Douglas Emmett - Earnings Call - Q2 2025

Executive Summary

• Q2 delivered modest top-line growth and a small beat vs. Street on both revenue and GAAP EPS, but non-GAAP profitability compressed year-over-year; management narrowed FY25 FFO/share guidance and introduced an office-to-residential conversion at 10900 Wilshire as a multi‑year value lever. Versus S&P Global consensus, revenue was $252.4M vs $251.2M and GAAP EPS was -$0.04 vs -$0.059 estimate (beat) [GetEstimates: Q2 2025].
• Operating drivers were mixed: office leasing remained strong (973k sf signed; positive absorption 3 of last 4 quarters), but cash re-leasing spreads stayed negative (-13.3%) while straight-line spreads were +2.4%; multifamily remained 99.3% leased with >10% same-property cash NOI growth.
• Balance sheet actions de-risked maturities: a $200M office loan maturing Sep-26 was refinanced post-quarter to Aug-2032 and swapped to 5.6% through 2030; cash at quarter end was $426.9M.
• Guidance: FY25 net income per diluted share narrowed to $0.07–$0.11 and FFO/share narrowed to $1.43–$1.47; operating assumptions (office occupancy 78–80%, same-property cash NOI -2.5% to -0.5%) unchanged; dividend of $0.19/share continued.

What Went Well and What Went Wrong

• What Went Well

  • Strong leasing momentum: 973k sf of office leasing (over 300k sf new), positive portfolio absorption in 3 of the last 4 quarters; straight-line rent spreads +2.4% with low concessions. “Our office rental rates remain steady and concessions remain low” (CEO).
  • Multifamily resilience: 99.3% leased; same-property multifamily cash NOI +10.8% YoY; monthly rent per leased unit $3,408; Santa Monica and West LA monthly rents >$4,500 per unit. “Our multifamily portfolio had another tremendous quarter with full occupancy, increasing rents and same property cash NOI growth exceeding 10%” (CEO).
  • Balance sheet/pricing actions: Extended maturities—post-quarter $200M office loan refinanced to 2032 at SOFR+200 bps (swapped to 5.6% through 2030); Q2 cash $426.9M.

• What Went Wrong

  • Non-GAAP profitability contracted: FFO/share fell to $0.37 from $0.46 and AFFO to $54M from $74M YoY; same-property cash NOI down 1.1% YoY (tough compare on prior-year property tax refunds).
  • Cash lease spreads remained negative: Cash re-leasing spreads -13.3% (mix and baked-in 3%+ annual bumps constrain cash spread optics in a flat market).
  • GAAP net loss: Net loss attributable to common was $(5.8)M (EPS -$0.04), pressured by higher operating costs and interest expense; EBITDA margin and NI margin compressed sequentially (see margin table).

Transcript

Speaker 6

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question and answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Speaker 0

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.

Speaker 6

Good morning, and thank you for joining us. While we continue to closely monitor macroeconomic concerns, we haven't seen any impact on leasing in our markets, with strong results in both our office and residential portfolios last quarter. We leased 973,000 square feet of office space, including over 300,000 square feet of new leases, so we have now achieved positive absorption across our total portfolio for three of the last four quarters. Our office rental rates remain steady, and concessions remain low. Our multifamily portfolio had another tremendous quarter, with full occupancy, increasing rents, and same property cash NOI growth exceeding 10%.

We're also making good progress on the four key growth strategies I talked about last quarter: leasing up our office portfolio, which remains our number one focus, redeveloping our 712-unit Brentwood apartment property, now rebranded as The Landmark Residences, re-tenanting Studio Plaza, and augmenting our existing portfolio with best-in-class properties. In that regard, I'm pleased to announce that we plan to convert our recently acquired 10,900 Wilshire office property into 320 apartments in the prime Westwood submarket. As you saw with our office-to-residential conversion in Hawaii, we expect this conversion will not only enhance the value of 10,900 Wilshire, but will also reduce office vacancy in the submarket. Finally, having already addressed all of our 2025 maturities, we have begun refinancing our 2026 debt maturities at very competitive rates, which Kevin will discuss. Thanks, Jordan, and good morning, everyone.

At 10,900 Wilshire, we are now planning a 320-unit apartment community with state-of-the-art amenities in one of LA's most desirable apartment markets. The Westwood residential submarket has significant unmet demand from UCLA faculty and executives. The existing 247,000 square foot office tower will be converted into apartments and integrated with a new residential building that we are constructing on Ashton Avenue. Including the cost to acquire the property, to convert the existing office tower, and to construct the new building, we expect that our new plan will increase the total project cost to be approximately $200 million to $250 million. The first apartments in the existing office tower could be delivered in the next 18 months. Like our very successful conversion of 1132 Bishop in Honolulu, the conversion will take place in phases over a number of years as office floors in the building are vacated.

We anticipate that the ground-up development of the new building should take approximately three years. At Studio Plaza, we remain pleased by the market response to the revitalized project. Our repositioning work is moving along rapidly, with the lobby renovation and several floors of corridor and restroom upgrades now complete, and our first tenant taking occupancy. We expect the remaining exterior site work to be completed during the third quarter, with additional floors completed on a rolling basis. Turning to financing, after quarter end, we refinanced a $200 million office loan that was set to mature in September 2026. A new non-recourse interest-only loan has a floating rate of 200 over SOFR, which we have swapped to a fixed rate of 5.6% until August 2030. The new loan matures in August 2032. With that, I will turn the call over to Stuart.

Speaker 0

Thanks, Kevin. Good morning, everyone. During the second quarter, across our total portfolio, we signed 245 leases covering 973,000 square feet, including over 300,000 square feet of new leases, with healthy leasing to tenants over 10,000 square feet. Looking ahead, our office leasing pipeline is robust, and our remaining office expirations in 2025 and 2026 are below historical averages. The overall straight-line value of new leases we signed in the quarter increased by 2.4%, with cash spreads down 13.3%. At an average of only $6.06 per square foot per year, our leasing costs during the second quarter remained well below the average for other office REITs in our benchmark group. Our residential portfolio remained essentially fully leased at 99.3%, with strong demand. With that, I'll turn the call over to Peter to discuss our results.

Speaker 6

Thanks, Stuart. Good morning, everyone. Compared to the second quarter of 2024, revenue increased by 2.7%, FFO decreased to $0.37 per share, and AFFO decreased to $54.5 million. Same property cash NOI was down 1.1%, as office expenses in the prior year were reduced by a large property tax refund, creating a tough comparison. Excluding property tax refunds, our same property cash NOI would have been slightly positive. At approximately 4.9% of revenue, our G&A remains low relative to our benchmark group. Turning to guidance, we now expect our 2025 net income per common share diluted to be between $0.07 and $0.11, and we are narrowing our guidance range for FFO per fully diluted share to be between $1.43 and $1.47. 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. 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, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like 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. Your first question comes from John Kim with BMO Capital Markets.

Please go ahead.

Speaker 5

Thank you. I wanted to ask, your leasing activity versus the occupancy and lease rate because the activity was very strong once again. When you look back last quarter, you had 351,000 square feet expiring during the quarter. It would seem like there would be a buildup in occupancy and lease rate during the quarter, but there wasn't. I guess that what's implied in that is that over 600,000 square feet of the leasing done this quarter were for early renewals or leases not expiring during the second quarter. I was wondering if that was abnormally high for you, and where do you think occupancy goes for the rest of the year?

Speaker 4

Okay. At the moment, that was a lot of questions embedded in there, John, but at the moment, we are at a pretty wide gap on leased to occupied. Now, that's, you know, most of the time you would look at that and go, that's a good day. For instance, in 2009, which was our lowest period on that gap, we were under 100 basis points. Right now, we're up around what, 280?

Speaker 0

270 basis.

Speaker 4

We're at 270 basis points. You can look at that gap and go, are they doing a lot of leasing or are they languishing? Of course, we've also told you we've switched over and we're starting to do larger deals, which, by the way, we love our larger deals, but larger deals take longer to get in, and it means that they're replacing somebody that was there. We're moving through the leasing, as I said in my prepared remarks, actually, the leasing pipeline is strong and it's good. I'm still optimistic of where we're headed. If you want to look at an indicator, if that gap starts really dramatically shrinking, you're going to say, wait a minute, you're not leasing as much. It can also shrink when we're very full. It mostly shrinks when we're having trouble doing leasing, and so our leased is very close to our occupied.

I know that a lot of people looked at it and received it in kind of the reverse and said, I saw the occupied go down, but I looked at it and I said, okay, this is good because we're doing a lot of leasing, so we're at a very high number. I think our average over a very long period of time for that number would be something of 150 to 180 or some median or something in that range. This is a meaningful gap up, which I would call a good sign, but the market takes it for what it's worth.

Speaker 5

When you look at your leasing pipeline or what you're negotiating today, how much of that is a continuation of this, right? Larger tenants that may not take occupancy in the near term?

Speaker 4

Leased is leased. That's signed deals. That's not in the pipeline anymore. That's over. Okay? What we're looking at is deals in process at various stages, letter of intent, the actual lease being negotiated, and, you know, how far are we from signing? Okay? Then it goes into leased. When we say to you, we are back having big deals, we say we're back liking the way Studio Plaza is going, we're saying our pipeline looks strong, those are the numbers we're looking at. You know, I wish it was very rapidly getting signed, everything was getting signed quickly, but we're signing a lot. The other number that was, I thought, and I tried to write it in the prepared remarks, but it got too cumbersome, then I got booted out by the rest of the people working on it.

You notice that when I say when we're having a good day, we did 300,000 feet on 900 and something, so we're over 30% new. That's another, whether it impacts at that moment or not, that's very positive because you know what our roll looks like. I mean, you know what our retention looks like over the long period. We're going in the right direction on that number too. That was actually the number that made me happiest about these numbers this quarter. You know, I'm not negative on what's going on leasing. In the past, I've said leasing is very tough and we're having a rough time, and it is very tough, but I'm not saying right now, I'm not negative on it. It's going quite well.

Speaker 5

That's great color. Thanks.

Speaker 4

All righty.

Speaker 6

Your next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Great, thanks. Good morning out there. Can you tell us what the lease rate is on Studio Plaza at this point? How should we think about the timing of NOI contributions from those leases that you've signed thus far, and maybe just some color on the demand for the additional space at the property?

Speaker 0

Hey, Blaine. We're not giving leasing stats on individual buildings or individual leases, consistent with the way we've kind of always done that. Obviously, you can tell based on our comments that we're pleased with the velocity of the leasing and how well the building's being received by tenants in that market. As Kevin said, we already moved our first tenant in, so we'll have some rent coming in. The real NOI contribution will come over time. Some of the deals we've done are larger, and like Jordan said, they take longer to build out and move in. We'll look for that, not a big impact this year.

Great, thanks, Stuart. Then second question with respect to 10,900 Wilshire. Can you talk about the timeline a little bit and touch on kind of any major lease expirations at the building that'll allow you to go in and convert the space? Also, how we should think about the NOI drag from those vacates in 2026 and maybe any offsetting capitalized interest?

Speaker 4

Okay. Starting at the beginning of that, we're going in and do something very similar at that. There's a lot going on at that building. Let me just stop. There's like a hundred versions of questions you guys can ask. To answer your particular question, I think you're asking about the tower. With respect to the tower, we're going to do the same thing as we did in Hawaii. As we get space back, we're moving in and converting it to resi. We also have a big conversion of the first floor and the amenities, and we're changing where the entrance is, and we're building a building in the back that's going to take capital. There will be a lag, just like there's always a lag between someone moving out and new people moving in.

This is a very reliable, I mean, actually, in a weird way, I would say 1132 Bishop, which was the 500,000-foot conversion we did in Hawaii, we kind of accelerated into a better situation, even though there were still office tenants and it was still going as an office building, into a better situation as we got faster and faster at building out the floors because the floors were leasing super fast. When we were finishing resi floors, it was just, you know, snap of the fingers, and they were like, all 20 units are leased. There will be a lag. We have a major build-out on each floor we have to do. We're also going to be doing amenities in the building. We're also doing a lot of other stuff. I'm not sure that you'll see a giant difference coming out of the fact that we're doing the conversion.

Other than that we're done, I think you're going to really like the amount of NOI and stable NOI coming out of the building.

Speaker 0

Got it. That's helpful. Thanks, Jordan.

Speaker 4

All right.

Speaker 6

Your next question comes from Anthony Paolone with JPMorgan. Please go ahead.

Speaker 2

Thank you. I wanted to go back to John's questions on the occupancy side. You kept your guide for the full year at 78% to 80%, but I think the first half, it looks like that was in the low, maybe 78%. Do you think you're going to see a second half where there's some absorption then and get you to the middle of that range, or how should we just think about that given you kept the range?

Speaker 0

Yeah, the guidance is an average for the year, Tony. Obviously we're still comfortable with that range. We're not going to give guidance on just the second half where we're going to go, but hopefully we'll get some absorption. I think we're very comfortable that we'll be within that range for the full year on the average.

Speaker 2

Okay. Just second one, following up on 10,900 Wilshire, any brackets around just what the yield on the all-in cost might end up being when you're all done?

Speaker 4

Actually, we have given that. I mean, we told you because we didn't just wake up one day and say, let's convert it. We've been looking at these various scenarios depending on where leasing went and tenants and how we thought we were going to get floors back, and frankly, some work that we're being required to do because the rail's coming through and it's right in the front of the building. We have to move the entrance. Anyway, I think I told you already when we bought it, we were going in over a 10 and I think we're going to be right around there on the way out too.

Speaker 2

Okay, on that.

Speaker 4

That's, by the way, that's yield on cost. We're still not even talking about cash flow IRR, which is like good.

Speaker 2

Right. On your new updated budget numbers, you feel good about a 10% on that?

Speaker 4

You realize these numbers kind of roll out over years, but yeah, I feel very good about what we're doing.

Speaker 2

Yeah. Okay, great. Thank you.

Speaker 6

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

Speaker 1

Hey, good morning. Morning out there. Nice on the office conversion. Certainly, if it's anything like the Bishop project, should be good. The first question, Jordan, just big picture. On the apartment REIT earnings calls this quarter, LA was cited as among the weakest, and the different apartment REITs cited everything from weak jobs to still COVID delinquencies to some supply pressure to the Hollywood strikes, etc. For you guys specifically on the Westside and up in the Valley, is your view that right now LA as an economy and demand for real estate is soft? I'm just trying to understand the apartment REIT commentary being perhaps broader about LA versus, in fact, maybe you guys are saying, hey, you know what? Typically this far into a recovery, yeah, we'd expect LA to be doing better this year versus where we thought it would be back in January.

Just trying to understand where LA is now versus your expectations in January, and if you share the apartment REIT view or if your view is different.

Speaker 4

I think some of what, I mean, I think a lot of what you're seeing is where people own their product, where they own their buildings, where those buildings land. I can tell you, first of all, I do the reverse. I'm surprised by how, I mean, we're not going to, and I've said this many years in the past, we're not going to get this kind of growth in our residential rents the way we've been getting recently over the long term. They're just too high. The history of residential rents for us in our markets is between 4% and 5%. When you get up to these really lofty numbers, and I think it was like 10% this year, this quarter, those are crazy unsustainable numbers. We are in a very narrow piece of the market here on the Westside, which is very tight.

We own very high-end product, high-end, and also we're spending money on it and even making it nicer. Our stuff is, as you can see from the numbers, extraordinarily well received. If it wasn't, and if this quality wasn't, we wouldn't be converting 10,900 Wilshire. It is, and there's a real shortage. Maybe if their product is in the broader LA County, I can't say what's happening with that stuff. The truth is these larger, more meaningful, large residential deals, we've been aggressive buyers of in this really tight market. I know that a lot of the REITs don't actually have a lot where you're getting data in this kind of tighter Westside market where you know we exist primarily in Brentwood, Westwood, I mean Brentwood, Westwood, and Santa Monica. I suspect that's a reason for the difference.

Speaker 1

I'm saying bigger picture though, LA overall, including office, your view, what's going on right now. Back in January, did you think LA would be stronger, that your portfolio would be stronger? Today, is it on pace or is it a little behind? That's what I'm trying to get at. That's office and apartments, like the old Emmett.

Speaker 4

I think, I just told you I thought apartments were ahead of where I thought. I mean, apartments are, you know, really doing extremely well. I think the office is very hard to judge one quarter to the next, but I still expect the year to be where, I think the year will land where I expected the year to land.

Speaker 1

Okay. Second question is, in your PowerPoint, one of the things that, and I'm sure it's been in there a while, Stuart, but that jumped out is that LA has more tech workers than Silicon Valley. Certainly with the uplift that San Francisco has been having recently, especially with AI, do you expect that LA's tech scene will, you know, we'll be hearing the same positive, you know, strong leasing demand stories that we're hearing out of San Francisco, or is LA's tech scene fundamentally different than the Bay Area such that what's going on up there, especially with the AI push, may or may not resonate with the tech users in LA?

Speaker 4

I think the LA tech scene revolves around entertainment. They're here to a very large extent because this is where kind of the entertainment world is. I think in the world of cutting-edge research, I have more of an expectation that in medical research and quantum computing, we're going to become a center for both of those things. That's because UCLA is spending $500 million to $1 billion, I mean, they're spending an enormous amount of money creating a colossal center for all that stuff that's bringing in people from all over the world to do that research. It's going to be one of the larger quantum computing centers in the country, and it's going to be for sure the largest immunology and research center.

If you told me that tech as pure tech, especially around AI, I know these guys are all sitting around the table with me, I have not seen that. We've seen tech come here more to be involved with content producers, which is the entertainment world, not even just the studios, but we have all kinds of versions of whether it be gaming or otherwise of entertainment companies here because it's where the talent is, and that's what brought the tech here. Peter, you look like you want to say something. Okay. That's what I think is going to happen with them.

Speaker 1

Thank you.

Speaker 4

All right, thanks.

Speaker 6

Your next question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.

Speaker 0

Great, thank you. Just wanted to follow up on Blaine's question on Studio Plaza leasing. You mentioned you already have a tenant moving in, but other ones that have leased space but haven't moved in, do you anticipate them to move in at some point this year, or is this more of a 2026 event? I think we'll have other tenants moving in this year, yes. Okay, great. On Barrington Plaza, now The Landmark Residences, what's driving the redevelopment costs higher there? It looks like you anticipate $400 million now versus $300 million earlier this year. What do you expect the yield to be there now?

Speaker 4

I think what's, we said it'd be over $300 million, and I didn't say it is $400 million, I said it's approximately. I think what's driving it, the primary thing driving it is we have contracts now, so we actually know the cost. That's a big thing. Before we were making estimates, but I'm sure there's been other cost run-ups in some things, and there's been reductions in some things. That's the difference between estimating and thinking over $300 million and somewhere in that range. We actually are still in that territory, but I think we're closer to the territory to $400 million, so we said more approximately $400 million. Yield-wise, we're fine, good shape.

Speaker 0

Okay, great. Thank you.

Speaker 6

Your next question comes from Nick Yulico with Scotiabank. Please go ahead.

Thanks. Going back to the residential conversion, can you just talk a little bit more about the Westwood office market? I know you control several of the major buildings in the market, and now you're taking one out of service, the benefit you think that might have for the submarket there. Also, whether you've lined up any of the tenants that are larger tenants that are expiring in that building, if you've already lined them up to take space in your other buildings you have there or in your portfolio.

Speaker 4

For the most part, they're learning about this at the same time you are. Of course, we will put a huge effort to make them happy and hopefully move them into others of our buildings, and we're focused on that. It's not like Hawaii. I don't want to give people the misunderstanding. I mean, it's taking some space out of the market, that's true. In Hawaii, they really didn't have, you know, they were going to go into the other buildings one way or another because that's all that's there, right? Here, Westwood can trade with Century City. It theoretically could trade a little bit with Beverly Hills. It theoretically could trade a little bit with the Olympic office corridor, maybe even a little with Brentwood. They're not nearly as captive, but I do believe for the most part, a lot of those tenants want to be in Westwood.

It might be helpful to the rest of the portfolio. It's always helpful to take product out of the market for any market. We will have that impact.

Okay, thanks. The second question just goes back to leasing volume. I know there's already some questions on this, but specifically, I'm asking about the stabilized lease rate. Nothing about occupancy or occupancy versus lease rate. Just what's the catalyst to get your lease rate improved? Just thinking about a volume of new leases that you need to get to. What would drive that higher? Could certain industries be becoming active? Any more commentary on that would be helpful. Thanks.

I've looked at a lot of that because I've been curious to like what can I expect when I can't tell you exactly, you know, as an economy, we're a huge economy. When things get going, they just get going on all fronts and they're going. I've tried to, we've tried to look at what, you know, like what can we expect when the economy does get going? When people are saying, okay, we're super comfortable spending, expanding, hiring, whatever that list of stuff is, regardless of the industry. I mean, because we have a pretty, pretty robust mix of industries in our markets. How can this thing move? How fast can this thing move? We've looked back at, you know, I mean, Ken and I have been running this for four, for sure, four recessions, and you might even call out five.

We have a tremendous amount of history on like portfolio recovery and how quickly we lease. I think if things, the most recent one that, without 2008, 2009, 2010, whatever you want to call that one, that was one of the slowest in terms of annual gains. We didn't lose a lot in that one. It's funny because that one was like, you just thought of like the great, you know, even greater than a normal recession. We actually didn't lose as much as you might have expected. If you go back to some of the other ones, you're going to come out with an average to say, you know, if we're really, you know, in really big recovery, you know, the thing can move about 3% plus or minus 3% a year, you know, of increase in occupancy or increase in lease rate.

That's like more than like which industry does it come from? What industry is driving? Is it education? Is it research? Is it accounting? Is it legal? Is it entertainment? Is it, you know, vacationers or whatever, tourism? I mean, there's a lot of industries that are here. When people are comfortable in the economy, that's the kind of movement we've seen out of what we have, which is a relatively large portfolio. That's the way it can move. The average is actually over 3%. All right.

Speaker 6

The next question comes from Seth Bergey with Citi. Please go ahead.

Speaker 3

Hi, thanks for taking my question. I just wanted to circle back on Studio Plaza. How are the rents that you're kind of getting there on some of the new leases compared to your initial expectations? As we think about a timing perspective, I understand you guys aren't getting a lease rate, but what is the build time before you would be able to recognize revenue on some of the leases you're signing there?

You want to answer it?

Speaker 0

Yeah, I think that to take the second one, I think our rental rates are kind of in line with our expectations. We're happy with the rates we've been doing and the deals that have been done there. That's going good. On timing, it really depends on the size of the tenant. The larger tenants and the larger build-outs take a lot longer. We've already moved, like we said, we've already moved in some tenant that was on the smaller side. The smaller spec build-outs that we do all the time, we can get those guys in very quickly. Some of the real large ones can take quite a while.

Speaker 3

Okay, great. My second one is just kind of on the tax credits that California passed. You've seen for the entertainment industry, are you seeing any impact on that with respect to demand?

I think that you're talking about the entertainment, the movie-making tax credits?

Yeah.

We don't have a lot of visibility into that. We don't own any studios, and you're talking about kind of like the manufacturing, and we're more the administrative offices or all of the vendors that support it. I think the tax credits are designed to get them to film movies here in California, but the rest of the work is done here anyway. This is where the people live. Whether they're doing the sound or fully show, however that all works, they're all here. The accountants and the agents and the lawyers and all of that. I don't know whether it's having an impact. Probably Victor does know, and he'd be better than that. We get revenue from people filming in our buildings, but honestly, I think it's under $1 million. Is it under $1 million a year?

Yes.

Yeah, it's under $1 million a year. They're just using our buildings for like that Barbie movie or something. They're just there or some other movies you guys have seen are in our buildings.

Thanks.

Speaker 6

Your next question comes from Jana Galan with Bank of America. Please go ahead.

Speaker 7

Thank you. Maybe following up a little on Nick's question with LA having a number of positive kind of catalysts occurring between the university investment that you mentioned, the expanded tax credits, and the World Cup next year. Just kind of curious if you're seeing increased touring or demand in the portfolio from these segments, or do you expect to be seeing it, is it just a little too early right now?

Speaker 4

I can't say those exact segments, but it's not too early to ask us how our pipeline looks, which we've been saying looks very good. Maybe some of that's driving it. I think it's all the areas. I think people are just worn out from not having their space. They're bringing everyone back. I don't even think there's a question mark about people coming back anymore. They want to settle them into space and they want them to get to work. That's causing tenants to go, the fiction that somehow my occupancy costs were going to be lower because the world from now on is going to tell people to sit at home and work and they don't need to be around each other has just been completely erased. People are back working and our pipeline has grown as a result of that.

Speaker 7

Thank you. Maybe just on the cash releasing spreads, they were a little bit lower than they've been trending. I don't know if there was anything to call out on specific leases or just the nature of the roll.

Speaker 0

Yeah, it's just kind of the mix and nature of the roll. That number will bounce around quarter to quarter based on kind of the mix that gets done and, you know, some larger tenants or whatever it might be. We look at the straight line metric as kind of the one that we focus on more because that captures the full value of the prior lease compared to the full value of the new lease. We have very high annual rent escalators built into our leases. They're on average greater than 3% a year. It's very hard to have a positive cash spread when you've got such good bumps throughout the lease and you're in a market like this where, you know, market rents aren't screaming up. Pleased that our cash or our straight line spreads have stayed positive. They were positive again.

They've actually stayed positive throughout, you know, throughout since the pandemic.

Speaker 7

Great, thank you.

Speaker 6

Again, if you have a question, please press star, then one. Your next question comes from Peter Abramowitz with Jefferies. Please go ahead.

Speaker 0

Yes, thank you for taking the question. Just wondering if you can give a little bit more color on the decision to convert the asset on Wilshire to residential rather than invest in it and try to release it as office. Was that based on something you saw in the market, or do you think it's just better risk-adjusting returns by converting it? Just wondering if you could give a little bit more color there.

Speaker 4

There were a number of unique things to the building that really put it into the category where we had to take a hard look at converting it. You did have some large, you know, there was some larger tenancy that we had already known we were going to have to replace, which creates an opportunity to have a lot of floors that you can work on at once. We're building a residential building in the back, so we already knew that as a result of that building, we were going to, by one way or another, have residential amenities there. They're putting a subway stop literally right in front of the building. When I say in front of it, partly on land of the building, that has destroyed our front entrance. We were being forced by that process to move the front entrance and completely rearrange our first floor.

We were already having to do that and address the first floor as a result of that. When you take all of those, and by the way, the tower, and it's not the only building we'd have that had this one aspect, but the tower has very good floor plates for residential in terms of depth and the way they lay out and the way the windows work, where you can really kind of cut your units more liberally at locations, and you don't have to just immediately meet like a metal mullion that is, you know, five feet on center or whatever that number may be. Because of all that, it was a kind of cost-effective, good candidate. As we've been working through it, I mean, we said this is a good way to go. We've been discussing it since we bought it.

Speaker 0

All right, I appreciate that, Jordan. Thanks for the time.

Speaker 4

All righty.

Speaker 6

Seeing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.

Speaker 4

Thank you all for joining us, and I'm sure we will be speaking to you during the quarter. Goodbye.

Speaker 6

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.