3rd Quarter 2026 Earnings Conference Call - DOUGLAS EMMETT INC

Explicit Guidance:

• 2026 Net Income per Share (Diluted): Expected to be between negative $0.20 and negative $0.16.
• 2026 Fully Diluted FFO per Share: Expected to be between $1.39 and $1.43.
• Assumptions: Guidance excludes impacts from future property acquisitions/dispositions, stock sales/repurchases, financings, insurance recoveries, impairment charges, or other capital markets activities.

Business-Segment Outlook:

• Office Leasing & Occupancy: High occupancy backlog with a 370 basis point spread between leased and occupied rates (historic average was lower). Management anticipates the majority of signed but uncommenced leases to commence within the next two quarters, with the remainder likely completing over the next four quarters.
• Apartment Development: On track to add over 1,000 residential units over the next few years, specifically including 712 units at Landmark Residences (Brentwood) and up to 323 units at 10,900 Wilshire/Westwood.
• Residential Portfolio: Portfolio remains over 99% leased; same-property cash NOI grew 4.4% year-over-year.
• Tenant Mix: Expansionary demand significantly outpaces contractions; demand remains strong across legal, accounting, finance, and entertainment sectors.

Market and Competitive Outlook:

• Office Market Structure: Management anticipates continued capital constraints forcing other owners to divest, creating rare opportunities to acquire super Class-A office buildings at significant discounts not seen in decades.
• Rent Dynamics: While lease rate value increased 1.8% in the quarter and fixed rent bumps of 3–5% are standard, management expects market rents to exceed these built-in escalators only once the lease rate shows a strong upward trajectory and occupancy moves into the mid-80s.
• Capital Markets: Expectations of a "less inflationary" environment and moderation of interest rates within the next couple of years, driven by anticipated federal policy shifts.
• Geographic Focus: Expansionary activities and acquisitions remain strictly focused on Los Angeles, specifically the West Side and potentially North LA (NLA).

Macro / Industry Outlook:

• Interest Rates: Average cost of debt increased from 3% to 5%, adding over $135 million in annual interest expense compared to 2019. This remains the single biggest challenge.
• Inflation/Fiscal Policy: Optimism that federal inflationary policies will face moderation, leading to lower interest rate trajectories, which is viewed as the most critical factor for business recovery.
• Regulatory Landscape: Management anticipates potential political spending in G&A next year to address statewide transfer taxes; expects favorable conversations with state leadership regarding residential conversions, though local council dynamics remain variable.

Strategic Initiatives:

• Refinancing: Successfully refinanced $1.2 billion over the last nine months; most recently closed a $366 million office loan with a four-year term effectively fixed at 6.24% through September 2029.
• M&A/Acquisitions: Committed to utilizing "dry powder" to pursue generational acquisitions of super Class-A office assets; no apartment purchases planned as current cap rates are not favorable compared to internal development costs.
• New Development: Currently undertaking preparatory/architectural work on two new sites; no ground-up starts will commence until current major projects (Barrington/Landmark Residences, Studio Plaza) are substantially completed.
• Debt Maturity: Plans to refinance all upcoming debt maturities (including swaps) comfortably, potentially extending maturities further out.

Risks and Headwinds to Outlook:

• Interest Rate Exposure: High debt service costs due to the increase in average borrowing costs from 3% to 5%.
• Execution Timing: Development projects and large lease moves carry timing risks; income from Studio Plaza and Landmark Residences may not roll in for 2–4 quarters after physical completion.
• Litigation Uncertainty: Insurance litigation proceeds are pursued but carry legal uncertainty regarding final recovery amounts.
• Regulatory Uncertainty: Potential changes in local rent regulation and transfer tax policies in California.
• Lease Economics: Negative cash spreads persist due to built-in rent escalators (3–5%) in current leases, delaying profitability improvement until market rents outpace these escalators.

Management Tone on the Future:

• Confidence: "Optimistic" despite "murky" macro conditions. High confidence in the ability to recover FFO to 2019 levels and exceed them through rising occupancy and development, even without rate moderation.
• Strategic Aggressiveness: Leadership is "super focused" on leasing, with the CEO and President actively pursuing large and small deals; described as "raring to go" on acquisitions when opportunities arise.
• Priorities: Primary focus is achieving full occupancy and maximizing lease rates rather than waiting for higher future rents; FFO recovery is prioritized over immediate new development starts.

Miscellaneous:

• Acquisitions Pipeline: Management indicates "excellent" partnership environment with capital partners ready to join future deals.
• Development Funding: Balance of construction for current projects is funded via construction loans; no additional equity funding required for these specific builds.
• Tenant Retention: Current retention rate is ~70%; management aims to increase this but acknowledges it is difficult to move higher at this stage.