Douglas Emmett - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly conference 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 a question and answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

Stuart McElhinney (CFO)

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 (President and CEO)

Good morning, and thank you for joining us. Many of our most important operating metrics are comparable to, or even better than, levels before the pandemic. Rental rates have held and continue to show strength. We are achieving significant lease transaction volume. Our retention rate continues to be high. Our leasing concessions have remained minimal. Tenant defaults are back to our historic low. We continue to experience positive straight-line rent roll-up, and our tenant improvements and leasing commissions per sq ft remain below our 2016-2019 average. Nevertheless, the most important metric at this time, new office leasing, was not sufficient to drive positive absorption. The shortfall, again, came largely from new leases over 10,000 sq ft.

My confidence in the long-term outperformance of our portfolio is validated by the continued strength and diversity of our tenant base and the severely restricted new office supply in our markets. We are seeing some signs of increased activity from larger tenants, and I firmly believe that as they abandon their defensive posture, our portfolio will be among the strongest in the country. With that, I'll turn the call over to Kevin.

Kevin Crummy (CIO)

Thanks, Jordan, and good morning, everyone. Sales transaction volume remains depressed, although we are beginning to see some trades of multifamily properties. The sellers consist of core funds looking to raise liquidity and owners of floating rate financing. While cap rates have risen slightly, they remain at fairly low levels. There have been fewer office purchases, mostly by owner-users and high-net-worth individuals. The pricing for these trades has been quite high on a per sq ft basis, reflecting the scarcity premium for quality West LA real estate. With that, I will turn the call over to Stuart.

Stuart McElhinney (CFO)

Thanks, Kevin. Good morning, everyone. During the second quarter, we signed 222 office leases covering 793,000 sq ft, including 205,000 sq ft of new leases and 588,000 sq ft of renewal leases. The overall value of new leases we signed in the quarter increased by 1.1%, with cash spreads down 12.4%. Of course, in any quarter, the specific leases rolling off and on can cause those numbers to vary substantially. Our total leasing costs during the second quarter averaged $5.62 per sq ft per year, below our pre-pandemic long-term average and well below the average for other office rates. This success reflects several key advantages of our operating platform.

First, with our dominant market share and standardized buildouts, we have finished suites that can accommodate most tenant requirements without expensive modifications. In other words, we often already have a suite that fits the tenant, compared to other landlords who must incur significant TI costs to accommodate new tenants. Second, our upgraded, customized website and search technology allows tenants to quickly find and virtually tour potential suites. Finally, by doing space planning, design, and construction work ourselves, we control costs, design standardized buildouts that are reusable, accelerate move-in times, and improve tenant satisfaction. Our residential portfolio remains essentially fully leased at 99% and continues to generate healthy rent roll-ups. With that, I'll turn the call over to Peter to discuss our results.

Peter Seymour (Analyst)

Thanks, Stuart. Good morning, everyone. Reviewing our results compared to the second quarter of 2023, revenue decreased by 3%, as higher parking and residential revenue was more than offset by vacancy at Barrington Plaza and lower office occupancy. FFO decreased by 4.5% to $0.46 per share, primarily as a result of higher interest expense and lower revenues-

... partially offset by higher interest income and lower operating expenses. AFFO decreased slightly to $74.2 million, and same-property cash NOI was essentially flat, with multifamily growth offset by lower office NOI. Our G&A remains very low relative to our benchmark group at only 4.7% of revenue. Turning to guidance. Our second quarter FFO benefited from anticipated property tax refunds and the timing of operating expenses. In determining our guidance for the rest of the year, we have not included similar benefits, but have factored in the usual seasonal increase in our utility costs in the third quarter, the move-out of Warner Bros. in Burbank, and higher interest expense. As a result, we are keeping the midpoint of our FFO guidance unchanged and narrowing the range to between $1.65 and $1.69 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 property acquisitions or dispositions, common stock sales or repurchases, financings, property damage, insurance recoveries, impairment charges, or other possible capital markets activities. I will now turn the call over to the operator so we can take your questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And once again, in consideration of other participants, please limit your queries to one question and one follow-up. We will now pause for a moment to assemble our roster. Today's first question comes from Blaine Heck with Wells Fargo. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Great, thanks. Jordan, I think in your prepared remarks, you mentioned rental rates that have held and continue to show strength. Can you just give a little bit more color on recent rental rate trends you've seen, whether that comment is based on asking rents or net effective rents, and maybe which submarkets are showing the best resiliency or even growth?

Jordan Kaplan (President and CEO)

Yeah. So I'm saying rental rates have held for a couple reasons. First of all, you know, there's the fact and we report this to you guys, we've had a number of years and continue to have quarters of positive straight-line roll-up. Which considering the strength of the markets from the previous period, 2019 and earlier, that's, I think, pretty impressive. We're also seeing... But the only way to do, like, year-to-year is to look at asking rates, which you get out of CoStar or one of those places. And we're seeing, we're seeing that strength, and we're seeing that strength not being offset by concessions, but actually existing in the net effectives of the deals. We're seeing that ourselves. So as I said, we feel pretty good about where that rental rates haven't fallen off.

We saw them, like, after the 2008 recession, we saw them really fall off. We have not experienced that this time.

Alexander Goldfarb (Managing director and senior research analyst)

Great. And any specific submarkets that you'd call out as being a little bit better or worse positioned within your portfolio?

Jordan Kaplan (President and CEO)

Well, I mean, I have to say it, that, you know, I spent so many years making excuses for Hawaii, and Hawaii is just like a colossally strong market now because we took some of the product out of the market, so it's very strong. But, you know, I think beyond that, I think most of the Westside is, you know, I don't think you would differentiate anything there. It all, all the way around, we're seeing that strength. And, you know, Warner Center has a lot of good things happening, but it still has its issues with respect to vacancy. But that probably covers the whole gamut.

All right, great. And then just second question, can you just talk a little bit more about your plans for upcoming debt maturities? Just looking past the swaps, you have a few upcoming maturities later this year and in early 2025. Can you just talk us through your plans for those? Will you be looking to pay those off at maturity with your cash balance, or is it more likely you look to refinance? And if you're looking into refinancing, can you just talk about the overall financing environment and whether you think you'll need to pay down the loans with cash to reset LTVs or add other assets as collateral?

So each loan has its own kind of thing that will be done. We do have a plan for all of the loans, and I feel good about it, and I'm confident we'll get it all done. There are some times when we'll do—there'll be some cash paydown. I don't think that's as significant. We have a lot of buildings that are unencumbered, so we can actually extend loans by adding collateral and making everybody happy, especially ones that are a few years out. I'm happy to repeat that I feel confident about our debt, our portfolio. We're giving nothing back. We're all good on that. I mean, I don't like what... I mean, no one can like where rates are, although they're coming back our way a little bit, so that's also probably a piece of good news.

Alexander Goldfarb (Managing director and senior research analyst)

Great. Thanks, Jordan.

Jordan Kaplan (President and CEO)

All right.

Operator (participant)

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

... Hey, morning out there. Two questions. First, Jordan, on the national tenants, when you say they're still hesitant, is that like they wake up last Friday, look at the jobs print, and go, "We're not leasing space?" Or is it really the way those outposts are doing in your market, those national tenants don't have the business that warrants them to be doing the leasing? I'm just trying to separate, 'cause clearly, the local tenants are doing deals and leasing. I'm trying to figure out, is it the national tenants just aren't doing their business in your markets isn't healthy, or it's someone in corporate that's getting scared because of a bad jobs print or something like that?

Jordan Kaplan (President and CEO)

Well, that's a very refined question, and I, you know, I don't, I don't know a lot of these guys. I don't wanna overstate that larger tenants have just sort of dropped out completely. That Stuart had some information about it. Maybe I should turn the call over to Stuart. But I want-- I'm feeling better now. So I'm feeling better about leasing the pipeline, and starting to see more. We are starting to see more activity from larger tenants. So I don't want to paint it as though we're still in the, you know, the doldrums of a year ago or whenever it was at its worst. We're actually probably feeling a little better now. But, Stuart, do you wanna add something to that?

Stuart McElhinney (CFO)

Yeah, sure. So, you know, we made it, I think, a point of telling you last quarter that we only had signed one new lease over 10,000 sq ft in the first quarter. That was, you know, well below trend of what we typically do. So we saw improvement in that. This quarter, we did three deals over 10,000 sq ft in the second quarter, so, feeling better to see some momentum there. It's still not back to levels, you know, pre-pandemic average levels, so we'd like to see that strengthen more. But I'd, I'd echo Jordan's comments that we are starting to feel a little bit more optimistic with that segment.

Alexander Goldfarb (Managing director and senior research analyst)

Okay, and then maybe just as a follow-up there, Stuart, you know, given that small tenants are active, is there something that impedes your ability to break up those over 10,000 sq ft spaces into smaller pre-built suites and lease them? Or it's literally, you've maxed out all the demand in the smaller tenants, and therefore, you're 100% leased, you know, effectively on the small tenants, and really, the only place where you're literally gonna get incremental demand is from those larger tenants. I'm just trying to figure out how much you can feather-

Stuart McElhinney (CFO)

No, no

Alexander Goldfarb (Managing director and senior research analyst)

- the throttle between the two.

Stuart McElhinney (CFO)

Yeah, no, I understand. I, I think that, no, we, we still would look to take larger spaces and break them up. That's still an option in our portfolio. By no means have we maxed out our, you know, our ability to, to break up larger space into smaller. In fact, we've been vocal about doing that at Studio Plaza. As we're looking to re-lease the Warner Bros. Discovery space, we'll break that up into smaller spaces. It's a floor-by-floor and kind of building-by-building decision. If we have good product, that smaller spec suite product available at the moment, then we don't need to take larger space and break it up. So, you know, we've got a lot of leasing to do across the portfolio. We're very focused on it, large leasing, small leasing.

We could get improvement out of all those categories. We could see more. We could see better, smaller leasing, although it's still remaining, very active. That could, that could improve. So we could get improvement across the board. We're, we're focused on small, large, medium tenants. We can break space up, build more spec suites. We've been, we've been very aggressive about doing that, and it remains very successful for us.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. Thank you.

Operator (participant)

Our next question today comes from Michael Griffin with Citi. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Great, thanks. I wanna go back, just the comments on the leasing environment, and I realize kind of quarterly numbers can be choppy there, but, you know, how many of these larger tenant deals do you think you need to be doing in order to get that negative net absorption to turn positive? And kind of when can we expect that inflection point for net absorption?

Stuart McElhinney (CFO)

Hey, Michael. You know, if we look back over a longer-term average, we used to do 5 or 6, you know, 5 or 6 deals, maybe over 10,000 sq ft and maybe kind of in a 90,000-sq ft average range per quarter. We've been below that. You know, we talked about how we've been below that, so we could see that improvement. As to when, I have no idea. I hope it's soon. Jordan and I just told you we're feeling a little bit better about what's going on with the larger guys. There's some dialogue and some activity, so that's optimistic, but I can't tell you exactly when we'll see that switch.

Alexander Goldfarb (Managing director and senior research analyst)

Gotcha. Appreciate that, Stuart. And then just turning kind of to the transaction market. I think you mentioned distressed opportunities and, and maybe more coming to the market on the multifamily side relative to office. But, you know, as you sit out there today, are there any office properties that kind of meet that category of, of sort of your bread-and-butter-type properties that, that you could see, you know, maybe these high-quality buildings come in at, at distressed pricing? And if so, you know, would you prefer to execute more on the office side, or could we see it more on the multifamily?

Jordan Kaplan (President and CEO)

So, this is Kevin. The multifamily is still trading at, you know, it's not trading at the extremely low cap rates that it was, but it's still very, very low cap rates and fully priced. So there's going to be a better discount on the office side. But the office side has just taken a little longer to work its way through the system. And so, you know, I mentioned that there have been a couple of user trades, a couple of little buildings of high net worth, but the multi-tenant class A office on the west side, we haven't seen as much. Although, you know, I'm thinking that, if there are gonna be opportunities, they'll be second half of this year or early part of next year. So we're definitely watching it.

Alexander Goldfarb (Managing director and senior research analyst)

Great. That's it for me. Thanks for the time.

Jordan Kaplan (President and CEO)

Thanks.

Operator (participant)

Our next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Yeah, thanks. Good morning. Jordan, just to kind of follow up on the leasing, you know, what industries, is it tech? Is it media? Is it kind of everything? Like, where do you need to see the biggest, I guess, improvement in order to, you feel, get a kind of a bigger upturn in the leasing activity overall?

Jordan Kaplan (President and CEO)

You know, it's probably not tech and media. As you know, we don't have a big concentration of them, so we've never kind of leaned back on them. But the other industries, the service industries, the other kind of general office and, you know, accounting, all of those guys, you know, that's stuff we're feeling better about. I have to say, I feel that it's coming back. So if I was to take a guess about this, I would say that we have a good chance. It's horrible to make this prediction. I don't want to do it with you, Steve, because you're gonna remember it.

But I think once we get past Studio Plaza, we are gonna see we have a very good shot at heading back in more of an upward direction. And that's because of what we're seeing in terms of pipeline and activity.

Just a quick follow-up there. I know big media and tech are not necessarily your tenants, but other companies and other smaller businesses feed off of those. So to the extent the streaming wars, you're laying off people and other businesses. I guess I'm trying to think about the feeder effect of tech and media being down as having, like, a derivative impact on your customer base. And if they don't come back, can your tenants come back?

Well, I'm not sure that the— So, the derivative impact was a very large lease that we had that already renewed and went 10 more years, which is an agency, right? The kind of secondary, tertiary impacts, which is the accountants, the lawyers, they still seem to be going full tilt. I'm just gonna tell you. Even though I know many of their clients are entertainers and this, that, and directors and producers and all of those people. So they, for us, still seem to be moving along at a good clip.

We're not, you know, the creative side, I would say, the sound stages, the studios, that activity doesn't need to be moving in any kind of meaningful way for the people that we're dealing with, that are, whether they're working on deals, good, bad, or indifferent, to be very active, and that is happening.

Alexander Goldfarb (Managing director and senior research analyst)

Okay, thanks. Peter, just as a follow-up, I know the last two quarters, you guys have had these tax refunds that have, you know, benefited your, property operating expenses in the office. So, we're just trying to really figure out what is kind of run ratable and would continue, and how much of these are truly just one-time payments that don't really lower the overall basis. Because it feels like you guys have benefited. I'm trying to figure out if that's just a function of COVID problems that have allowed you guys to reduce the property values, and it's more of a permanent savings, and how much of that savings was really one-time in nature.

Peter Seymour (Analyst)

Yeah, Steve. Yeah, it's Peter. So the tax refunds are generally related. They, they take... They're a long life cycle. These are things that, you know, we appeal and start the appeal process years ago, and you don't know, you know, for some time, you know, when, when they're gonna resolve. And we had some of them resolve in the first quarter and the second quarter. It's, you know, we, we are expecting a bit more, but it's a, it's a multi-year process, and we have incorporated what we know into our guidance.

Alexander Goldfarb (Managing director and senior research analyst)

I'm sorry, Peter. So you, there are more pending, you just don't know when, so they're not in guidance?

Peter Seymour (Analyst)

Well, what we know, we've incorporated in our guidance, and, yeah, you know... But-- and we always, you know, every time we buy a building, there's an appeal. There's, you know, there's a lot of these in process, over a period of years.

Alexander Goldfarb (Managing director and senior research analyst)

Got it. Thank you.

Peter Seymour (Analyst)

Steve?

Operator (participant)

Our next question today comes from John Kim at BMO Capital Markets. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Thank you. Jordan, I know we're harping on this a little bit, but, we're still interested in your, commentary of, you know, large tenants coming back or feeling better about national tenants in the market. Is there any way to quantify how what's that has been as far as tour activity or what percentage of your leasing pipeline that is, and what submarkets that may benefit from that?

Jordan Kaplan (President and CEO)

There is, but I'm not anxious to do it. But I can tell you that the reason I feel that way is as a result of our activity, our activity with larger tenants. So when you look at, like, who we're talking to, as we're approaching deals, what kind of deals we're working on, I go, "Oh, God, there's some good big guys coming back.

Alexander Goldfarb (Managing director and senior research analyst)

... that's expansions in your, in your market, or just moving around from downtown to West LA?

Jordan Kaplan (President and CEO)

I'm not sure that I would call it moving around. I mean, I'd have to look into each one and see where you're asking where those tenants are coming from. One that's noteworthy for me is an expansion, one that I'm familiar with.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. On your credit facility, a few quarters ago, you let it expire. Now, with the rates coming down and stabilizing, are there any signs that the fees have come back so that it'd be attractive for you to secure another one?

Jordan Kaplan (President and CEO)

I have not seen that. I mean, we allowed ourselves to build up a lot of cash. As you know, we let that expire, we cut the dividend, and we allowed the cash to build up, which you guys have seen. We did one loan that brought a lot of cash into, on one of the, on a couple of apartments. I think that trade, that cost of us carrying more cash can in an environment today, where there's still rates are still pretty good, is substantially better than what I would have to pay to create availability through a credit line. So even if rates come down, they'd have to come down even more and costs come down. I mean, there still would be a ways to go.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. So it's lower on your checklist as far as, desire to get another one? Great. Thank you.

Jordan Kaplan (President and CEO)

Well, if the costs are good, I would, but I just don't even think they're close right now.

Alexander Goldfarb (Managing director and senior research analyst)

Right. Thanks a lot.

Jordan Kaplan (President and CEO)

Thanks.

Operator (participant)

Thank you. Our next question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Great. Thanks for taking my question. Just, maybe regarding Barrington Plaza here, you know, have expectations shifted following the tentative ruling from this past June?

Jordan Kaplan (President and CEO)

No. I mean, there's a variety of ways we use that way. There's a variety of ways we always knew it would be a while to get there, you know, get in a position to do the work. The building's about 90% vacant right now, so, you know, by one way or another, I'd always assume there be some tenants that will have to, like, figure out how to finish off with.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. And are they all sort of in one building, or is that something you can move into one building, so you can start on the other parts of the project, or how does that work?

Jordan Kaplan (President and CEO)

Well, there's some city programs that, depending on which what we use, that would leave us in, you know, some are better or worse. We'll start with the ones that are better, that and the position permit. But I don't think it's very material in any case, to our numbers because there's so few people left.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. Thank you. And then, my second question was just on, you know, when you said rent roll-up in your prepared remarks, you know, is that because of relatively larger percentage of your portfolio has already rolled since COVID? And do you think that rent roll-up can continue over the near medium term or even the longer term?

Jordan Kaplan (President and CEO)

Well, I don't know about future predictions about where rental rates are going, but, you know, if you look at the... More what my commentary was revolving around is, we've held rate, and actually, to some degree, rates improved. And so I know we were looking back at our rent roll-up stats for the last four years average, without putting weight to four years ago, I mean, including recent numbers, and we're averaging over 7%. That, that-- I mean, if you would've told me, COVID, and recession doldrums, and we were going to average over 7%, I would've said, "Wow, that's a good time." And that's a basis, a lot of basis for why I say, I feel like rates have held in our markets.

Alexander Goldfarb (Managing director and senior research analyst)

Great. Thank you. That was helpful.

Jordan Kaplan (President and CEO)

Mm-hmm.

Operator (participant)

Our next question today comes from Peter Abramowitz with Jefferies. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Thanks. Yes, I just wanted to go back to the comments that you're feeling better about national tenants. Could you elaborate and possibly quantify what this means in terms of, your leasing pipeline, overall leasing activity, or tour activity? Any comments to quantify or elaborate again would be helpful.

Jordan Kaplan (President and CEO)

The short answer is no, not really. But, I mean, I felt like it was... I don't want to overdo it, underdo it. I just want to get it right. And what I'm telling you guys is we're seeing larger tenants start working their way back, and I'm very pleased to see some in the pipeline. And we need—Let's get those deals made, and then we'll come back, and then we'll really be able to talk about them. I'm not ready now, and it's still going to be a battle to get back and lease up the properties, and that's still in front of us. So I don't want to overstate. I'm just saying I'm feeling more positive.

Alexander Goldfarb (Managing director and senior research analyst)

Okay, that's helpful. That's all for me. Thanks.

Jordan Kaplan (President and CEO)

All right.

Operator (participant)

Our next question today comes from Camille Bonnel with Bank of America. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Hi there. I wanted to follow up-

Jordan Kaplan (President and CEO)

Hi.

Alexander Goldfarb (Managing director and senior research analyst)

-on an earlier question. Can you quantify the impact of tax refunds that contributed to the second quarter? I assume the outcome came in line with your expectations, given you didn't adjust guidance, or was it more favorable with offsets elsewhere?

Peter Seymour (Analyst)

No, it was. It's Peter. It was in line with what we expected for the year. And when we take those refunds, they're, you know, they're reflected in office expenses. You can see the big reduction in office expenses versus prior year, and most of that is from the tax refunds.

Alexander Goldfarb (Managing director and senior research analyst)

Can you quantify what that was?

Jordan Kaplan (President and CEO)

Usually, you can go through it, Peter, later.

Peter Seymour (Analyst)

Yeah.

Jordan Kaplan (President and CEO)

But it's, you can quantify it. You can look at the expense change.

Alexander Goldfarb (Managing director and senior research analyst)

Okay. And then just shifting, I noticed your signed lease not commenced gap occupancy has been trending lower the past three quarters. So I was wondering if you can provide any guideposts on how much of these leases are commencing in the rest of this year versus 2025? Thanks.

Jordan Kaplan (President and CEO)

Yeah, generally, our leases commence for the most part over the next three quarters after they've been signed. That's generally the majority of the leases. We were getting, you know, a lot of attention when that spread gapped out. A few years ago, we had a pretty wide spread, which actually we like. It means we're doing a lot of leasing. I think long-term average for that spread is 180, 170 basis points, something like that. So, we, you know, the more leasing we can do, the wider that spread usually gets. We like that, so we'd like to see that improve in that upward direction. But generally, our leases are commencing very quickly with our smaller tenants. We get them in that quarter over the next couple of quarters.

Operator (participant)

Thank you. And our next question today comes from Rich Anderson at Wedbush. Please go ahead.

Alexander Goldfarb (Managing director and senior research analyst)

Thanks. So is there another Bishop Place in your future, do you see in your portfolio anywhere, given the success you've had there? Or is it, you know, tough to find an asset that would, you know, accommodate a conversion like that?

Jordan Kaplan (President and CEO)

It's not. We actually have a lot of assets that physically can accommodate the conversion, but financially, to have the conversion make sense, you need a meaningful spread between a very meaningful spread between office rents and residential rents. And if it's not very meaningful, since our buildings are all in markets that where, you know, you can lease up your buildings, and we're confident to get there. We aren't seeing that spread. So in Hawaii, office rents were low and have been persistently low as a result of the higher, kind of, stabilized vacancy of about 85%. But we saw that apartment rents were very strong, which even in the exact same market.

So when we calculated and added in the cost of doing the conversion, considering the strength of the apartment rents and also the kind of reverb that would happen to the rest of our portfolio, we knew that one would make sense, and in fact, it more than made sense. It was extremely successful. That's not as easy to achieve in a larger market where, like this one, where if you take a building out of the portfolio, it substantially changes. If you take a building out of the office stock, it substantially changes the amount of office that's available to be leased. So you don't have that, you know, tailwind as part of the process. You have to just do it straight as a result of, like, this was an office building, now it's an apartment building.

So you got to really rely on that rent spread. And, you know, I don't know that there's anything that we have at this time that's there.

Okay. And then the second question is, you mentioned, and we all know, you know, you don't have a whole lot of media exposure. I'm wondering why that's the case. Was that an intentional move on your part, or was it kind of lucky? You know, I'm not, again, I'm not, I don't mean to be throwing Hudson Pacific under the, under the bus because I think that they'll ultimately do fine there. But is there something about that, that industry that you intentionally sort of veered away from?

Stuart McElhinney (CFO)

No, I think it's more our strategy that we don't like relying on large tenants.

Alexander Goldfarb (Managing director and senior research analyst)

Okay.

Stuart McElhinney (CFO)

We don't like single-tenant buildings, and both media and tech tend to be larger tenants. And so we've always, you know, we don't, we just don't win a lot of bids on buildings, even if it's credit. We're more comfortable with small tenant credit. Our small tenant credit profile has been outstanding historically and through this period of time. And so we're just built for smaller tenants, which means we don't have buildings, we're not leasing to, we're not focused on a lot of the larger tech and entertainment guys that are looking for big blocks of space. Not that we probably, you know, we have that big block coming up in Warner Center. We'd be happy to—I mean, not in Warner Center, but in—

Burbank.

in Burbank, but they moved out. But so, so that's the reason we don't have exposure to them. We don't have the types of buildings that they would probably find appealing.

Alexander Goldfarb (Managing director and senior research analyst)

Yeah. Okay. Thanks very much.

Jordan Kaplan (President and CEO)

All right.

Operator (participant)

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.

Jordan Kaplan (President and CEO)

Well, thank you all for joining us, and we'll be speaking again in another quarter.

Operator (participant)

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.