Douglas Emmett - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $245.0M, down 5.5% year over year; GAAP diluted EPS was $(0.01), FFO per fully diluted share was $0.38, and AFFO was $58.7M.
• Same‑property cash NOI declined 4.5% on lower office revenues, partly offset by 6% multifamily growth; residential assets remained essentially fully leased at 99.1%.
• 2025 guidance introduced: FFO/share $1.42–$1.48 and diluted GAAP EPS $(0.17)–$(0.11), with average office occupancy guided to 78%–80% and interest expense $260–$270M.
• Strategic catalysts: signed 204 office leases in Q4 (796k sf) with improved large‑tenant demand; formed JV to acquire 10900 Wilshire and an adjoining resi site; closed $325M JV refinancing and a new $61.8M JV loan, both fixed in the 6%s.
• Estimate comparison unavailable: S&P Global consensus data could not be retrieved at time of analysis, so beats/misses vs Street are not assessed (see Estimates Context).

What Went Well and What Went Wrong

What Went Well

• Residential portfolio remained essentially fully leased at 99.1%, providing stable cash flows despite office headwinds.
• Large‑tenant demand rebounded to pre‑pandemic averages; Q4 signed 204 office leases (796k sf) including 242k sf new and 554k sf renewals, with straight‑line rent up 4% and leasing costs at only $5.46/sf/year.
• Executed growth initiatives: JV acquired 10900 Wilshire with an estimated combined project cap rate above 10% post‑work; management emphasized operating synergies and robust development pipeline (Studio Plaza, Barrington Plaza).

What Went Wrong

• Topline and profitability pressured by lower office occupancy and higher interest expense: revenue fell 5.5% YoY, FFO/share fell to $0.38 (vs $0.46), same‑property cash NOI down 4.5%.
• Warner Bros. move‑out at Studio Plaza created occupancy drag; management noted leasing/occupancy lag of 100–350 bps, delaying conversion of signed leases into occupied space.
• 2025 outlook cautious: guided GAAP EPS negative and interest expense up to $260–$270M; average office occupancy guide (78–80%) implies muted occupancy recovery despite positive absorption ambitions.

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 would now like to turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

Stuart McElhinney (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 (President and CEO)

Good morning, and thank you for joining us. The recent fires in and around Los Angeles have been devastating, impacting many of our friends, partners, and coworkers. Douglas Emmett is supporting the city's recovery efforts with our personnel and expertise. Fortunately, none of our properties were damaged by the fires. We've made significant progress on several key growth initiatives.

In January, we purchased an office property and by-right residential development site at the corner of Wilshire and Westwood Boulevards. In Burbank, following the move-out of Warner Bros., we have begun redevelopment of our 456,000 sq ft Studio Plaza office building to convert it into a multi-tenant property. We are signing leases that will commence as common areas and the related floors are completed. Our 712-unit Barrington Plaza residential property now has a permit to begin construction. As expected, our Q4 was adversely affected by the Warner Bros. departure.

Lower office occupancy and higher interest rates also negatively impacted 2024 revenues and FFO. However, we maintain stable office rental rates, good control over our operating expenses, and continue to produce strong performance across our residential assets. Excluding the Warner Bros. move-out, we achieved positive absorption during the second half of 2024, even with muted Q4 leasing due to the holidays both falling midweek.

Looking ahead, our 2025 lease expirations are 25% lower than 2024's record high and well below our five-year average. We're also seeing a rebound in demand from larger office tenants. Given these factors, I'm optimistic that we will achieve positive absorption during 2025. I am also excited that our ongoing development projects will provide strong long-term growth. Kevin can provide some details on our new development project.

Kevin Crummy (CIO)

Thanks, Jordan, and good morning, everyone. As Jordan mentioned, we formed a new joint venture to acquire a 17-story, 247,000 sq ft office building and adjoining residential development site in Westwood. We estimate the JV's total investment, including acquisition, upgrades to the existing tower, and construction of a new residential building, will be approximately $150 to 200 million over a three-to-four year period, depending upon our final plan.

The new JV obtained a $61.8 million secured non-recourse interest-only loan that matures in January 2030 and has a fixed rate of 6% until July 2027 and 6.25% thereafter. We manage and own a 30% interest in the new JV and expect to enjoy significant operating and leasing synergies due to the proximity of our other Westwood properties. During December 2024, we also closed a $325 million loan for another of our joint ventures, in which we own 20%.

The loan replaced a $400 million loan that we paid down using cash on hand in that JV. The new debt matures in December 2028 and is secured by five office properties, with interest swapped at a fixed rate of 6.36% until January 2028. With that, I will turn the call over to Stuart.

Stuart McElhinney (VP of Investor Relations)

Thanks, Kevin. Good morning, everyone. For all of 2024, we signed 876 office leases totaling a record 3.8 million sq ft for an average of 945,000 sq ft per quarter. During the Q4, we signed 204 office leases covering 796,000 sq ft, including 242,000 sq ft of new leases and 554,000 sq ft of renewal leases. New leasing demand from tenants over 10,000 sq ft improved again in Q4 and is now back to our pre-pandemic average.

The overall value of new leases we signed in the quarter increased by 4%, with cash spreads down 7%. At an average of only $5.46 per sq ft per year, our leasing costs during the Q4 remained well below the average for other office rates in our benchmark group. Our residential portfolio remained essentially fully leased at 99.1%, with good demand.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 Q4 of 2023, revenue decreased by 5.5% due to lower office occupancy, which, combined with higher interest expense, lowered FFO to $0.38 per share and AFFO to $58.7 million, and same property cash NOI decreased by 4.5% due to lower office revenues, partly offset by 6% multifamily growth and good expense control.

At just under 5% of revenue, our G&A remains low relative to our benchmark group. Turning to guidance, we expect our 2025 net income per common share diluted to be between -$0.17 and -$0.11, and our FFO per fully diluted share to be between $1.42 and $1.48. Our guidance includes the consolidation of our previously unconsolidated fund and the new joint venture that we just formed.

However, we do not expect a significant contribution to FFO from the new joint venture during 2025, as we only own 30%, and we expect NOI to be impacted by construction. 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)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. 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. At this time, we will pause momentarily to assemble our roster, and in consideration of other participants, we ask that you please limit your queries to one question and one follow-up. Thank you, and our first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Alexander Goldfarb (Analyst)

Hey, good morning. Good morning out there. And certainly thoughts and prayers with those affected in the communities. Jordan, first question, I'm sure you can imagine, is we're reading a lot about some local politicians proposing or wanting to have rent freezes or eviction moratoriums.

Just a sense of on the ground, what you think the likelihood of any of these happening and how you think if CEQA and the Coastal Commission truly will stand down and allow the development to go on, or if you think they're also going to be challenging some of the governor's emergency initiatives?

Jordan Kaplan (President and CEO)

In terms of the rent freezes, I mean, I hope they don't do anything. I know it was moved kind of off the agenda for a while to knock back on the agenda. I don't know what's going to happen with it. I'm hopeful from conversations that we don't have to face that again. It certainly hasn't been good for the production of rental housing.

In terms of the Coastal Commission and CEQA impacting the redevelopment of the Palisades, if you're talking about the Palisades for Coastal Commission, for sure, I think the governor's order was extremely clear, and then he reissued a second order to make sure it was triply clear when the Coastal Commission came back and said, "We still want to be involved."

And in terms of kind of the politics and the way the Coastal Commission's created, if what he wants is them not to be involved, they're not going to be involved. And he came on super strong. And by the way, the city also came on super strong. They want to fast-track the reconstruction, and they're working pretty hard to make sure, in their words and conversations I've had with them, to make sure they stay out of their own way. So I'm optimistic on that.

Alexander Goldfarb (Analyst)

Okay. And then the second question, Jordan, is you gave optimistic outlook that you'll see positive absorption this year and that leasing is trending the right way. But when we look at the occupancy for the year, the guidance is 78 to 80%, which is basically, I think we're 79% now. So how do we jive that average office occupancy, which basically implies flat, with your positive comments on absorption and leasing trends?

Jordan Kaplan (President and CEO)

I mean, the office occupancy is a range, to be fair, but I will also say occupancy is people moving in. We're working on a lot of leasing. Leasing has a lag time, and especially if we're successful and we get positive absorption out of the year, and you've seen this.

I know you've seen this in the past that when our leasing ramps up, the spread between leased and occupied widens, and so I'm hopeful that we see positive absorption on leasing, and of course, that's always like a great sign for occupancy moving up or eventually moving up, but there's a real lag there all the time.

Alexander Goldfarb (Analyst)

Thank you.

Operator (participant)

All righty. Our next question will come from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thanks. Following up on the leasing topic and guidance, is there a way you could give us a feeling for leasing volume assumed in guidance this year versus last year, flat, up, down, in order to get to the occupancy range that you're talking about?

Jordan Kaplan (President and CEO)

So last year, at the end of the year, we saw a real slowdown, which is a leading indicator for us at the earnings. So we saw it really slow down, I mean, substantially below the amount of showings we would expect to have even in December because of the way that kind of those two went.

There were two Wednesdays with holidays, so people seemed to have sort of blown out both weeks at the end. So it didn't even get to our average. And we're now seeing showings in January and going forward that are way above our average. And that's one, if not, there's others of the reasons I'm just feeling. It's that combined with that we have historically very low move-outs or very low roll this year. I should have said roll, not move-outs.

We have very low roll this year, which we typically expect to get about 70% of. So when you have lower roll, and then you turn around and you go on feeling good about showings, and you're feeling good about the pipeline, then I'm going to be optimistic. And I'm telling you guys that I am.

Nick Yulico (Managing Director)

Okay. Thanks. And then I guess secondly is just in terms of if you could just talk about a little bit more about how January leasing is shaping up. I don't know how much January really makes or breaks a year or not, but anything you could talk about in terms of if the fire has impacted, whether it's sort of existing tenants thinking about space or leasing decisions that were kind of in the works with people, if there's been any impact so far on leasing?

Jordan Kaplan (President and CEO)

I think it's very hard to tell whether the fire is going to have any impact on it. Quite frankly, I don't think it is. But there's not any data out there to figure that out yet. And even if it does have a tiny impact, and I couldn't even tell you if it would be plus or minus, the general positive tide that I just described in terms of kind of our outlook and what's going on, I think would overwhelm it. So I don't think it would be meaningful anyway.

Nick Yulico (Managing Director)

All right. Thanks. Appreciate it.

Jordan Kaplan (President and CEO)

All right.

Operator (participant)

Our next question will come from Steve Sakwa with Evercore. Please go ahead.

Steve Sakwa (Senior Managing Director)

Yeah. Thanks. Good morning. Jordan, I know you're probably loath to talk about cap rates on individual deals, but can you just help us kind of size up maybe what the economics look like for both kind of the office and the planned apartment at the new acquisition of 10900 Wilshire, just so we can kind of help think about either stabilized yields, IRRs? How do we think about that investment?

Jordan Kaplan (President and CEO)

That's great, you know. I mean, we've only been working together for, what, just almost our 20th year or something. That's true. I hate cap rates. I don't think cap rates are particularly indicative other than a cap rate on an apartment market, at least apartment building. But because you asked, I will say, with you knowing, I really don't like cap rates as an indicator of anything, that I think we're going in at a little over a 10 cap rate, and I expect when we're done with all our work to be over a 10 cap rate.

Steve Sakwa (Senior Managing Director)

Just to be clear, that's just on the office component, or that's office and residential combined?

Jordan Kaplan (President and CEO)

Going in couldn't be on anything but obviously the office. And then coming out, it's combined.

Steve Sakwa (Senior Managing Director)

Okay. And then moving up to the Warner Bros. building, just as we think about the money you're putting in, the $75 to 100 million of CapEx redevelopment, I know Warner Bros. was paying kind of low 60s rent on that building. When you're done with the work, how do you think the new rents for the multi-tenant building will stack up to that prior rent?

Jordan Kaplan (President and CEO)

I think that, well, I will say to you, so remember, they just moved out like a month or two ago. I think that we're very pleased with our leasing, and we're not talking about individual deals, but we tried to describe in our prepared remarks that we're already leasing, and what's now is we got to get this work done and get the common areas done and get some of these floors done so we can get these people in and paying, so I would say this, we feel very good about what's going on there.

Steve Sakwa (Senior Managing Director)

Okay. Thanks.

Jordan Kaplan (President and CEO)

Okay. Thanks, Steve.

Operator (participant)

Our next question will come from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck (Senior Equity Research Analyst)

Great. Thanks. Good morning out there. Just to follow up on a couple of your answers, can you remind us what the lag is between leasing and occupancy that's typical in your portfolio? And I guess you mentioned 70% for retention. So just to confirm, that's what you guys are expecting this year, especially given that we noticed you've got a lot of expirations in the valley towards the end of the year. Are those a concern at all?

Jordan Kaplan (President and CEO)

We are expecting, and I got to tell you, historically, with a lot of regularity experience, I think the real number is like 69 point something%. And that's very historically, quarter to quarter doesn't mean a big deal, but it's very reliable over three, four quarters. So that's why we're expecting, and I would expect it here. And so that was your question on renewal. What was your other question?

Blaine Heck (Senior Equity Research Analyst)

Just the typical lag between leasing and occupancy.

Jordan Kaplan (President and CEO)

So that number can range from 100 to like 350 basis points and even higher. I mean, if you're really leasing at a torrid pace, it gets up above 300. When things are extremely lackluster, it gets down. It can get down to 100. I would say if you just look at it like, there's never a normal time in real estate.

But anything you would call a normal time, maybe 150 basis points. But I got to tell you, if you go back a few years when we were doing a ton of leasing, I don't know if you remember going back, but there was a time when sort of COVID was over, but I know people weren't talking about recessions. We had kind of a weird year there where we got positive again.

I remember we got up to about 350, and everyone was saying, "When are they going to move in? When are they going to move in?" And I said, "Well, you just want to keep that 350 because it means we're just doing a lot of leasing." Because they were trying to get the 350 back down. You don't want it to go down because those people move in, you want to have more people that are in that pipeline. But that seems to be the nature of it.

Stuart McElhinney (VP of Investor Relations)

Blaine, if you're asking about timing on moving folks in after we've signed a lease, typically it's very quickly. We can move folks in a quarter or within two quarters when they sign their lease. Of course, on Studio Plaza, with building out multi-tenant quarters, and that's the kind of stuff that's going to take longer.

Blaine Heck (Senior Equity Research Analyst)

Great. Very helpful. That was fine. That was helpful commentary from you too, Jordan, and then secondly, on the acquisition, it looks like this is a new JV partner. If that's the case, can you tell us anything about that partner and their willingness to do more deals with you, and then whether QIA was considered as a partner and kind of their ongoing interest in investing with you. Thanks.

Jordan Kaplan (President and CEO)

We don't really like to talk about our JV partners. And to be perfectly frank, they're not anxious to be in the press. If they want to say something themselves, they're always welcome to do it. But we've been asked the question. I got to tell you, I think every quarter for now four or five years, we've been asked whether our JV partners still had an interest in buying office, still had an interest in resi, had this, that, and the other.

And I said, "Yeah, they definitely do." And you can look at the fact of how much we got squeezed down on this deal to know how aggressively they do want to be in these deals. I mean, that money is out there.

And I'm happy that we were able to do a deal and give those guys some way to have some participation because if you don't give them deals, you're going to lose their attention. And I know Kevin's been doing a good amount of traveling with Stuart and Griff, and they've been getting out and continuing to send those guys. We think we're going to be able to make deals, and now we're making them. So I'm super happy about that.

Blaine Heck (Senior Equity Research Analyst)

Thank you.

Operator (participant)

Our next question will come from Jeff Specter with Bank of America. Please go ahead.

Jeff Spector (Managing Director)

Great. Thank you. Jordan, follow-up question on your comments around absorption. We've met you in the past. You've talked about in a healthy, I guess if there's health-positive absorption, you want to see one-third new, you want to see 2,000 to 4,000, 10,000 to 15,000 sq ft tenants. Can you provide a bit more color on what you're seeing in the market that backs up your thoughts for 2025, besides the fact that you have less roll? Thank you.

Jordan Kaplan (President and CEO)

So less roll makes a big difference, for sure. But we're just getting a lot of activity, as Stuart has said. And this is one of the questions he was going to answer. But we, again, saw last quarter a great return of the over 10,000 sq ft tenants and back to at or above our norm, which has been what's been missing in terms of us achieving really the big goal, which is to get something in the 800,000s and to be one-third new.

And so we were really having trouble getting there with the one-third new because we need some of these larger guys to come back, and they've come back. And then add on to that that as this year has launched out, I mean, we're just feeling much better about everything that's going on in terms of the actual lease activity, the showings, and all the rest of it. I mean, that's what caused me to write that in our prepared remarks.

Jeff Spector (Managing Director)

Thank you. And I guess, could you talk a little bit more about that new demand, in particular the larger tenants, what type of industries they're coming from, where they're in, I should say? Thank you.

Stuart McElhinney (VP of Investor Relations)

Yeah. We saw demand across the board. It wasn't concentrated in any particular industry. So we saw real estate. We saw across the board kind of demand in Q4 for those larger tenants.

Jeff Spector (Managing Director)

Thank you.

Operator (participant)

Next question will come from Michael Griffin with Citi. Please go ahead.

Michael Griffin (Senior Equity Research Analyst)

Great. Thanks. Maybe to expand a little bit on Jeff's question surrounding the large tenant demand. I mean, in your summation, what has maybe changed in that tenant's mindset that makes them more confident to go out and sign leases? Is it improved business confidence? Is it an updated outlook on the economy? I know that work from home was never really an issue with your tenant base, but maybe just kind of the why you're seeing those sort of tenants come back to the market.

Jordan Kaplan (President and CEO)

I didn't know why they weren't backing it last year. I know that many large tenants were taking sort of a posture of prepare to be in an extreme recession or that's what's coming or whatever. And I'm sure that attitude has changed, and that's played some role.

But I got to tell you, I also watched our leasing group, our operating platform, and I will add our kind of development group, which we kind of maintained, and actually, oddly, grew during this time. And a lot of people are kind of falling away from some of those things. And they've adjusted strategies. They've figured out how to be and where to be aggressive in this market and how to get attention.

And I don't know whether it's us, it's everybody, it's them changing their attitude, but some of it is just I can see it in our platform because I saw when we were bidding against that other deal that was going on and other people that were trying to come in the market because they might have thought that would be a good deal.

And I could see that we're now substantially more qualified to handle and take advantage of these opportunities, both from leasing perspective in terms of our platform's even more robust now, and from the perspective of having not only maintained but sort of built up our development platform. I mean, this is rare. We're now taking on multiple development deals. And I know on that deal we've just been on, I don't think anyone was even realizing there was another development opportunity there.

So, I'm feeling really good about all. I mean, I feel great about it, not even just really good about our growth stuff. And I wrote that in my prepared remarks. We have a lot of growth things going on now.

Michael Griffin (Senior Equity Research Analyst)

Yeah. That's a helpful color. I can definitely gauge the excitement in your voice there. And then just maybe one follow-up on the 10900 Wilshire acquisition. Do you envision this as a big tenant building? Would it be more your bread and butter kind of tenants? And anything you can comment on the upcoming rent roll or lease maturities and whether or not there's a mark-to-market opportunity in the building?

Jordan Kaplan (President and CEO)

That building uniquely has presented us with more than one extremely good option, and before we talk more about it, we need to decide what direction we're going in, so we need to spend a little more time on that. I feel that that building provides a lot of opportunity, but we got to decide in what direction we're going to go in, and we need to get that done in the next relatively soon, so I'm going to let that sit for a while.

Michael Griffin (Senior Equity Research Analyst)

Sounds good. Appreciate it. That's it for me.

Jordan Kaplan (President and CEO)

Thanks.

Operator (participant)

All right. And the next question will come from Rich Anderson with Wedbush. Please go ahead.

Rich Anderson (Managing Director)

Thanks. Good morning. So a quarter or two ago, Jordan, you had mentioned on Warner Center, "I hope it's not single tenant." And now it's definitely not single tenant, sounds like, for the money you're spending.

What have you guys done to sort of gauge the market to get you to the point where you're so committed to multi-tenant execution that you're spending that kind of money on it? Was there some work done on the ground to say, "Okay, we got some real opportunity here, but it's not going to be 450,000 sq ft"? I'm just curious what the process was.

Jordan Kaplan (President and CEO)

So I think you're talking about Studio Plaza, which.

Rich Anderson (Managing Director)

Excuse me. Excuse me.

Jordan Kaplan (President and CEO)

The tenant was Warner, the old tenant was Warner Bros.

Rich Anderson (Managing Director)

You know what I meant.

Jordan Kaplan (President and CEO)

So, it would have been. Look, I'm not going to say just like all good developers and leasing guys. I mean, if we would have had the problem of we're turning down a 450,000 sq ft tenant, I guess maybe I don't know that we would have turned that down. I had never seen us do that. So I'm not sure that we had really the options the way you're describing it. I will say that we like that market a lot.

Our comfort level is not with large tenants. We like the distributed risk of multi-tenant buildings. It's a great market. We did benefit from it being a single-tenant building. Well, we had a decade in there when it wasn't. But in general, two out of the three decades, it was a single-tenant building.

I'm pleased now to be obviously, nobody likes having their building vacate, but I'm pleased that we have an opportunity now to extremely de-risk that building and lease it up. Like I said, we like what we're seeing on the lease up. I mean, we like what's going on. That's good.

Rich Anderson (Managing Director)

Think you'll have some real concrete stuff to talk about in a quarter that quickly from a leasing perspective?

Jordan Kaplan (President and CEO)

I'm really telling you we're signing leases.

But if you'll say to me, "Are we going to start tracking it that way?" No, but we're not going to just take one building and start tracking it. But if you're asking me in terms of having the building ready for those tenants to move in, we have actually given a bunch of info on that and that work's going on. I think we might even have some imagery and stuff on our website on that building, and you could see what it's going to look like going forward as has been seen by the people we're leasing to and our prospects.

Rich Anderson (Managing Director)

Okay. And then second question, interest expense was projected to be up 15-some-odd% year over year. A lot of clear rationale behind that, swaps, expirations, and so on. I'm wondering if the environment is causing you to sort of change your way of your approach to the balance sheet at any level. You're kind of exposed to quite a bit of variable rate debt, and that increases as time passes in 2025. Anything you can share with how you might manage this situation in the current macro environment?

Jordan Kaplan (President and CEO)

Well, we've never been in love with variable rate debt. It's just that you got to go variable when a loan's coming out, right? So we normally borrow seven years and fix it for five, and we expect to refinance. And because of the way the market's been, we've been stuck with stuff that's kind of during those two years has gone to floating.

It's not that that's been a strategy. And as you can see from the deals that we did, which Kevin described in his prepared remarks, those deals are fixed, right? They're both in the sixes. So I mean, we're willing to live with that. And as stuff comes up and we have the opportunity to make those changes with the longer-term loan and those opportunities, we're probably going to swap it or do fixed-rate deals.

Rich Anderson (Managing Director)

Okay. Good enough. Thanks very much.

Jordan Kaplan (President and CEO)

All right.

Operator (participant)

Next question will come from Anthony Paolone with JPMorgan. Please go ahead.

Anthony Paolone (Executive Director)

Thanks. Maybe we'll stay on debt for a minute. If we look out to 2026, I think you have about $1.3 billion coming due. Any likelihood of addressing some of that earlier than next year? And is any of that in guidance? And also just anything we should be looking out for as we look out to that, whether it's a big increase in spreads or where some of that debt might reside at the asset level that we need to consider?

Jordan Kaplan (President and CEO)

We just announced two deals. So you have some comps on interest rate on lease, right? In terms of working on them, we definitely want to deal with them this year and are working on that. But because of the way the market is, it's as equally uncomfortable for us as everybody that we're having to walk down the line so far and deal with these loans when they're so much closer to the maturity. But the 2026 debt, we at this time are very focused on dealing with now and making deals and extending out. And for sure, we're definitely working on that.

Anthony Paolone (Executive Director)

So there's some of that in the interest rate guidance, I assume.

Jordan Kaplan (President and CEO)

No. No, because we don't include in our guidance deals that aren't done. So when those deals are done, then that'll go in there. But until they're done, we don't include prospective or potential deals in the guidance.

Anthony Paolone (Executive Director)

Got it. Okay. And then just follow-up. On 10900 Wilshire, you talked about how much you like the deal, and it's pretty unique. So should we think about that as one-off, or are you seeing capital markets thaw out there and a deal pipeline starting to build more broadly?

Jordan Kaplan (President and CEO)

You want to answer.

Kevin Crummy (CIO)

This is Kevin, Anthony. So we did see a number of larger tenant format buildings that traded last year, but that's not what we do. We're looking for multi-tenant assets that we can apply our operating platform to. And so this was a great opportunity. It was a perfect fit. And I'm optimistic that there's going to be more of that in our markets over the coming year.

Anthony Paolone (Executive Director)

Good. Thanks.

Operator (participant)

The next question will come from John Kim with BMO Capital Markets. Please go ahead.

John Kim (Real Estate Analyst)

Thank you. I could see why you wanted to disclose the 10% cap rate on 10900. But I wanted to ask about that. So on the office side, I think Jordan you mentioned that's the going-in cap rate, but you do have some options. So I was wondering if there was some maturities and maybe some upside of that 10% if you redevelop it. And then on the multifamily developing at a 10% yield, is that an affordable housing multifamily development? And that's the reason why you can get that attractive yield. I just wanted some more details if you could provide it.

Jordan Kaplan (President and CEO)

So I said above 10%. I didn't say 10%, just to be clear.

John Kim (Real Estate Analyst)

In both instances.

Jordan Kaplan (President and CEO)

The multifamily is not low-income. It's that market.

John Kim (Real Estate Analyst)

So how were you able to get that? I mean, it's hard to develop above a six, I think, in multifamily.

Jordan Kaplan (President and CEO)

I don't know. It's a function of everything surrounding the deal. It's rents in the area. It's the cost to build a building. It's the price we paid and handled that option was included in the deal. I said it earlier. Kevin's reminded me by writing on a piece of paper that it does not include.

There's no allocation of land because I'm telling you right now we bought it with no building, and I just gave you the cap rate. So there's no and you're assuming that we're building it for a 10 cap rate. But anyways, in what I told you is for the entire project. It's not just for the apartment building. Not to say that it won't be a high cap rate.

But what I described earlier about kind of people's recognition of that opportunity with respect to this deal, I'm pretty sure we're the only ones that saw it because we have such a kind of robust development platform to begin with. And we know what's going on here, obviously. And you know there's been some changes to state law that we're very familiar with.

And I've been pointing out to you guys that there's locations along Wilshire that we own today and that now it's a new world. Now you can by-right, build, resi. And with all that knowledge here and our development group and being able to understand costs and the fact that literally, I don't know, blocks away in Brentwood, we just built a high rise. We just have a lot of information on this front.

And so we were able to recognize the opportunity and be able to also add that in. And it's very easy to do. And we paid a price that I think when we're bidding against everybody just contemplated that it was the building that's standing there today.

John Kim (Real Estate Analyst)

Congrats. It sounds great. Just wanted to follow up on your guidance. What is contemplated as far as capitalized interest and how did capitalized interest end up last year? I think you were on an $8 million run rate in 2024.

Peter Seymour (CFO)

Yeah. It's Peter. I mean, we don't give guidance specifically on capitalized interest, but you can assume that as we expand development, there'll be a bit more of it. And yeah, I think that's all I have to say on that.

John Kim (Real Estate Analyst)

Can you remind us if Studio Plaza has secured debt?

Jordan Kaplan (President and CEO)

It does not.

John Kim (Real Estate Analyst)

Great. Thank you.

Operator (participant)

The next question will come from Dylan Burzinski with Green Street. Please go ahead.

Dylan Burzinski (Senior Analyst)

Okay, guys. Thanks for taking the question. Jordan, just wanted to go back to your previous comment about having existing density within the operating portfolio today. I know you guys kind of alluded to it in the past, but can you kind of describe just how big of an opportunity set that is?

Jordan Kaplan (President and CEO)

Have I told people that in the past?

Stuart McElhinney (VP of Investor Relations)

It's thousands of units.

Jordan Kaplan (President and CEO)

Okay. It's thousands of units.

Dylan Burzinski (Senior Analyst)

I guess, I mean, is there any sense for a lot of these to be near-term endeavors, or are these sort of longer-term in nature in terms of being able to actually get at that and start development process?

Jordan Kaplan (President and CEO)

So I've been asked in the past how rapidly we are going because there were changes in state law and whatnot, how rapidly we are going to move in and build and continue building units because we're a primary owner along Wilshire where most of this is impacted by these changes.

And I had said in the past, I think our goal would be to do a deal in Hawaii and a deal in LA, have two deals going at a time at any particular time, but the deals take a few years, and then you finish them, and then you go to the next thing.

And you would say, "Well, wait a minute, you're already in more than one deal here because we're doing Barrington complete redo, and now we all just took on another one." And as I said, I mean, I think it's a function of how strong our development group has become. And maybe it is the case that we could take on more than one, but I'm not anxious to take on many more than two. We have two now, and it just takes a lot. We have three now. Do we have three now? Yeah. Okay. We have three now. Stuart's putting up three fingers. So yeah, we have a lot going on.

Dylan Burzinski (Senior Analyst)

Great. And one more if I may. You mentioned an activity over 10,000 sq ft getting back to sort of pre-pandemic levels. Can you kind of just talk about what you guys think is sort of driving this renewed optimism amongst this cohort of tenants?

Jordan Kaplan (President and CEO)

Well, so I think there's two kind of big things going on. Number one is I do believe larger tenants are doing a bit of an about-face, and they're no longer in a completely guarded position vis-à-vis like a dramatic recession that's going to come and beat the place up.

And I think that shift is definitely making a difference. But I'm going to tell you, I also see a difference in our penetration in the market and our teasing out tenants and getting access to tenants and getting these deals made. And it's hard for me. I don't know how to separate the two, but I can tell you, we got a lot more big tenant deals going. But we got a lot of people focused on it.

I mean, if you ask any we have 800 people, and if you go to any of them and go, "What's going on at Douglas Emmett?" They're going to go leasing, leasing, leasing. I mean, that's what's been going on. So if you stay that long enough and hard enough and focused enough and are strategic enough, you're going to do leasing. And that's what's happening.

Dylan Burzinski (Senior Analyst)

Great. Appreciate your comments.

Operator (participant)

Question comes from Upal Rana with KeyBanc Capital Markets. Please go ahead.

Upal Rana (Director and Equity Research Analyst)

Great. Thanks for taking my question. The $335 million loan that matures in March and that you're currently in the process of negotiating an amendment and an extension on, what have the conversations been like there, and what's the probability of the amendment finalizing by the due date?

Jordan Kaplan (President and CEO)

I mean, I don't think I'm prepared to discuss that, anything that's going on there right now. I mean, obviously, you've already outlined what's going on, and that's probably the amount we're willing to discuss. So we don't like to discuss deals, certainly in process, and we really actually announce them after they're done and closed.

Upal Rana (Director and Equity Research Analyst)

Okay. Sure. And then my other question would be on the 10900 acquisition. You have about 40,000 sq ft expiring this summer, with some of it being sublet as well. What's your confidence that those tenants may re-sign? And have you had any preliminary conversation with those tenants prior to purchasing the asset, especially with your plans to upgrade the existing tower?

Jordan Kaplan (President and CEO)

Well, I mean, we're in the market. We're obviously familiar with all the tenants. So I don't know that I can I mean, we're not going to talk about individual tenants. We kind of gave you we have a couple of paths we can follow, and we have to decide what path we're going to follow.

I don't want to give guidance on a building for midterm. We kind of gave you where we are today and where we're confident we're headed. It has a lot going on. It has redevelopment. It has residential. It has a lot going on. So we need to just play that out and make some better decisions about it or make some decisions about it. I'm sure it'll be good.

Upal Rana (Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Our next question will come from Jamie Feldman with Wells Fargo. Please go ahead.

Jamie Feldman (Managing Director)

Great. Thanks for taking the question. Just thinking big picture about the impact of the wildfires, if you fast forward a couple of years here, what do you think is going to be most different about Los Angeles going forward? And then based on the conversations going on with rebuilding and planning, what are you most optimistic about, and what causes you the most concern about things moving forward?

Jordan Kaplan (President and CEO)

So this morning, there was an article in The New York Times about the Palisades. And it made a lot of projections about where the Palisades is headed in terms of a market, in terms of the people that are going to be there, and how the Palisades is going to change and the focus it's getting.

I read it, and I thought that that outcome was probably a good guess as anything because there's a lot of history around other communities that have been impacted by fire, which is devastating. I mean, I didn't spend a lot of time at the beginning of this thing, but you can't imagine how much time. Personally, the people here at Douglas Emmett, I personally can. I mean, Stuart, Kevin, Peter, not even back in his house. I mean, what's going on now is I would have never imagined.

But if you want to jump very far forward and say, "Where does this all go in the end?" You look at what has happened in Malibu and other markets where fires come through. You already know that the city's dedicated to making a bunch of extremely positive changes to that area in terms of support of development, allowing development to be more rapid. I know a lot of people are talking about leaving.

I know very few people that are just saying, "I'm out of here." Actually, almost to a T, people are either like, "How fast can I rebuild?" And they're also in the market for their neighbor's lot. So I see that happening. And I think to myself, "This has been horrible destruction. We're going to go through a rough few years," but it does give me optimism about where the Palisades is headed. And so we'll see.

Jamie Feldman (Managing Director)

Okay. Thank you for that. I know it's a difficult topic, and then I guess just thinking about commercial real estate, we've heard about some high-profile leases in Santa Monica. Anything you think changes in terms of the demand profile for the different submarkets you're in or other submarkets that might be more interesting for you guys going forward with the rebuild and changes?

Jordan Kaplan (President and CEO)

Well, I know we're talking to some schools too. I know there's some schools that kind of look for space because, of course, they want to stay open, right? I mean, they have all the kids and that whole thing, and I know that other schools that were not damaged around Santa Monica.

I'm on the board of one school in Culver City. I don't want to mention them, but I know they're now accommodating other schools, students, and programs to try and help out, so I know that is all going on. Putting that aside, I have to say again, the actual Pacific Palisades area, they had one or two medical office buildings, medical with a little bit of normal office. There was some other normal office. There are the schools, and there are businesses.

But I'm not sure that that transplant in the size of our market is going to be the thing that makes a big difference. And as I said, the tide of just the kind of tide of leasing, I think, would overwhelm any of that. I know that I was asked earlier. I said a lot of people just have been displaced, and they're renting houses that might not be as big as where they were before.

Work from home, to the small degree that it existed, might be much more difficult now. People want to come in the office. Maybe they're renting a smaller place. They don't have an office or something until they build their house back. I don't even think work from home is impacting us that much.

So I can't even say that I think that will make a big difference to leasing, and especially against where I think the tide of leasing is going.

Jamie Feldman (Managing Director)

Okay. I would assume Santa Monica [crosstalk]. No, that's super helpful. I mean, I would assume Santa Monica would get the benefit from reconstruction-type architects, engineers. I mean, is that the closest?

Jordan Kaplan (President and CEO)

Yeah. I think Santa Monica and Brentwood and Westwood, all these areas here, I think it is way too early for that to happen. But if you're saying to me there's a lot of capital that's about to come into this place, and when more capital comes in, that means they need more office space, and there's going to be construction and activity here in a big way for quite a few years. Yeah. I mean, that will incrementally, I'm sure, make a difference, but the difference hasn't had a chance to be made yet. So we aren't seeing it yet.

Jamie Feldman (Managing Director)

Okay. All right. Thank you. And we send our best to your entire team.

Jordan Kaplan (President and CEO)

Thanks.

Operator (participant)

Our next question is a follow-up from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico (Managing Director)

Thanks. Just going back to 10900 Wilshire, we'll sure not beat a dead horse on this, but it looks to us that you bought the leasehold in that asset. You don't own the ground. So is that correct? And is that also why the cap rate yield expectation you're citing is higher than what some would expect?

Jordan Kaplan (President and CEO)

No. We bought it in fee.

Nick Yulico (Managing Director)

Okay. Thank you.

Jordan Kaplan (President and CEO)

We own the ground and the building. We own both. We own the whole thing.

Nick Yulico (Managing Director)

Thank you.

Jordan Kaplan (President and CEO)

All righty.

Operator (participant)

This concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.

Jordan Kaplan (President and CEO)

Okay, well, thank you for joining us. I know this was a complicated release, and I appreciate that you guys spent the time to look it over and had a lot of good questions, and we will be speaking with you again in a quarter. Goodbye.

Operator (participant)

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