3rd Quarter 2026 Earnings Conference Call - DOUGLAS EMMETT INC

Financial Performance:

• Third-quarter revenue increased 4.0% to $261 million (vs. $251 million in Q3 2024), while Same-Property Cash NOI decreased 3.1%.
• Funds From Operations (FFO) rose to $69.6 million from $68.5 million; Adjusted Funds From Operations (AFFO) declined to $47 million from $52 million.
• GAAP expenses remain at a record low of 4.6% of revenue, the lowest within the benchmark group.
• Office occupancy improved by >100 basis points to 76.7%, driven by positive absorption of ~1 million square feet over the last four quarters.
• The spread between leased rate (80.4%) and occupied rate (76.7%) is 370 basis points, significantly above the historic average of 100-150 basis points.
• Residential portfolio remains fully leased with 99%+ occupancy and Same-Property Cash NOI up 4.4% year-over-year.
• Refinanced $1.2 billion in debt over the last nine months; average cost of debt rose from 3% to 5%, adding ~$135 million in annual interest expense compared to 2019.

Guidance and Future Outlook:

• Full-year 2026 diluted net income guidance set between -$0.20 and -$0.16 per share.
• 2026 fully diluted FFO per share guidance maintained between $1.39 and $1.43.
• Management projects FFO recovery to 2019 levels by 2026, driven by rising occupancy and current residential developments (Barrington/Landmark Residences), excluding future accretive acquisitions or entitled land development.
• Leasing pipeline is healthy; non-commenced leases are expected to commence primarily within the next four quarters, with the majority rolling in over the next two to three quarters.
• Optimistic outlook on interest rates moderating within the next couple of years following recent political shifts, potentially aiding economic recovery and rent growth.

Business Segments and Product Lines:

• Office: Signed 224 leases totaling ~1 million sq. ft. in the quarter (142 renewals, 82 new). Straight-line rental value increased 1.8% over prior leases for same space, offsetting lower initial cash rents with 3-5% fixed escalators.
• Residential Development: Projects on track to add >1,000 units over the next few years, including 712 units at Landmark Residences (Brentwood) and up to 323 units at 10,900 Wilshire/Westwood.
• Acquisitions: Successfully completed two acquisitions in the current market; holding dry powder for generational Class A office deals at historically low prices. Explicitly stated no intention to acquire existing apartment assets at current valuations.
• Studio Plaza: Major redevelopment/leasing project nearing completion; income ramp expected within 2-4 quarters.

Market and Competitive Landscape:

• Office market showing signs of recovery with expanding demand from legal, accounting, finance, and entertainment sectors.
• Company is actively pursuing "super Class A" office assets in the Los Angeles market (primarily Westside and potentially NLA/Westside) at discounts unseen in decades.
• Management notes that market-wide demand is growing rather than just competitors losing tenants, with organic expansion outpacing contractions.
• Residential development remains more accretive than acquisitions due to company's existing land bank and entitlement advantages over third-party developers.

Risks and Challenges:

• Interest Rates: Identified as the primary headwind; 300bps increase in average debt cost has negated most FFO growth since 2019.
• Lease Expirations: Large deal expirations in 2027 have been mitigated by early renewal strategies, prioritizing occupancy over maximizing short-term rent escalations.
  Capital Markets: High borrowing costs constrain leverage utility; deals must have high all-cash IRR to justify financing.
• Litigation: Ongoing insurance litigation regarding property damage; proceeds are viewed as potential but uncertain.
• Regulatory: Transfer taxes and potential rent regulation remain key policy concerns in California.

Management Commentary and Tone:

• Tone is optimistic yet cautious; management acknowledges the "murky" macro climate but expresses high confidence in operational execution and the strength of the leasing backlog.
• CEO Jordan Kaplan emphasized a "no debt default" track record over 40 years as a key competitive advantage for accessing capital.
• Management indicated a disciplined approach to new residential starts, prioritizing the completion of current projects (Barrington, Landmark) before initiating new ground-up developments.
• Strong focus on tenant retention (approx. 70%) with aggressive sales efforts on both large and small accounts to drive lease rates higher.

Analyst Questions and Answers:

• Leasing Velocity: Analysts asked about the cadence of the 370bp leased-to-occupied spread; management clarified most non-commenced leases (mostly small tenants) will roll in over the next 2-3 quarters.
• Large Deal Dynamics: Confirmed an uptick in larger deals across the portfolio, though some face higher concession costs and slower move-in times.
• Capital Structure: Discussed upcoming debt maturities; confirmed plans to refinance but no "debt jeopardy," expecting rates to rise slightly but managing through spreads of 1.70-2.25% over treasury.
• Post-Election Impact: Asked about state/federal policy shifts; management expects federal inflation moderation and continued pressure to negotiate on California state transfer taxes.
• Investment Parameters: Reiterated focus on Los Angeles-based Super Class A office deals; stated apartment acquisitions are currently unattractive compared to in-house development returns.

Other Key Points:

• Renewal rate is stable at ~70%; management is actively testing strategies to increase this further but views the current level as high for the sector.
• Cash spread remains negative due to built-in 3-5% escalators on new leases, though straight-line values remain positive.
• Management plans to engage with equity partners for future large-scale acquisitions, noting the environment is excellent for JV partners.
• No assumption in guidance for future capital markets activities, such as equity raises, repurchases, or specific acquisition/disposition timing.