Douglas Emmett Inc (DEI) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. (Operator Instructions) Now I'll turn the conference over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.

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.

(Operator Instructions) I will now turn the call over to Jordan.

Good morning, everyone. I know we're competing with the election news. Don't worry, if either candidate for President concedes during the call, we'll let you know. Our third quarter results still reflect major challenges from the pandemic. Though we did see some incremental improvement in rent collection, tenant utilization and leasing activity compared to second quarter. As of today, we have collected 91.4% of our combined second and third quarter rent, including 95.9% of our residential rent, 93.7% of our office rent and 39.7% of our retail rent.

Once the eviction moratoriums and our markets expire or even just come in line with other major U.S. cities, we expect current collections to improve and to collect a large portion of the past due amounts. In prior downturns, the impact of personal guarantees and small business owners' commitment to their companies have kept our defaults very low.

Compared to last quarter, we increased our deal flow from 125 deals to 175 deals, with increases in both new and renewal transactions. We accomplished this despite the fact that many tenants are deferring their decisions during this uncertain period. We have not observed a trend toward tenants giving up space to work from home. And in fact, we are seeing more tenants coming back into the office. Our small tenants don't face significant mass transit, parking or vertical transportation concerns, making it much easier for them to reoccupy their offices.

While cash rent spreads are down and straight-line growth is slower, tenants have become less focused on TIs, which has enhanced our net effective rent. Having managed through 3 prior recessions, each of which seem unique, we are confident that we will emerge from this downturn stronger than we entered it.

With that, I will turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone. Lease enforcement moratoriums remain in effect in California and are considerably more restrictive than those in place in most other major U.S. cities. While we continue to work towards making these orders less onerous, they are likely to remain in place for the foreseeable future.

Turning to construction. We remain focused on our 2 large multifamily development projects which are progressing nicely. We are now fully leased in our first phase of 98 units at our office-to-residential conversion project in downtown Honolulu. The demand for this new high-quality product in the center of the CBD has been outstanding. We hope to complete the next phase, which is comprised of 76 units and building amenities in the next few months.

Our Brentwood high-rise apartment construction remains on schedule to deliver our first units in 2022. We also continue to work on securing additional entitlements to build more apartment units on sites we already own. In September, we successfully increased the allowable density at our Waena Apartment community in Honolulu. The 12-acre parcel is a short walk from the CBD and currently has 468 apartment units. A new zoning increased our height limit to 400 feet and allows us to build up to 2,800 additional units on the site.

As I discussed last quarter, property sales in our markets remained significantly below normal levels. Reflecting today's low interest rate environment, we have seen a few smaller trades at record prices for long-term lease office properties.

I will now turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. In Q3, we signed 175 office leases, 40% more than during Q2. These leases covered 735,000 square feet, including 171,000 square feet of new leases and 564,000 square feet of renewal leases. As Jordan mentioned, we are seeing tenants more willing to trade tenant improvements for competitive office rents. As a result, we reduced our annualized office leasing costs per square foot this quarter by 30% from a year ago and 20% from last quarter.

Cash leasing spreads for the third quarter were 14.7% for straight-line rent roll-up and negative 0.7% for cash roll-up. While our tenant retention was in line with long-term averages, our office lease percentage declined 1% to 89.8% as new leasing volume remained below pre-COVID levels. On the multifamily side, our leased rate declined from 98.7% to 97.5% as continued university closures and military deployments in Hawaii have caused slightly higher-than-usual vacancy at a couple of our properties.

I will now turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning, everyone. First, to show the gross impacts of the pandemic and very tenant-oriented lease enforcement moratoriums in Los Angeles, I'll compare this quarter to Q3 2019. FFO was $0.40, down $0.11 per share from Q3 2019. Major items contributing to this decline were the following: write-offs from slower office collections reduced our FFO by about $0.08 per share; parking utilization, though up from last quarter, reduced our FFO by about $0.045 per share; lower office leasing resulting in lower occupancy reduced our FFO by about $0.02 per share; uncollected insurance recoveries related to this quarter from an apartment fire reduced our FFO by just over $0.01 per share. These negative FFO impacts were offset by about $0.03 from higher-average in-place rent and about $0.03 from operating expense savings.

AFFO declined 26.6% to $69.2 million, and same-property cash NOI declined by 15.5% as lower revenue was partly offset by office operating expense savings.

Now I will compare Q3 2020 to Q2 2020 to highlight the most recent trends. FFO was down a net $0.01 per share from last quarter, largely as a result of the following: better office collections, lower write-offs and slightly higher parking income increased our FFO by about $0.04 per share; normal seasonality in our utilities and higher insurance premiums reduced our FFO by about $0.04 per share; and the uncollected insurance recoveries reduced our FFO by just over $0.01 per share.

At only 4.4% of revenues, our G&A for the third quarter remains well below that of our benchmark group.

Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance. Although it's still early in Q4, the trends in cash collections and parking so far appear to be consistent with the trends in Q3. We expect occupancy to continue to decline until leasing volume improves. Once the eviction moratoriums in our markets are allowed to expire or come in line with other major U.S. cities, we expect collections to improve and to collect some of the past due amounts, that is unlikely to have a material impact on the current year.

I will now turn the call over to the operator so we can take your questions.

(Operator Instructions) The first question comes from Dave Rodgers of Baird.

Jordan, maybe to start with you, or Stuart, I wanted to talk a little bit about pricing power and the pricing that you saw in the quarter. You guys talked at length there just about how the customers were trading, the TIs and LCs, I guess, for the lower face rent. But what do you expect to see in terms of pricing power as you move forward, both on the renewals and the new leases, one, I guess, overall, and then two, I guess, as you divide it up between the Valley or the Westside and maybe to a lesser extent, Honolulu? What type of pressure do you expect to see in those particular areas?

Well, I mean, pricing power, that's a great way to put it. I don't know if we have pricing power. I mean we're always reacting in the market that we're facing. But just to back up a little bit. In general, what we want to do is keep occupancy as high as possible because that puts pressure on rental rates, right? I mean vacancy, less pressure up, occupancy keeps pressure up. We're in markets that are relatively well-occupied, so that has allowed us to hold our own pretty well. We're doing even better than that in Hawaii.

But -- so put quite in an aside, where it's a very tight market, but if you look at our markets here in L.A., we've been able to do fairly well in terms of rent -- I think your client rental rates. But you're seeing a little bit of slippage each quarter, and that's as a result of the fact that while we're holding our own on renewals, it's hard to get the new deal flow all the way up to where we need it to be.

Now I would say, and I say this all the time, I mean, I'm just so happy with the response from our operations because we were off about 1.5 in the second quarter. We've now started narrowing that and working that number down. Hopefully, we can keep working it down because that's kind of the game until the thing turns around and heads back up, which I'm optimistic will happen sometime in 2021.

Maybe I would ask that slightly differently. Just in L.A., what's the difference in your new rents on a new versus renewal basis? If you had said that or given that, I didn't see it. But is there a meaningful delta between those 2 right now?

Well, it's very -- since you don't do an office lease 2 years in a row, the best stats that we can give you that are based on stats, not a feeling, are the roll-up, roll-down stats, which we give. And we're still obviously rolling up on leases. I think the straight-line is about 14%. So if you were to say, wow, it used to be up in the high 20s, now it's 14%, that will give you some instinct that things are moving off a bit, which is why we tried to say during the call, which you would expect that they are, but in fact, the overall lease economics seem to be holding on pretty well because as you've heard in Stuart's section, our other leasing costs are down dramatically compared to last year and even down compared to last quarter.

Okay. And then maybe just a follow-up for Peter. Can you break down the write-off that you talked about between anything accounts receivable-related, the straight-line rent write-offs and then any security deposits you applied in the third quarter? Those details would be helpful.

Yes. So a lot of the impacts, I mean, we said it was $0.04 better than the previous quarter. There's -- that includes the better collections. It includes a small amount of write-offs for new tenants. There's very little straight-line in that number this quarter. And it also includes a small positive impact from improved parking.

The next question is from Alexander Goldfarb of Piper Sandler.

So just a few questions here or 2 questions. First, on the rent collections, as you guys look at your portfolio, especially now that you've been through 2 quarters of the COVID, what percent of the depressed collections are people just ghosting you, like choosing voluntarily to not pay the rent, versus people who literally have gone under? So I'm assuming on the retail side, there are probably a lot of tenants who have either closed or just don't have literally the means to pay the rent. But there's still lots of private space trying to provide amenity, and then there are probably a bunch of other tenants who have decided, hey, we don't need to pay, we'll just keep occupying it, and we'll set up with the house whenever the moratoriums are lifted. I'm trying to understand, from a rent collection, what the snapback would be once the eviction moratoriums end.

Well, you probably got it pretty good. I mean, I -- and so, first of all, I would say, if you go back -- we believe that these numbers will hold for this recession. If you go back to the last big recession, which was in 2008, our actual default loss was -- ran around 2%, okay? If you look at what's going on right now and you look at the collections that we're missing from our office tenants, we have a very strong feeling that we'll be able to collect that money and at the end of the day, most of that money. But we'll see. It's very hard to see through the fact that the moratoriums, when they -- you can tell when people just have a horrible attitude towards you, and that it's like stop bugging me, I'm told I don't have to pay and therefore, I'm just planning not to pay, all right? So -- and we're definitely getting that.

On the retail side, especially small retail, not large retail, it's pretty easy to see what's going on with them. And so -- and they represent, as we've told you in the past, about half of the money that we aren't collecting. And you might take a guess, that some portion of that, we're going to make deals on. That's where we're trying to make deals because most of that retail acts as an amenity to our office, and retail is only 5% of our portfolio anyway. And there, we want to protect that group, right, because we don't want to lose the amenity.

Okay. So on the office side, Jordan, it sounds like most of the people who weren't paying you were just ghosting you, whereas on the retail side, it's legit.

I don't know how much of the retail side is legit, but I could tell you, if you look at our office buildings and our tenants, I'm -- I suspect our collections would be dramatically higher if we did not have the moratoriums. I mean I see the people that aren't paying us, it's super aggravating. I mean super aggravating. Some of them have -- are managing more capital, and many of them are managing more capital than we are.

Okay. The second question is, Peter, on the effective rent, can you just give us a sense of the impacts of lower TIs for lower rent? But then when you boil it down on an effective rent basis, where do you stand for third quarter leasing versus prior quarters? So are net effectives, improved a little bit, a lot, the same? Just trying to get a comparison for the net effectives now with the new lease economics versus prior periods.

We were talking about -- Peter can answer, but I could just tell you quickly. We were talking about that and looking at it. And I think our net effectives are still as strong as they were like pre-pandemic, we'll call it. So if you look at the net effectives before any pandemic, end of last year or whatever, we're hitting those numbers because of the big dropoff from the -- on the TI side.

Next question is from Jamie Feldman of Bank of America.

So I guess, as you talked about how you think occupancy continues to slip and so you see leasing volumes pick up, where are tenants going? Obviously, that implies that you're just going to continue to see move-outs. What are you hearing from people that are moving out and why?

Jamie, I think what we're seeing is kind of a normal course of business from our retention -- from a retention standpoint. So we've had a drop-off in volume of new business that we're doing relative to what we're used to, and we kind of just have our normal course of move-outs. So we're not seeing any trends. Like we said, we're not seeing trends of, hey, I want to go work from home or anything like that. We're just seeing the normal level of move-outs that we would normally see, and we're seeing less backfill on the new side that we usually rely on to hold on to occupancy and grow occupancy.

Okay. And then if you read some of the press reports -- or the broker reports, there's definitely different pockets on the Westside that seem to have larger spikes in sublease. Can you just talk about across the different markets where you think things are maybe better or worse in L.A.?

Yes. We've seen those reports. Definitely sublease space, if you read those reports, is picking up. But from everything we're reading through, that's largely concentrated in the larger spaces. So it doesn't tend to impact the smaller tenant that we service. There are some -- we have seen some pockets of larger space in Santa Monica and Century City taking up a little bit. But again, those are concentrated in the very large tenant spaces.

Are you seeing any of those get broken up, though, to become more competitive with smaller?

No. I mean they tend -- we're hearing full floors, multiple floors come back, stuff like that, so bigger spaces, but I don't think people are proactively breaking up space. I mean that tends to be something that we do that most of our competitors do not, is break up larger spaces and go after smaller guys.

I think some of that space is also in buildings that would not be very breakupable.

Okay. And if I could just ask a follow-up to one of the earlier questions, like what would you say your current mark-to-market is in terms of portfolio rents to market rents?

It's about 6%.

Below. Portfolio is 6% below?

No. Yes, we would have -- we have a 6% markup to market, yes.

The next question comes from Frank Lee of BMO.

Jordan, you mentioned in the past that 1132 Bishop conversion was going to cause some disruption in the market and possibly create some tightness from an office vacancy standpoint. Just wondering how you think that is playing out. Or is there anything else to read into the lease percentage being down in Honolulu during the quarter?

Well, I don't know about the slight least percent reduction, but I could tell you, the 1132 Bishop plan that we've been going through in terms of occupancy in downtown Honolulu has worked spectacularly, I mean, maybe one of the few best ideas that's come out of this company, quite frankly. I think it completely changed the market metrics in terms of office leasing in that downtown market. But even more importantly, it's starting something -- I mean, we're -- obviously, we're in front of the City Council a lot. We're talking to them about what we're doing. And it's starting to change the face and feel of downtown because of not just that project, the work there, but other work that we're doing around that building.

And now what's happening is more in the center of town. So it's been just spectacularly successful and both on the OP side. And I mean, boy, we brought out almost 100 units and at least all of them within a quarter. That was, I have to almost say, unexpected. It moved so fast. So our feel for demand, our feel for rental rate, all extremely well-confirmed; our feel for the impact on downtown, extremely well-confirmed. There's a little bit of movement from tenants moving in and out in that market. But still, the occupancy is high and the pressure on rental rates is good.

Yes. We still need to move out from 1132 way more office tenancy than we have availability in our remaining buildings. So you are going to see some timing noise quarter-to-quarter, but there's a good up arrow.

Okay. And then second question I have, you noted some incremental increase in office utilization rates from last quarter. Do you have a sense of what percentage of your tenant base are back in office now and where we can see that increase as we close out the year?

Well, we think -- I mean I will tell you, like we think it's around 30% to 40%, is the utilization numbers, but it's body and on and off and whatever. But more importantly, and I mean, I particularly see it, I think we all see it, is that while offices are not maybe formally open and not all showing up at 8:30 or 9, then leaving, I mean, we're seeing, at all different times, people coming into the office, including weekends and all the rest of it.

So if you were to say, "Oh, I'm going to do a consensus count at a specific time in the week and see where we stand," you're going to come to a 30% to 40% number. But if you said to me, across our portfolio of office tenants, how many of our tenants have some people coming in at different times, it seems like at one point, we're able to turn one elevator off, we have floors that we didn't think were being addressed, I mean, now that we have -- people are all through the buildings.

The next question comes from Manny Korchman of Citi.

It's Michael Bilerman here with Manny. Jordan, I was wondering if you can talk a little bit about sort of your eagerness for external growth. And look I recognize your stock price doesn't allow you to sort of go raise capital today to make those deals accretive. But can you talk a little bit about sort of how private landlords are sort of dealing with the struggles that you have? As a large organization, a public company, you can weather the storm pretty well, but I got to assume a lot of your private landlords that may have leverage and they have rent collection issues and they have CapEx issues, may have a larger desire to flip those assets into an entity like yours. And you've done OP unit deals before. The difficulty is your stock's at $25, $26, and I think you would believe that NAV is held a lot higher. So is there some way to structure transactions for the -- where 1 plus 1 is greater than 2? Or is that just not really a focus of yours today?

We are working, I can't tell you how hard. So the foundation of what you're asking is do we still believe in the market so much that we want to continue to grow in the market? And the answer is absolutely yes. And we're doing everything we can to acquire assets, believe me. Every trick, every -- figure out a way for -- obviously, I don't want to do an OP unit deal or I'm selling them my building for $500, and I'm buying theirs for $1,000 a foot.

But we are working on that on every front that we can. Now I will tell you, if we're successful, that the market as would be the case for you or anybody else, right, if you own a building in this market and you've weathered a lot of recessions, you know about the sort of long-term strength of the market, and you're not going sit there and do a deal in the recession that you feel has, well, I'll put quotes on "recessionary pricing."

But even if we can just break these people lose at the normal good pricing, we would do it. And we are working on it, but it's even slower now than usual. But yes, we're doing our best. I don't think we have -- the stock being down is -- hasn't been that big of a problem. People with OP unit deals, they understand that. And we have plenty of other ways to access capital. But we're working on it the best we can. Certainly, there are some older families that could be wearing out. But they also have been emboldened by living through many recessions, and especially this one where they feel like, wow, why would I take any kind of discount or anything at a time when I'm pretty sure, the next year, we're going to be back to where we were in 2019. And so it's just fine, I'm willing to take those assumptions if we can get them to make deals. So we're doing our best.

But I guess if you take those 2 comments, one, just your enthusiasm for staying invested in the market, but then also potentially sellers wanting to hold on because they sort of view the other side positively, why aren't you using some capital more aggressively to buy into your portfolio, which you know extraordinarily well, and on the screen where it trades on a per foot and a yield basis?

We are assisting, but why aren't we buying back stock? And I would say this, I don't believe, the way you're kind of implying, it's that simple of a decision for a company to buy back its own stock. It has a lot of other ramifications, what your debt levels are. And frankly, when you buy back stock, if I was to buy back the stock at 25, and it went to 20, would you say I was a smart guy at 25? Probably not, right?

So it puts me in the business. And I'm not saying I'm against buying back stock, by the way, but it puts me in the business, in your guys' business, right, not making the decision about the stock price and where it's moving around as opposed to a decision about real estate, where I have a lot more confidence. I'm not -- obviously, I'm not against buying back stock. I bought -- personally, I've been buying the stock. But it's a very different decision for the company than it is for me personally. And so, I mean, I'm slow and careful to make that decision, but I'm not necessarily against that either.

Right. I guess the difficulty is if you do find an acquisition, the story about it, right, if you're not going to be paying $500 a foot, right, you're not going to be paying where your stock is trading, it's going to be something higher, right, where you said, I want to get good pricing, not prerecession pricing. It's going to be able to demonstrate the value of that acquisition to The Street relative to purchasing your own portfolio. So I think that's the -- the capital allocation decisions are linked together.

I don't think they're linked as tightly as you're saying, that -- I mean, that would be a longer conversation. I mean I would always add good-quality real estate in the markets where we're focused, which I think we get great long-term gains on. And I think it's a -- you have to have tremendous extraordinary confidence to trade within your stock against where -- not where my real estate is going, but where the stock market is going. And stock market trades, will march to its own drum, not the drum of a real estate market, which I have a lot more confidence around directionally in supply/demand characteristics and industries driving demand and all the rest of that.

Just last one. I assume joint venture capital is one of the arrows in your quiver that you can use. Can you talk a little bit about their desire to partner with you to buy office assets?

They have a high desire to partner to buy office assets, and it's killing me that we're not able to provide them with more -- I want to provide them with more product. We're trying to provide them with more product. And when you hear me discussing, you're saying, I know you're trying to buy assets, believe me, in our conversations with them, we're saying that double. I mean we're going to get it. We are doing our best. We're trying to shake anything loose as we can.

Okay. And I think it's great that you're buying stock personally. I don't want to make it seem as though that's not a good thing. That's certainly demonstrating your, obviously, focus. You obviously own a lot of the stock already. So it was just much more talking about sort of capital allocation at the firm level.

The next question, Steve Sakwa of Evercore ISI.

I guess 2 quick questions. I noticed the income of multifamily was down, the other income, I guess, and Peter talked about the insurance payment. I'm just curious sort of what happened there. And if it's just a timing issue, was there a reason that wasn't booked in the quarter? And I guess, what are you expecting for fourth quarter? Is there kind of a catch-up payment, where you'll get 2? Or how does that sort of work going forward?

Yes. It's Peter. Insurance is always unpredictable. Things moved a little slower than we would have liked. And we hope it moves fast, and we catch up, but it's too early to tell.

So we should not expect any additional payments? Or this was just kind of an off quarter?

No, no. We're going to recover this. It's just a question of when. And is it this quarter? And is it -- do we double-up this quarter? Do we end up with 1 quarter's worth? Yes. So...

You realize we can't book it until we get it. So we know each quarter, money will go to us, but then you have a bigger negotiation with the insurance company by getting checks out of them. So -- and the checks would come and they could go, "Oh, this is for your work in the units, not for the rent." You're still arguing about how much rent they owe you. So it's not such an obvious -- I mean, it just comes in, and I don't want to say in a bad way, but in a way that wouldn't be smooth to match up perfectly with the quarters of the income that you go to because you can't book it until you get it.

Yes. So it's coming. It's just a question of when.

Got it. Okay. And then I was a little surprised that your office expenses were up. They were a lot higher than what we were assuming. And I know there's some seasonality in the business on expenses. But given still the low utilization rates of the buildings, any thoughts on maybe what expenses do in the fourth quarter and maybe in the first half of next year? I guess I would have thought they would have been a little bit lower.

Yes. Well, so I mean, let's start with just the seasonality. We typically get about 30% of our utility costs in the third quarter. It's the summer months, right? So you got in July, August and September, people are running the air conditioning. And at the utilization rates that we've been talking about, 30% to 40%, you can't run the air conditioning just for one person, you're running for the entire suite. So that kind of pushes us. The numbers are down versus the prior year. So we're still saving money versus prior year on utilities.

As far as the fourth quarter goes, yes, I mean, typically, we see utilities come back down, but we have other things. We've got some political spending. I would expect to see about a $0.02 impact or so of that in Q4. We also had, in those expenses, an increase in our insurance premiums, and we only had 2 months' worth in the quarter. So we'll get the full impact of that in the fourth quarter. So we're going to see some offsets there on expenses in the fourth quarter.

The next question is from Nick Yulico of Scotiabank.

So just first question is on the write-off, the $0.08. I just want to be clear if that was -- that's a new receivable write-off in the quarter. And what drove that happening third quarter versus the second quarter, and how we should think about, going forward, the chance that there would be additional write-offs on the office side?

Yes. So what we gave you is -- what we gave you was the $0.08 as a comparison to last year and what we're really focused on there. There's -- as I said earlier in the call that there's very little in terms of new write-offs with new tenants. So -- and most of that is just the impact of continued noncollection against the people that we wrote off last quarter.

Okay. That's helpful. My second question is just about your portfolio. And I guess, any lessons you're learning or hearing from tenants as they are doing renewals or contemplating changing their space now in a COVID world going forward. I mean what are you kind of learning about your buildings and whether you think they are well setup and well positioned for the office environment that could change now post-COVID?

I have to say, I mean, one of the things it's allowed us because, obviously, we listen to other people's calls and we hear occupancies at 15% and lesser numbers, and one of the reasons, I think, we're at such high numbers is that, in general, not the very large tenant, giant floor place, but in general, our tenants, across our portfolio, and I think actually most of the Westside, since it's a small tenant market, they're already built out like 225 feet per person. So I don't think there is a lot of TI or rebuilding needing to go on. And you're seeing it in our renewals. They're not coming in and saying, I need to renew and I need to rebuild my space.

I think people's spaces are pretty much built for a little bit of a more relaxed environment, and it already accommodates the 6 feet or 8 feet or whatever you want to go to in terms of occupancy. So I mean, I think, frankly, if I was guessing, the occupancy would be even higher if we were in markets where they were saying people could go back into work in the office. And even without that, they seem to be coming in.

Okay. That's helpful. Just last question is on Prop 15. What have you guys spent? I assume you guys are spending money to fight this. What have you spent? Have you already incurred any charges to FFO? Is there another choice to come in the fourth quarter? And then, I guess, the other question is are you guys still -- I mean, let's say there's a scenario where this does pass. Are you guys still going to take the approach of not giving an estimate on what your tax liability would be if this passes?

So all right, I'll just answer them both. So the question of what we spent, which Peter said in the last call, it's probably about $0.02 on that and some other political stuff in the fourth quarter and maybe like a little less than $0.01 in the third quarter. In terms of not giving an estimate, it's not that there's a number we know and we're keeping it close in because we don't want to make it out. We really don't think, even when people do give estimates, there's any way to give any kind of estimate. I don't think, functionally, it's operational. I don't think they're functionally would be able to do it if it passed.

So start out with how -- for how many years is it going to be before someone figured out some way to do this, or does someone come up and say, "Hey, this just doesn't work, and there's another proposition or something like that." That's number one. And then number two is across all these properties telling me where you're going to end up, in a Board of 3 judges, of trickling out a new value for it when there hasn't been any market transaction related to that property, there's huge swings in that process all the time, right now, even without all the properties needing to be reappraised. So I just don't think that it's reasonable to make any kind of an estimate. It's not that we have a secret estimate, we're not giving it out.

The next question is from Rick Anderson, SMBC.

So on the issue of moratoriums, I guess it's true that there's no credit impact if they take advantage of it, regardless of their circumstances. But is there a kind of a credit black market, where their reputation would precede them among the landlords in the area? Is that a real dynamic that could happen to folks that are sort of playing this card?

I -- you can only hope, right? I mean there's not going to be any great way to know until we're in recovery and to see to what degree a landlord will start saying to people, "Yes, I got it. You're saying your credit, but we saw the way you acted and therefore we're going to require, whatever, a bigger LC, a bigger this, a bigger that." You will see the market reconcile that. You'll probably see some reaction from long-term owners. Maybe short-term owners, you'll see less of a reaction. That's always been the case.

I would say, for Douglas Emmett, we've always been such a hawk on credit anyway, that it is unfortunate that it more speaks to the morality of these people than anything that they're choosing not to pay. But I do think, in the end, they will end up paying because I have confidence in the way we evaluate credit and whenever I look at the tenant base. So I'm not sure how -- whether there's a shadow mark on their credit profile or not. We'll see what happens.

Okay. And then your commentary about work-from-home not being kind of a factor in your tenant's decisions. And I guess, you're seeing that in the numbers just by the way the cadence of your renewals and all that sort of stuff seems kind of normal. But are you asking the question? I mean are you -- I mean you guys -- all these tenants that are -- that can provide you a lot of information about just mindset or centering around work-from-home and how it might change. I know all of your peers are kind of saying the same thing, and I happen to agree, that work-from-home will perhaps be the exception, not the rule, but maybe an option here or there, but not as big as the motions of the moment are suggesting. I'm wondering if you're really asking the question to sort of form a really informed opinion about it.

So we track when we lose a tenant out of our portfolio, and we also track new tenants that we chase and don't get, okay? And what you saw in the prepared remarks was we're -- nothing of what we're seeing is any kind of trend of work-from-home playing a factor in that, okay? Obviously, new tenants, I mean, they're saying we're looking to lease space. We're trying to get them on our portfolio. When we don't get them, they went somewhere else, right?

And on the renewals, I mean, you said it yourself. The -- there's a lot of levels of work-from-home. Are people going to just take -- I don't think many people are so extreme to go, that the office market is going away is everyone's going to work from home. But you see stuff as well, will be a little less because there's some kind of -- some percent of people work from home or some percent of people do this thing of sharing office or hotseating. And I have to tell you, the only mechanical thing that makes sense when you address work-from-home, at least in our markets, would be for tenants because we're not hearing anybody say, "I'm going to have a group of people working for me that are never going to come in the office." So mechanically, the only thing that makes sense is there's going to be a complete conversion of people who are going, we really embrace hotseating even when it comes to offices, which is that, Kevin, you're in Monday and Tuesday; Peter, you're in Wednesday and Thursday; and Stuart, have at it on Friday. Okay?

So -- and everything we're hearing is the opposite. Like I mean, like everything. Like people don't like sharing space. They want their own space. And people want them in the office in the entire week. And certainly, COVID doesn't encourage people towards a hotseating type of environment. So when you look at the mechanics of -- for some percent, reducing the amount of office demand, I'm just speaking for our markets, there are mechanics that nobody likes, I mean, nobody. So I don't know how a work-from-home scenario would have more -- would be particularly impactful. In fact, I think it might be the reversal a little bit of people appreciating the space, being back in their office, wanting to be back in the office. When they feel like they can come back in, I think you will have people looking forward to getting back to that routine of going to work. I think a lot of people miss it.

And I don't want to be the one -- because I don't want to be the one to Lysol the seat after Stuart's been sitting in it anyway. So...

Absolutely. But also, you don't want to be the one that gets told, "Hey, everyone's coming back except for you." I mean I actually think people take that poorly.

The next question is from Craig Mailman, KeyBanc Capital.

You guys were very successful at keeping CapEx down on the renewals this quarter and you kind of mentioned that, that on a net effective basis, you're still kind of positive here. I'm just curious, as new leasing kind of runs back up here and the market may be getting used to kind of lower face rents, I mean, what's your prediction or expectation on your ability to maintain positive net effectives, even in kind of a negative face rate environment?

I think that -- I mean, I think that all depends on how long -- how many quarters we go with a negative number and how well we're able to hold our own in terms of occupancy. If we -- if the world starts, if we go through fourth quarter, first quarter next year and then things start back, improving again and people sort of come out and start focusing on growth, I think we should be able to do pretty well. I mean if this thing becomes an all-of-2021 experience, then I don't know how any markets hold their own against it. It's going to be very tough.

But I'm optimistic that, especially considering the performance of the company, particularly operations, leasing, property management, the way it's operated, and second quarter, third quarter, what I see going on right now, that we certainly can hold our own well for the next couple of quarters and be very well-positioned to come out of it with a lot of strength. And that's what I'm hoping.

That's helpful. And then maybe taking the other side of Prop 15, assuming maybe it doesn't pass today, do you think this issue ever dies? Or does it just come back in a new iteration at the midterms and maybe next presidential election? Can the market ever -- or California ever kind of shake this overhang?

Yes, I think it can. Yes. I think if it gets beaten, then I think that it will not be something that you see again and again, but I hate to make a prediction of that, and who knows. There's certainly a trend towards taxation. But at the moment, it's so heavily discussed, it might be an overstated trend. So we actually have to see what happens. I think people are even more on guard than what the reality will be, but I don't know. And California was in a -- before the pandemic, California was in a very strong cash-positive position in terms of taxation. Like we were adding money to savings. I think we were like $25 billion-plus in terms of taxes versus the expenses. So we're not a state that we need to recover from what we spent on the pandemic, but we're not a state that has a permanent negative -- it's in a permanent negative or a deficit spending situation the way the federal government is.

Understood. And then just one quick one. Peter, did you say the $0.02 of political spending was in operating expenses or G&A?

I expect that to run through operating expenses in the fourth quarter. Yes.

Okay. So margins should get better once all the spending on the election goes away?

We would hope so. We would hope so.

The next question comes from Venkat Kommineni of Mizuho.

On eviction moratorium, is there any update in terms of carving out exclusions for office tenants in Santa Monica and Beverly Hills? And it seems like commercial tenants in Santa Monica are now required to pay 50% of rent owed -- sorry, 50% of rent due during 4Q? If that applies, do you think that leads to an incremental improvement in rent collection in 4Q?

Well, Santa Monica -- look, our collections in Santa Monica are very good. Santa Monica, frankly, has already carved out most office. Beverly Hills is the place where we have our largest problems because they've included all office and of course, so has, functionally, so has L.A. And then our collections are good again in Hawaii, which has much less of the moratoriums. So I don't know about the 50% then. I think you might be talking about residential, but the -- in terms of the office collections, we don't need any improvement in Santa Monica. They already -- there's still a little bit that's covered. But basically, what's covered now in San Monica's retail.

Okay. That's helpful. And in the multifamily segment, it looks like Santa Monica seems to be outperforming less than L.A. in terms of occupancy and rental rate. Any color that you can provide there?

I talked a little bit about it on the call. I mean we're having some university closures and some military deployment issues in Hawaii. So those are, in fact, those are impacting kind of the properties that we have closer to UCLA and obviously the Hawaii stuff more.

The next question comes from Bill Crow, Raymond James.

Jordan, I want to get back into the political question and ask if by looking at Prop 15 and work-from-home, we're not missing the bigger picture which is higher state income taxes, potentially wealth tax, maybe an exit tax. And you've been outspoken on these things in the past. I'm just -- the number of headlines indicating move-outs from California is picking up speed. I just -- could you give us a picture of the environment out there and the challenges it may pose?

Well, I'll take -- I think the -- I know there was talk about a wealth tax, and we're not even going to let people leave, we're going to trap the -- I mean I saw some of that. I think that talk was bigger than the walk. In terms of people exiting or leaving, I think there's more anecdotal people that are leaving out of frustration, maybe making more noise about it than people that are coming and working. I just have a hard time believing an economy as large as ours, that still has pretty strong population growth, is going to -- well, everybody is frustrated by the tax situation.

But I also think that the state is focused on business recovering and getting back to being able to employ people. And so while I know there's been a lot of conversation about additional taxes and focus on taxes, I also think that, in every area, people are focused on creating a better environment for jobs and employment recovery. So that's why I just don't think it's so obvious what's going to happen in the next year or so following as the pandemic is relieved and following the election. I just don't think it's that obvious.

Okay. Appreciate that. And then my follow-up is focused on the multifamily portfolio. Can you kind of give us an estimate of what percentage of your tenant base is in the kind of restaurant, retail, hospitality area that has been particularly hard hit?

Well, about 5% of our tenants are retail.

Bill, I think you're asking of our multifamily tenants, how many...

Correct. Correct.

Employed in those industries? I don't know that we have a good -- I don't know that we have a good feel for that. My guess is that the rent levels we're talking about in Santa Monica and West L.A., that we're not -- most of our tenants are not in the service industry.

No. No, they're not. If you're saying like working at Starbucks and stuff, I would say we have very little of that.

Next, we have a follow-up question from Jamie Feldman of Bank of America.

I think you guys said your rent collections are improving. And then you provided rent collection data that's 2Q and 3Q combined, if I heard that right. Do you have a breakout for 2Q versus 3Q versus even October?

Jamie, it's Peter. We actually combine them because you get a lot of noise based on when you collect the cash, you're putting it against the old balance, the April balance, the July balance, the September balance and so on. And rather than view that and then try to explain why 1 month looks like this and another month looks like that. We think the best picture is just to do the average since the pandemic started. And you can see that if the average of the whole is slightly better, then there could be a sense that we're trending better.

We did give you that we collected more cash, but it does get applied backwards. And so if you get beyond just did you collect more cash, it gets very complicated.

Okay. So I guess, to boil it all down, how much better is it? Like can you say basis point-wise or gut feel, which has improved?

Jamie, it's Peter. We probably collected about $6 million more cash this quarter than we did the previous quarter. So it's moving in the right direction, but obviously, there's a lot of work to do.

(Operator Instructions) The next question comes from Blaine Heck of Wells Fargo.

Just a quick one from me. Can you talk about any interesting trends you're seeing in your Valley markets? Are you seeing any incremental demand from companies that may want to have a location and less of an urban environment or kind of less density? Is utilization any higher in the Valley than what you're seeing on the Westside? And I guess, just generally, how do you see those submarkets faring throughout the pandemic and the recovery relative to the Westside?

I don't think we've seen big differences, quite frankly. I mean there are maybe a few, but not many anymore larger tenants in our Valley portfolio than they are in the Westside portfolio, which is overwhelmingly small tenants. But when you say utilization and kind of responses to the pandemic in terms of kind of the market, I don't think there's a big difference. Maybe it's early. I don't know...

This concludes our question-and-answer session. Now I'll turn the conference back over to Mr. Jordan Kaplan for closing remarks. Please go ahead.

All right. Well, thank you all for joining us this quarter, and we will speak to you again in 3 months.

This concludes the conference. Thank you for attending today's presentation. You may now disconnect.