have a lot. We have an enormous amount of capacity to delever by adding real estate, to cover, you know, to. We have a lot of cash, and also to cover, you know, to do paydown. We have I mean, we have every tool in the shed in terms of debt, and we don't even have any meaningful debt coming up until the end of next year, and we really don't have any meaningful debt coming up until 2025. While we've always taken a posture to guard the company, and I know that this is, Kent, my fourth rec- I want to call it our fourth recession, so we've learned many lessons through that.
Of course, we entered this recession, and we entered even the pandemic in extremely strong shape, and that's played out, you know. So I don't feel we have any issues there, but the other lessons I learned is, don't waste these opportunities to grow the company because that growth is super meaningful, and I'm, I'm not gonna waste it, and that's why I wanted to have the liquidity to take advantage of things, and we have it, and, and it's my intention to do that.
Camille Bonnel (REIT Analyst)
As my follow-up, appreciate your comments there, Jordan. I was just running some quick math, and the updated interest expense guidance seems to be $5 million-$10 million higher than what's implied in the SOFR curve and the new residential loan. Just wondering if you could help us bridge the gap here.
Jordan Kaplan (CEO)
I, I, I can't do the math you're doing. I think it is the cause of that, those two things. I, I'm almost 100% sure it's the cause of those two things, but, you know, you can give Peter a call and try and-
Peter Seymour (CFO)
Yeah, we, we can walk through it.
Jordan Kaplan (CEO)
He could try and understand what you're doing and compare it to whatever's there.
Camille Bonnel (REIT Analyst)
Sounds good. Thank you.
Jordan Kaplan (CEO)
All righty.
Operator (participant)
Our next question will come from Dylan Brzezinski of Green Street. Please go ahead.
Dylan Brzezinski (Research Analyst)
Thanks for taking the question today, guys. I guess sort of going back to the capital allocation question that was just asked, asking it a little bit differently, in terms of, I guess, how do you guys weigh share buybacks versus being opportunistic on the acquisitions front? Is it simply just, some spread to your implied cap rate, or, or just what does that internal process look like?
Jordan Kaplan (CEO)
It's not that. What, you know, We're in general, if you said, where, where, what, what, what's our inclination? Our inclination is to buy great buildings. I mean, they sustain us for the long term. I'm very confident in their earnings growth. We've experienced earnings growth for the last 35 years and in the way this market's matured, and I, I love owning high-quality buildings and the concentration here in these markets. Sometimes it just becomes impossible to ignore the opportunity in the stock. You know, I don't wanna just, like, you know, buy back stock and miss the opportunity to buy a building. We're just always balancing those two things.
Dylan Brzezinski (Research Analyst)
That's helpful. I guess just, just one other one, going back to, to Barrington Plaza. Are you guys able to share any yield on cost expectations at this point in time?
Jordan Kaplan (CEO)
Not really. I mean, that, that's a long way out. What we're focused on right now is just getting this building to the standards that we have in all our other buildings of safety, of having these fire sprinklers in and getting all this fire/life safety stuff done. I mean, two fires in this building is just way more than we can stomach, and that, that is something that just career-wise, we had to just get resolved, and we are now resolving it. That's why, as I mentioned in my prepared remarks, I'm so happy that we're finally kind of firmly on this road to getting this done.
Dylan Brzezinski (Research Analyst)
That's it for me. Thanks.
Jordan Kaplan (CEO)
Thanks.
Operator (participant)
It is star and then one to ask a question. Our next question will come from Bill Crow of Raymond James. Please go ahead.
Bill Crow (Managing Director and Senior Research Analyst)
Yes. Thanks. good morning. Jordan, is it fair, and I'm sorry to ask another capital allocation question, but is it fair to assume that your decisions, including taking on more debt and maybe share repurchases and prospective new investments, et cetera, are done against a backdrop that you assume that Warner Bros. Discovery does not renew next year?
Jordan Kaplan (CEO)
Yes, we assume they're not renewing. That's correct.
Bill Crow (Managing Director and Senior Research Analyst)
Yeah. Okay. you do the test against that. Okay. then just a couple real quick ones. Barrington Plaza, do you have business interruption insurance in addition to the actual physical cost of repairing the building?
Jordan Kaplan (CEO)
Yes.
Bill Crow (Managing Director and Senior Research Analyst)
Okay. the, the $0.04 this year might be recouped. Finally, any comments on the latest statewide rent control ballot, and any initial reactions to the end of the debt, or the, rent moratorium related to COVID?
Jordan Kaplan (CEO)
Okay. Obviously, the ballot's unfortunate. It's driven by 1 guy, and the ballot initiative, it's just, you know, 1 more thing that we have to fight, and our group will fight it. He's proposed it times in the past. It's unpopular, and it's been roundly beaten, you know, you never know every time. Nobody likes to be attacked. In terms of the moratorium ending for the sort of the 1st half of the rent relief on apartments, I'm not sure that's super impactful on us. We don't have a lot of... You want? Come closer. What? We don't have a lot due from apartment tenants. I mean, we have some, not, not a ton.
No matter what they do with that, I'm not sure you guys are gonna see a meaningful impact to us.
Bill Crow (Managing Director and Senior Research Analyst)
Okay. All right. Thanks.
Operator (participant)
Our next question is a follow-up from Blaine Heck of Wells Fargo. Please go ahead.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Great, thanks. Just wanted to circle back. Stuart, you mentioned a large tenant giving back some space in the third quarter. Can you give any more detail there around, you know, where it is, how much it's giving back, and, and the reason they might be moving?
Stuart McElhaney (VP of Investor Relations)
Yeah, you know, we, we don't like to talk about individual tenants too specifically. As you know, we're kind of a flow business, but this was, you know, this was noteworthy because it's, it's large and, and you guys are likely to see the impact in the numbers next quarter. It's a tenant in Woodland Hills. They, they are renewing but downsizing, which, you know, we're happy to have them stay in a portion of the space, but they, they, they wanted to give back some of what they had. Not much to say beyond that. You know, not, not an atypical situation, but wanted to mention it because, you know, it, it's likely to be noticeable.
Blaine Heck (Executive Director and Senior Equity Research Analyst)
Got it. Thanks.
Operator (participant)
At this time, we will conclude our question-and-answer session. I'd like to turn the conference back over to Jordan Kaplan for any closing remarks.
Jordan Kaplan (CEO)
Thank you all for joining us, and we will speak to you again next quarter.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your line.