Douglas Emmett, Inc. (NYSE:DEI) Q2 Results Conference Call August 2, 2022 2:00 PM ET
Company Participants
Stuart McElhinney – VP of IR
Jordan Kaplan – President and CEO
Kevin Crummy – CIO
Peter Seymour – CFO
Conference Call Participants
Steve Sakwa – Evercore ISI
Michael Griffin – Citi
Alexander Goldfarb – Piper Sandler
Nick Yulico – Scotiabank
Jamie Feldman – Bank of America
Rich Anderson – SMBC
Dave Rogers – Baird
John Kim – BMO Capital Markets
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Douglas Emmett’s quarterly earnings call. Today’s call is being recorded. [Operator Instructions]
I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Stuart McElhinney
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.
Jordan Kaplan
Good morning, everyone. Thank you for joining us. As pandemic concerns subsided, we saw strong tenant demand in our local office markets. During the second quarter, we leased over 1 million square feet, including 355,000 square feet of new deals. Based on parking income and feedback from our property managers, we estimate that our office utilization has meaningfully improved and now exceeds 80% of pre-pandemic levels.
Despite leasing over 1 million square feet during the second quarter, our net absorption metric was slightly negative. With the expiration of commercial eviction moratoriums in our markets, we are finally able to replace non-paying tenants while still pursuing collection of their outstanding balances.
So during the second quarter, we recovered approximately 100,000 square feet from such tenants and that turned our net absorption metric slightly negative. We still have about 100,000 square feet occupied by non-paying tenants, which we expect to address by year-end. Although these efforts impact our nominal occupancy, they will actually have a positive impact on our financial results as we have not been recognizing revenue from those tenants.
Our growing residential portfolio is performing well. It remains fully leased, and rents on new leases are increasing at a very strong pace. We added 162 units to our apartment portfolio during the second quarter through the acquisition of 1221 Ocean Avenue and our ongoing conversion project at 1132 Bishop. Our portfolio now includes over 4,500 apartment units.
While tenant demand remained strong in Q2, we’re closely monitoring the macro environment for recessionary impacts, and we are already adapting to the impacts of inflation.
With that, I’ll turn the call over to Kevin.
Kevin Crummy
Thanks, Jordan, and good morning, everyone. During the second quarter, we acquired 1221 Ocean Avenue, an iconic 120-unit apartment property overlooking the ocean in Santa Monica. The property is essentially fully leased. We are upgrading the common area and the individual units as they roll, and we are achieving significantly higher rents in our upgraded units. Our development projects at 1132 Bishop and downtown Honolulu and The Landmark Los Angeles and Brentwood continue to progress nicely.
With the recent spike in interest rates, we are fortunate that our program to refinance $1.3 billion last year extended our maturities and locked in a very favorable 2021 rate. We now have more than two years before any significant maturities.
With that, I’ll turn the call over to Stuart.
Stuart McElhinney
Thanks, Kevin. Good morning, everyone. We had an extremely successful leasing quarter, signing 261 leases covering over 1 million square feet, including 355,000 square feet of new leases. For the reasons described by Jordan, our nominal net absorption was slightly negative, bringing our lease rate down to 87.5%.
As Jordan mentioned, our lease-to-occupied spread widened to 3.7% as a result of the large amount of new leasing we did during the quarter. That number was also impacted by the permitting delays and on-site inspection delays that we have been experiencing during the pandemic nearly half of our current occupancy backlog is scheduled to move in during Q3.
As we’ve been saying these past several quarters, we expect rent spreads to be choppy as our primary focus remains on recovering paying occupancy at this point in the cycle. Our leasing spreads this quarter were positive 3.5% for straight line and negative 7.4% for cash. Our multifamily portfolio remains full at 99.6% leased, and we continue to achieve very strong rent roll-ups on new leases across our various residential submarkets.
With that, I’ll turn the call over to Peter to discuss our results.
Peter Seymour
Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the second quarter of 2021, revenues increased by 9.8%. Same-property cash NOI increased by 5.1%. FFO increased by 9% to $0.51 per share, driven by increases in both Office and Residential revenue, including improved office parking income, partly offset by higher expenses, primarily utilities. AFFO increased 15% to $89.6 million. Our G&A, at only 4.7% of revenues, remains very low relative to our benchmark group.
Turning to guidance. We are narrowing the range of our full year FFO guidance to now be between $2.03 and $2.07 per share. 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 acquisitions, dispositions or financings.
I will now turn the call over to the operator so we can take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Steve Sakwa with Evercore ISI. You may proceed.
Steve Sakwa
Jordan, I was wondering if you could just provide a little bit more color on the leasing environment? I certainly can understand the desire to want to take back the space. But can you give us some sense as to what maybe the pipeline looks like? I know you’ve got a lot of space coming due both in the second half and next year. And just trying to sort of figure out the cadence of occupancy improvement over the next 12 to 18 months?
Jordan Kaplan
Well, I think, so I focus more on leasing and occupancy because leasing is sort of the lead that tells you where you’re going to end up with occupancy. Because as the market comes down, that spread just keep shrinking and shrinking, so I’m always looking for leasing.
But I can tell you, obviously, we had a great quarter last quarter. I know there was a slight loss in the occupancy number, but it really was driven by the fact that we’ve started now moving people out, taking space back or more turns over. And so it’s really just impacting a stat, it didn’t impact revenue. The great news is we did 350,000 feet of leasing.
So a lot of what I’m telling you is driven by the experience I saw. I mean, we’ve had a little bit of July, right, happen. And we’re on track, but I’m definitely hearing a lot of the same things all of you are hearing about a potential slowdown in economy. I can’t say we’re seeing that yet, obviously, but we’re watching carefully for that to happen.
So it’s hard to make go forward predictions other than to say, assuming we don’t have a recession, that assuming everything goes along good, I would look at the last quarter and actually the last few quarters, on the amount of leasing we’ve been doing, going, we’re really starting to come back strong. And so strong, we have the confidence in getting people out and saying, okay, let’s start putting people in. And if these people don’t want to pay, we’re going to sort of have it out with them but get them out of the space.
Steve Sakwa
And as a follow-up, you sort of mentioned Bishop and The Landmark. Can you just kind of provide any more financial commentary around the pace of leasing at The Landmark, where our rents are coming in versus pro forma and sort of where Bishop is in the kind of evolution of that lease up?
Jordan Kaplan
So Bishop, both of them are moving quite well. Bishop, when it’s done, it’s going to be a little under 500 units, 493 units. I think we’ve done about 300 of the units. We’re now gotten some floors back. We’re working on some more floors. You have to wait for tenants to move out to finish. We’ve done all the common areas. It’s a beautiful project. I encourage anyone of our investors, when you’re in Hawaii, to go by and check it out. And we’re still working through it. It is definitely a sort of poster child, both in Hawaii and here, for an extremely successful conversion for Office to Residential. Including maintaining a reasonable level of income, because we still have tenants, all those tenants paying and as they move out, we convert the floor and it shifts over. So that was an engineering feat and very successful. And as I said, we’re over 300 units down there and still building out floors.
Landmark, Los Angeles, which we’ve been calling L&LA, it really opened for tenants in April. The leasing has gone extremely well. We had a little bit of a lag in terms of — we’ve leased a lot, we can’t move that many people in, so there’s a lag between the amount of people that have moved in and the amount of leasing we’ve done. So I think we’ve done over 150 units of leasing. That project is 376 units. But we’re kind of just now catching up on getting them into the project because there’s one freight elevator, you can only move so many people at time, et cetera, et cetera. So that project has also been very successful.
The rents are so far above kind of all of our initial pro forma is about the project, and even some later performance that I think we’ve sort of abandoned the original pro forma at this point.
Did that answer your question, Steve, or?
Steve Sakwa
Yes. I mean, I think you were tracking around $9 a foot, maybe I just didn’t know if that was still sort of holding or you had to sort of pull back on that?
Jordan Kaplan
Yes. I mean, we hold on to the $9 number, which so far so good. That’s an incredible result for that project. That’s correct.
Steve Sakwa
Great thanks. That’s it’s for me.
Operator
Thank you, Mr. Sakwa. The next question comes from the line of Michael Griffin with Citi.
Michael Griffin
Maybe to get back on the leasing. I noticed the lease terms, at least relative to last quarter, were up this quarter, both on new and renewals. Can you sort of comment on that and kind of seeing how you’re expecting lease terms for leases signed to be trending throughout the rest of the year?
Jordan Kaplan
Frankly, I think our lease terms have bounced around a little bit. And while, yes, I’d like seeing the longer term, particularly in the new deals, I don’t take a lot out of that. It depends on some larger ones. It can be longer.
So yes, lease terms look longer, but I’m not sure that I would read a lot into that. And though I will say that the number that I would read a lot into is the volume of activity that we have because that’s the number that I’m looking at to try and quantify, qualify the market and the demand and what’s out there for us to get to our #1 goal, which is our #1 goal is to get our lease rate back up over 90%. Remember, we went into this around 93%, and so that’s what we’re primarily focused on.
And the only thing that can get on our way there is if we get hit with a real recession and end up without the volume being out there that we can get people into the space. And that volume number, which you saw this time in the 1 million feet, fantastic million-plus feet, but the 355,000 feet new is just a really wonderful number. I mean, it’s telling you that people are really coming back in.
And as you heard in our prepared remarks, the other thing that’s very gratifying is that we’re now, I think, soundly up over 80% utilization. So we’re getting up into really good territory there, too. All of which are very positive signs, although I’ve been reading a lot of articles about the other markets, and thinking that we might be looking a little bit like an outlier.
Michael Griffin
Maybe for my second question, just touching on recession. I think we’ve seen some of your office peers come out and say potentially that a recession could be good for the office space. I think we’ve seen kind of how historically that may not necessarily be the case, but curious kind of to get your thoughts of what we could expect from an impact on the portfolio just given the central recessionary environment on the horizon?
Jordan Kaplan
Well, do you think the recession could be good for the office space or inflation could be good for the office space?
The only way I would call it recession to be good is if it comes with a level of unemployment that puts employers back in the driver seat and allows them to get all their employees back into the office. I don’t think it’s something our markets necessarily need, as you just heard, people are coming back in. Beyond that, recessions are a revenue hitting activity and if my tenants are feeling the impact of recession, then I can’t imagine how I think that’s good.
Now you could take the position that inflation, because fixed assets rise in value during time and place. Inflation has a long-term effect that’s very positive for real estate. It has a short-term effect of the costs of running the buildings and our interest costs going up, and we’re an industry that’s under some level of leverage, so the interest rates have an impact on us. I do think over the long haul, inflation has generally left real estate in better shape than when it arrived.
But a recession, I could only imagine maybe the thought would be that unemployment would be up. And therefore, employers would be getting drivers to bring people back in the office, which is where they want them. Rather than that, I would not be pleased to have us going a recession.
Michael Griffin
That’s it for me. Appreciate the time.
Operator
Thank you, Mr. Griffin. The next question comes from the line of Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb
Jordan, you must have been pretty psyched to get that 100,000 square feet back, and I’m guessing the same will be when you get the remainder.
Maybe a two-part on that space. One, what are the steps that you need to go through to get back the remaining 100,000 square feet? And then, Stuart, if we just do simple math on the space, should we just take like $40 a foot times the 200,000 square feet and spread it out over two years and then assume that that’s the income pickup over the next 2 years or is it something more to the math than that?
Jordan Kaplan
Well, the process for getting each space back varies. Certainly, you start with payer quits and UDs. And a lot of times, that’s the end of it, and then you’re in a position.
The calculation about what pick, so we just said it wasn’t going to be, it wasn’t going to be negative because we’re not recognizing any income from those people. I’ve always said, them included, that we will collect a lot of money from the people that haven’t paid us. And we have collected a lot of money on the people who haven’t paid us and I’ve said we won’t have more than 2% default, and we won’t have more than 2% default, including collecting money from these people.
But in the end, once you make decision to get them out, a mixture of things happens, including that they kind of owe you the whole lease but you have the obligation to mitigate and re-lease the space to figure out a net what they owe you, and then you end up making some kind of deal about that. So that’s a pretty complicated process. It would be hard to make a prediction. Certainly, it would be hard to say you take a number and you spread it out over the next couple of years because they’re obviously people that have resisted paying, we decided it was time to just get them out. And we also believe they have money and so they can pay.
And so we’re now need to do our — we’ll do some mitigation. We’ll try and clear from them, and it will play out just like it’s been happening under California a while for 50 years.
Alexander Goldfarb
But Jordan, I guess, maybe I made it too complicated. Just simply, 200,000 square feet, $40 a foot, that’s like $8 million. Should we assume $8 million of NOI pickup over the next two years, so add in $4 million next year and added an incremental $4 million? Like, I’m just trying to think of earnings. We should think about earnings going up 2024 by $8 million? Or is it not that simple?
Jordan Kaplan
Well, the fact that we have another couple of hundred now and probably 200,000 feet that we’ll have available for lease. It obviously has value, which can be calculated in some way.
But the reality is we’ve been saying for a while, I think we have 600 basis points or maybe now 500-something basis points of pickup that I think we will pick up as the economy recovers, and that’s a lot more money than you just mentioned. But I would just mix this space in with the rest of it.
Alexander Goldfarb
And then moving to the balance sheet, you guys finally have some floating rate debt, I think there’s about $550 million that just had swaps burn off and I think it’s due in 2027. Can you just talk about your thoughts on floating rate debt in the current environment? Are you thinking about implementing some near-term swaps? Or what are your thoughts around because you haven’t had any floating rate for a while. So now that you have it and rates are rising, just trying to see what you’re thinking about it.
Kevin Crummy
Well, Alex, it’s Kevin. I’ll answer that. Our program is to borrow for 7 years and swap for 5, which gives us a lot of flexibility with a 24-month runway to reply. And that strategy provides flexibility, which is exactly what you need in the current market.
As you’re well aware, there’s a lot of turmoil, rates have gone up and just as importantly, spreads have gapped out. So it’s really not an ideal time to do anything until things calm down. And we’re monitoring the market, and we’re going to take advantage of it when it makes sense. But right now, it’s just not an ideal time to do anything.
Jordan Kaplan
So we let that go to floating because it’s just not a good time to lock things in right now. There’s too much turmoil in the market.
Operator
Thank you, Mr. Goldfarb. The next question comes from the line of Nick Yulico with Scotiabank.
Nicholas Yulico
First question is just going back to the occupied versus lease number, that gap you talked about, the 3.7%. And then in the release, you talked about half of that is — or half of the current occupancy backlog scheduled to move in the third quarter.
I just want to be clear, are you suggesting that we take the 3.7%, take half of that, just under 2% of occupancy pickup next quarter, is that the right way to think about that?
Jordan Kaplan
The changes to occupancy have a lot more to do with just absorbing that you have some outs, and you have that going in. And actually, even though I think we’ll pick up, saying that half of the people, half of the 3.7% will move in is simply giving you pacing for what’s happening. As a matter of fact, we can end up with that number again next quarter. If we do a lot of leasing this quarter, we could do a lot of leasing and that number could stay there.
But what we were trying to give you a feel for is, and I think it was in maybe Stuart’s section is there’s a couple — it’s a very wide gap, and we were just trying to give you a feel for the pacing and the cause of that gap. Because when you look at it, you go, what the heck? I mean, all these people 12 months to move in or what? Which is why we said about half of them are actually moving in next quarter.
But then we also said — but here’s what’s driving this. Number one, we’re doing a lot of leasing, particularly a lot of new leasing, which is obviously what drives that number. But numbers 2 and 3, both relate to just the pace at which you can get the city out to do inspections, the pace of which you can get plans approved. I mean, the world has just slowed down. And we’re very good at speeding things up during tough times, but it’s just the world is slower. And by the world being slower, especially in terms of getting people’s TIs done and getting the final sign-off, that by itself, when you’re leasing a lot, even exacerbates the gapping out.
And you can tell that that’s what’s going on because it’s not even a ton of work we’re having to do in these situations, they’re just slowing us down so much that, as we pointed out to you, out of that 3.7%, half of it is movement in this quarter that we’re now in.
I’m sorry, I know that wasn’t exactly the question you asked, but I don’t want you to take half the 3.7% and say, now that number will be 1.85% next quarter or some board. Now, I know I can just change occupancy by 1.85% because that’s not what’s going to happen.
Nicholas Yulico
Yes. No, that’s helpful. I’m just trying to think about the components of how you guys get to your full year occupancy guides, which the midpoint is roughly 100 basis points higher than where you’re at right now. So you have some of that occupancy pick up as a benefit, and then there’s still the expirations to deal with in the back half of the year, which I guess, any insight on visibility into those expirations right now? I think that’s still about 6% of your square footage for the rest of the year. Has any of that spoken for? So just as we think about the benefits of releasing some of those expirations as well.
Jordan Kaplan
Well, we’re going to have — so my recollection, we have a little bit lighter expirations in the second half of the year than we do in the first half of the year. But it’s a calculation that has 4 or 5 points to it. And we look at all those numbers when we provide guidance, and we still think we’re going to be within that range that we gave guidance on. So we said don’t change that range.
But you’re right to say, I mean, right now, we’re only halfway through the year. So we’ll see how the rest of the year plays out.
Nicholas Yulico
I guess because you didn’t change your occupancy guidance, I wasn’t sure if you’re now suggesting you’re more likely to be at the lower end of the range because of the extra space you got back. Or if you still feel like the middle of the range is possible, which assumes some occupancy growth through the back half of the year. That was kind of the point of the question.
Jordan Kaplan
I mean, really small changes. I know that in the meeting I sat in, we thought that range was still a valid range or anything like it had the main bell curve standard. That’s what I think it is. I mean, we will hit the dead center, I don’t know. Probably not, but we’ll be somewhere in there.
Operator
Thank you, Mr. Yulico. The next question comes from the line of Jamie Feldman with Bank of America.
James Feldman
Can you talk more about the 355,000 square feet of new leases. What kind of tenants are they? Are there certain buildings, certain submarkets? I’m just curious what the incremental demand is looking like. And then as you think about the pipeline, is it more of the same?
Jordan Kaplan
Yes. I think the great thing about our market is the diversity of tenants that are driving it. I think we’re still seeing that in our demand. We’re getting good demand kind of across the board of industries, so nothing noteworthy to point to that one industry is driving anything more than usual. We had several submarkets go up in the lease rate and some go down, so it was kind of a mixed bag. So I wouldn’t point to anything submarket wise or industry-wise that was noteworthy or a new, a new trend that we felt like was worth pointing out. It’s still a healthy demand across the board.
I think the same is true for the pipeline. We haven’t seen anything in the pipeline that would be a noteworthy change to kind of the typical diverse demand that we get.
James Feldman
And would you say the new or more tenants who didn’t have space at all? Or you’re winning deals from other buildings, other landlords?
Jordan Kaplan
It’s always a mix of that. We have tenants moving from other buildings in the markets. We have new business creation, so it’s always a combination of all those factors. I mean, like we had over 261 leases, so it’s a various group.
James Feldman
All right. So it sounds like no real perceivable trend or change in trend?
Jordan Kaplan
Yes, I think it’s normal.
James Feldman
And then shifting gears to 1221 Ocean. Can you talk about the expected yield on that or stabilized yield on that? I know it sounds like you’re having great success with the upgraded units.
And then, I guess, just bigger picture. I mean how big do you think you’d want apartments to be in terms of your total NOI stream?
Jordan Kaplan
Well, I mean, how or big of the amount of projects we find that we like. So it’s not a calculate, I think right now, it’s at 15%. I mean, if it was 20% or 25% or 30%, it would be fine with me. But the problem is it’s very hard, in at least the markets we’re focused in, to find large, high-quality institutional apartment projects, and most of where we’re getting a now by building them.
I mean, we aren’t really doing much in the way of building office. We’re primarily focused on building apartments. So maybe from that perspective, things will go up. But if the office market goes up a little bit or if the office market transactions start coming around again, then office will catch up, and it will go back to that 15%, 85% number.
In terms of — and your question was, are we still having success on the remodeled units at 1221?
James Feldman
I know you’re having success. What’s the targeted yield or expected yield on that project or that investment? .
Jordan Kaplan
You mean like cap rates or —
I mean, I think in general on that project, I would call it sort of down the center line. Job pretty well done would be an all-cash IRR on 10 years, around 7, maybe a hair under 7 because it’s such a high-quality apartment project. And I think the leverage number, it doesn’t have a lot of leverage. I think the leverage number because we’ve made — got a good loan on that project, and we have a partner in it. I think it will be somewhere in the 9th.
Is that what you’re asking?
James Feldman
What are you assuming, well, I mean, even just the yield. I mean, kind of use the model.
Jordan Kaplan
You mean, what am I assuming in the cash flow, right?
James Feldman
Correct. Your cash flow, your earnings yield.
Jordan Kaplan
Well, I just gave the IRRs. So you mean what’s, like, what was the going in cap rate or?
James Feldman
Sure, if you can give that.
Jordan Kaplan
I think going in, we’re around a three a little higher than a three.
James Feldman
So I guess if you — like for every incremental dollar you have to put to work, I mean, do you prefer apartments here? Or do you prefer office? How do you think about that decision?
Jordan Kaplan
If it was two equally very high-quality projects, I would be willing to do both. I’ve never had to make the decision to choose one or the other. We’ve done a pretty good job of having capital available, so I haven’t been forced in that position.
But if the projects aren’t of equal quality, we always go towards the higher quality one. So if I only had a fixed amount of money in the same market, and whether it was an apartment or office, I would do the higher-quality product.
Operator
Thank you, Mr. Feldman. The next question comes from the line of Rich Anderson with SMBC.
Richard Anderson
So on the estimate of 80% plus utilization, obviously, a good number. And you’re right, it compares well to the broader national industry, I would guess. But and logically, we’d rather see more utilization than less, of course.
But from the standpoint of future leasing, you’ve got nearly 3 million square feet expiring next year. How does utilization play a role in your ability to lease vacating space or expiring space? Is it more just optics and a good kind of coincident indicator of interest in using your space or is there something material that you can use in the leasing process that I’m not seeing? And if it’s a dumb question, sorry.
Jordan Kaplan
No, that’s not a dumb question. And part of what you’re saying is, I think it’s always better to show a building with activity and people in it and things happening. People want to be around that same thing.
I will say the utilization stat is probably more used than not as much from marketing, although I think it’s useful to have a building with activity, but it’s more used as a predictor for the level of activity and demand we should expect going forward. So when utilization was very low, we had low demand. Now, utilization is higher. Now, you only have a few things. We did a lot of leasing last quarter. You go, okay, that’s good, all right? And you go, now what are other things I can link my kind of analytics around to say what I suspect for the future?
Here’s another thing. The other thing would be, well, utilization is just keeps running up, which means more and more people are getting back in, and therefore, they’re going to be needing space and maybe reevaluating, saying I need a little more space or I just need space because I let my space go, and now I’m coming back in. So utilization is another sign, a positive sign.
What’s a negative sign? The negative side being too much discussion around recession. It’s going to scare tenants and you go, wow, we’re just hearing a lot about recession. So therefore, you take that and go, maybe I need to be a little more on guard because maybe it isn’t just clear sailing with a straight arrow up. So utilization is just one of those stats that helps us predict where we’re headed.
Richard Anderson
And the second question is the 200,000 square feet, is that everything that you can get back or is there some amount that’s out there that’s particularly stingy and for one reason or another, politically or otherwise, you can’t get to it in the short term?
Jordan Kaplan
So the way you’re saying it that can we get back, so we don’t want to get space back. We want to make a deal to mind how to multiply the space, just to be clear. So when you say that, it’s when we go there’s — having a guy there is making no use. We’re just going to go legal around and click what we can, or actually have to settle out and get them out of the space. We’re better off that way. And that is the amount of space we think we have left, may be a little less. But that’s kind of what we think we have left at this point of people that we’ll call this fall in that bucket.
Richard Anderson
And is there anything about that space that’s kind of particularly different than everything else that’s expiring, maybe non-paying rent, get space that’s a little bit more beaten up. Is it well located? I mean, how competitive is it relative to what you would normally see in the leasing process in terms of quality?
Jordan Kaplan
I think it’s just like the stuff we’ve been leasing, I don’t think there’s any special thing about the space that are a worst space has tenants that are — so resistance pains. It’s just same as the rest of the space in our portfolio.
Operator
Thank you, Mr. Anderson. The next question comes from the line of Dave Rogers with Baird.
Dave Rodgers
Yes. I wanted to ask about the uncollected rent balance. I know it’s not in the favorite topic, but I guess I’m curious about the 200,000 square feet of kind of the eviction tenants you’re talking about this year. How much of that balance from them?
And then maybe a second question just to kind of layer on top of that is the tenants that aren’t being evicted that still owe you money, how is that going to start coming in now that the addiction is over? Do we see that in the fourth quarter? Are you going to start kind of aggressively renegotiating leases with those guys early? How does that work? So maybe those 2 questions separately, if I could, please.
Jordan Kaplan
So they’re in the number that’s been decreasing anyway, but they’re in the numbers that we’ve been saying is outstanding that sell to us. Although their number is going to be hard to calculate now, right? So if you’re in the space and you haven’t hit us up to now, and we go, well, you owe some money up to now. Now once you get a victory from the space, you also owe money from the whole lease. But of course, we are also obliged to mitigate, right?
Now we obviously feel that we can get someone else in there, get them out. We get something else send there, get that money, and then we can kind of figure out what you owe us, and then we’re going to go at you and go, you owe it. So it’s hard to to say these guys pull money out or expand it or do whatever.
But that number is, as I’ve said many times, I think last time I looked at, it was $130 million. So that number is coming down, the 200,000 feet is not a very big number. All these numbers are coming down to small and smaller numbers. Because it’s complicated to collect from most people in particular because of all of our obligations to mitigate, and there might be a legal process attached to it. I think it would be very hard to predict timing for that money particularly coming in.
Although I will say in many, many most of those cases, I think they have the money and they will end up paying. It just put them in a bad habit of not paying in the past. And so it’s just a battle to get the money out of them.
Dave Rodgers
On the flip side of that, the other part of that was the tenants that are still in, they didn’t pay for a while. They owed you another paying, so you’re not evicting them, but they have some time to catch up. Can you talk about percentage of that remaining balance that is and how that comes in?
Jordan Kaplan
Well, I don’t know the split between the two groups of tenants. I could tell you that people are still in are paying some amount, probably paying current, probably paying current plus something, and it’s slowly causing the balance of decline. And this group that we’re talking about are the ones that were causing the balance to increase as the warrant. Yes.
Kevin Crummy
Yes. James, the way you characterize it, now we can start aggressively pursuing is not right. We’ve been aggressively pursuing collection the entire pandemic. So the folks that are still in, most of them we’ve made bills with. They owe us some past due balance, and they’re starting to pay that. They’re paying current rent, and some of them are hanging out and paying according to what the moratorium allows. But we prefer to sign a new lease with them or extend out their lease and let them pay us back what they own over time, so we’ve been doing that for 2 years now.
We haven’t been waiting until now to start aggressively pursuing those balances.
Dave Rodgers
Yes. Sorry for the mischaracterization, I think I was thinking about the evictions where you could pursue those now more aggressively.
Last just for me, I wanted to clarify on the occupancy guidance, both your lease and your occupied number for the end of the year. Before or after these evictions, those numbers don’t change. Is that correct? I mean, you’ve already taken them out of occupancy, they’re not in the lease number, so there is no change regardless of whether they leave or not?
Jordan Kaplan
Occupant leased and occupied stats are impacted now by 100,000 feet that’s left when they move out. But none of the account, there’s been no income, none the accounting stats are impacted by them because we didn’t accrue for rent, we didn’t take anything into revenue. We didn’t do any of that.
But they were in the stats for the fact that that space was leased, it wasn’t available for us at least to someone else and occupied. The spread between lease and occupied is driven by you’ve signed a lease but the person hasn’t moved in. That’s the difference between leased and occupied. There is no calculation about what we’ve been giving you is third number that just got created by the pandemic called utilization, and that some of these people could actually be in the space utilizing it and it’s leased and it’s occupied, but they haven’t paid us. Maybe many of them have, I don’t know.
Operator
Thank you, Mr. Rogers. The next question comes from the line of John Kim with BMO Capital Markets.
John Kim
I had a couple of questions on leasing activity. You did over 1 million square feet during the quarter, that was great. 440,000 square feet expiring in the second quarter, according to your last couple of months, and then you captured another 100,000 square feet.
This remaining 500,000 square feet or so that I thought would have improved your leasing number and then said it went down during the quarter, so I was just wondering if there was some other unknown vacate or termination that offsets the lease rate?
Stuart McElhinney
Yes, John, it’s Stuart. So if you just go back one quarter before this quarter and look at what we had expiring, it does not capture nearly the population of the expirations that we had in that quarter because, of course, nobody waits, most folks wait till last day of their lease to renew. So we’re renewing tenants 1.5 years in advance of their expiration, year in advance, 6 months all along the way, and that expiring number that we’re telling you that we’re putting the supplemental is what’s left to address. So if we’ve addressed it, if we renewed it, it comes out of the expirations.
So you can’t do the math the way that you laid it out, and you had to go back in the quarter and look at what you have expiring and then add the leasing you did and tie it out, you can’t do it that way.
Jordan Kaplan
And in fact, as long as it’s kind of sound, many tenants renew after expiration. So the lease theoretically expired, they’re on holdover, you’re still negotiating the deal, you make a deal. Some months later, they go, okay, put us back, give us a refund for our holdover portion, and now you have another new deal with them. But that happens with small tenants. That’s just — they’re not as focused on the exact date.
John Kim
So you have this additional 680,000 square feet of signed leases not commenced that’s not in your exploration schedule?
Jordan Kaplan
It’s somewhere in the exploration, it just isn’t necessarily in that quarter. I don’t know if you kind of watched it for a while, but every year as you approach the year, especially the year before, the next year starts shrinking in terms of its expirations because you’re doing those deals. And then when you get to the year, you might think the next year, I’m making this up a little but I’m not, is around 14%. But usually, by the time we get to the year, it’s usually less than 10%, 8%, 7%, because we’ve done a ton of deals.
Peter Seymour
But John, it’s Peter. You were asking about the signed leases not commenced, the $680,000. What was the question about it? Those are leases where, go ahead.
Jordan Kaplan
Yes.
Peter Seymour
Yes. So there are essentially leases we’ve done recently, right? So they’re considered leased. They just haven’t moved into occupancy yet. They will be in an exploration schedule, but if it’s a 5-year lease, it will be expiring 5 years from now, right? Those are new releases. The signed leases not commenced, the 680,000 square feet. That’s part of that gap, the gap between leased and occupied is those leases.
John Kim
Okay. I’ll follow up offline. But my second question was on seasonality. So you see at 1 million square feet of leases signed this quarter and $900,000 last quarter. Is there typically any seasonality in leasing? Or can this be resolvable in the second year?
Jordan Kaplan
Yes, there’s seasonality. Some are slow, some just tend to be slower.
John Kim
What about the fourth quarter?
Jordan Kaplan
Yes. I mean, there’s a lot of leases that end the last day of the fourth quarter. So a lot of times, the first quarter is one of our toughest quarters because leases ended at the end of the year right on that day. So it looks like it was in that day, but it’s not, made later the next quarter.
But if you say beyond that, if you’re talking about seasonality, the only seasonality of people signing is all I know that some are slow for all the reasons you know.
I’m not sure that the seasonality has had a lot of validity during the pandemic, to be frank. I mean, I think the pandemic has reordered the seasonality to move in accordance with people’s views on the economy and whether they think there’s ticks up, a tick up in COVID or COVID’s relaxing. I mean, that’s had more to do with shifting the pace of leasing than the seasonality that, let’s say, would have been more recognizable from 2019 and prior.
Operator
Thank you, Mr. Kim. The next question comes from the line of [Indiscernible].
Unidentified Analyst
So I know this past quarter was robust for multifamily rent growth across the country. Obviously, your markets were no exception. You had an average rent roll up over 8% across your portfolio during that time. I was just curious if you had any further detail about the rent roll up, sort of that number that came from your market rate apartments? And how much of a drag there was from any sort of rent controlled units you have?
Stuart McElhinney
Yes. The number we’re giving you is on new leases, so there’s no rent control component to that. That’s on new leases signed, which when we get it back when it’s vacant, that’s not subject to rent control on the new lease that side. We can sign a market rate deal. So we’re giving you the stat unblemished by the rent control.
Unidentified Analyst
Got it, Stuart. Very helpful, and we’ll definitely keep that in mind going forward. Then my other question was just on the 1221 Ocean Ave. acquisition. I know with that, you now have an entire block of frontage between that property, 1299 Ocean and 100 Wilshire. With that entire block of frontage on Ocean Avenue, are there any opportunities you’re looking at for operating synergies or any other revenue-enhancing upgrades across these contiguous sites?
Jordan Kaplan
Yes. So one of the things, it’s a good question because one of the things that made that acquisition special for us is they, 100 Wilshire and that building — well, all three buildings were built by, yes, Lawrence Welk. And the 100 Wilshire and 1299 have a common parking garage. And when we bought 100 Wilshire, I actually negotiated that agreement which was somewhat good for 100 Wilshire, not fantastic for 100 Wilshire. The garage is actually controlled by 1299 Ocean, and 1221. And so they had these separate floors for Valley.
There’s a lot of things going on there, let me just say it that way. This has totally opened up that situation. And by the way, these buildings also own a lot of other parking. We have another partner garage. So in parking, in management, it’s making a big difference. And we are redoing the buildings. I think they’re all going to look to have a more consistent front. I think they’re going to have a very nice look to them. And I think when we’re done, I think they’re pretty undisputed, the premium properties in L.A. now. But there will be even less disputers out there because it will be that nice. It’s really going to be a beautiful lineup of properties with incredible views, incredibly well-located. Top class all the way down the line, and that’s what we’re shooting for.
Operator
Next is a follow-up question from the line of Michael Griffin with Citigroup.
Michael Bilerman
It’s Michael Bilerman here with Griff. Jordan, I wanted to come back and sort of look at sort of stock price valuation and sort of firm valuation, and just how you’re sort of thinking about where the shares are today. And I know you’re not alone in the office world, trading where you are, but I suspect you’re as frustrated as other office CEOs are. And I know you’ve been reluctant to want to do stock buybacks by taking off capacity, raising leverage and not having that for acquisition development. But you’ve done, obviously, personal purchases alongside other members of management. You’ve also been reluctant to sell assets to joint venture partners because I think you’ve always preferred going arm and arm on a new deal where you’re both going in at the same basis. Where the stock trade?
Jordan Kaplan
Everything you just said is exactly right.
Michael Bilerman
I know. The question is like no, no, it’s okay. It’s totally fine, so you don’t have to answer it.
But the question is that at this point, is your mind shift, you just added 3 new Board members here last year, right? So I don’t know if it’s Shirley and Sugar Ray and Doreen have different views, but you also have new views in the boardroom. So where is your and the Board and Tan and Dan’s view today? Given the shares in the low 20s, I’m sure you’ve never imagined that the stock would be trading at a 7% implied cap, almost a double-digit AFFO yield. So help me sort of understand where this is, how it’s taking importance within the organization? And are there other steps that you can take to drive shareholder value?
Jordan Kaplan
So that’s a great question. I don’t take the share price to be a threat for the company. But I will say we had a long conversation about what kind of opportunity does what’s going on for Zen. And we’ve had that conversation with the Board. And it’s a very mixed opportunity, but it does, in some sense, maybe that’s what you’re willing to present an opportunity. And I know that the down the center line, conversation about that opportunity to buy your stock, and you’ve heard all my opinions about buying the stock. And I’m not saying that never should be done. And by the way, we bought back our stock. But that’s one of the options.
The other option is that it allows us maybe to pick up some buildings like we did just get 1221, a building I wanted since the 90’s. Are there buildings that we can buy that this type of condition, especially around office which we’re still very positive on office, and we have a platform that absorbs it extremely well, is there an opportunity to kind of finish our kind of office portfolio synergy, whatever you want, global enhancement of our position? So because office is very negative right now. So of course, when people are very negative about something, it’s good to look at it because that maybe they’re right, and then maybe it’s an opportunity.
And then as I’ve said in the past, on Residential has — and the upturn that may come from that is, number one, we’re building, we’re still building. But my comment is that I think a lot of people had residential deals that leans more heavily than usual on interest rates and cheap debt. And is that going to flush out some essential projects that we wanted.
So there is sort of an opportunity set that’s out there, and you have to think about what to do with it. And there’s obviously, always risks associated with the recession or inflation or whatever we’re in right now, kind of a negative bias on office certainly. And we’re looking at all those things, and I’m hoping that we can walk the line properly between taking advantage of opportunities.
The company has a very strong balance sheet, and we’re very well run. We have a lot of cash flow every year. Even now in the middle of everything that’s going on, the company produces a lot of cash flow beyond its dividend. And so you don’t want to weaken your company during a time like this, but you also want to take opportunities because opportunities like this don’t come around that often, and we’re talking that through. That’s been the biggest subject in our boardroom.
Michael Bilerman
And does the opportunity to sell existing assets either outright or to a number of your long-standing institutional partners, has that changed at all? Like obviously, your partners have appetite as evidenced by some of the deals you’ve done over the last 36 months. And so I know you haven’t liked to do that, but why not liquidate a couple of assets and use that capital to either reinvest in the stock and create NAV value that way?
We’ll just continue to reap proceeds and reinvest in a lot of those redevelopment and development activities or future acquisitions where you can earn a higher return?
Jordan Kaplan
Well, I mean, I guess one thing I’d say is if I think there’s an opportunity to buy, and it’s this again, it will be a long conversation with the [indiscernible]. I finally think there’s an opportunity to buy office buildings and apartment buildings, then that kind of contradicts things. It’s an opportunity to sell to my partners.
So the only reason you would say, there’s two ways to buy back your stock, and you’re highlighting on e of them, which is you can sell assets, which if your stock is way down, probably asset values are down. So you can sell assets and buy back stock. That doesn’t at least your debt structure. The other way is just to borrow money and buy back stock, because they are really the only two ways you can do it.
If I think there’s a buying opportunity right now, not very inclined to sell. I mean, I don’t want to be the seller in a situation where I think it’s a good time to buy. And I do think it’s a good time to buy.
Michael Bilerman
But then you still have to come up with the money and at $22, I think you have 0, probably negative interest in equity. And any of your private partners who you’d say, okay, we’ll take my take units because they’re valued in the 30s. Someone will say, well, I can buy some of the screen at 23%. And as much as I care about taxes, I’ll take the half discount.
I just don’t know how you get out of this, or maybe it’s just time? Like I just didn’t know how by having the new Board members buying where the stock is, whether things have changed at all in the mindset around some of these items?
Jordan Kaplan
Well, I can’t say having new Board members has changed the mindset around this. I think what’s changed the mindset is saying this was, say, its own type of opportunity. Different from the opportunity that happened in 2008, different than other recessions when we were private that created opportunities, and we’ve got to look at this one and do this one right.
But in the end, it means there’s two real simple things. Number one, when the company is way off, it usually presents a supplement opportunity. And number two, make sure that you protect the company and don’t put a risk, and those are the 2 primary things I’m looking at.
Michael Bilerman
I appreciate the conversation, Jordan, on that. Just one follow-up just on occupancy and lease rates, just so were perfectly clear. So as you mentioned today, 87.5% leased, 83.8% occupied, that 370 basis point delta, call it about 680,000 square feet, it sounded like half of that takes occupancy potentially in the third or fourth quarter. And then the only question is what happens with the role which you have about 1.4 million in the back half, about 800 basis points? How should we just think about the retention on that to really understand how occupancy and lease rate move in the back half of the year? And then obviously, 2023 is a whole different area. I just want to understand that aspect of where these 2 numbers go in tandem over the back half?
Jordan Kaplan
So our hope is to gain on both fronts. I don’t think those are — obviously, they’re not insurmountable numbers for the third and fourth quarter. I’m not sure beyond that what I can say. I mean, you have our guidance for the numbers and where we think we end up.
Michael Bilerman
You have the guidance for office, of occupancy, 84%, 86%. Did you also give an office lease rate? Because I don’t see that on Page 22, I see Residential.
Jordan Kaplan
We don’t give guidance on lease.
Kevin Crummy
Yes. We haven’t been giving guidance on lease other than we reported, obviously, every quarter.
Jordan Kaplan
And Michael, you asked about retention?
Michael Bilerman
Right. So that’s what I’m going with it, right.
Jordan Kaplan
Yes. So historically, our retention has been in the mid high, 60%. That’s typically what we’ve retained. No reason to think that that wouldn’t continue to be the case going forward.
Michael Bilerman
Right. But then there’s also new leasing for those at Viking? I’m just trying to understand what’s effectively — what you expect to happen in the back half, given the 1.4 million square feet of expirations and the 700,000 square feet of signed but not occupied. Just how those two pieces move, whether we expect to end the year at the same sort of spread, but occupancy and lease rates just moved up? Or if that spread narrows with occupancy staying relatively flat, which is the bottom end of the guidance? I’m just trying to understand the leased portion too of the equation.
Jordan Kaplan
Yes. Well, I think we’ve laid out all the components, but we have to — now we have to do the work. We have to see how the rest of the year plays out. So there’s new leasing to be done, there’s retention to be done. And we got a lot of folks moving in Q3, so we know we’ve got those move ins scheduled. But there’s a lot of unknowns in the components that we just laid out. We’ve got to continue doing the leasing and see how the retention plays out for the remainder of the year.
Stuart McElhinney
But as I said in answer to an earlier call, I’m not sure that all those factors also go along with shrinking the gap between occupancy and leased.
Michael Bilerman
Right, because you’re going to be in the next 6 months, you’re leasing for ‘23 and ‘24 expirations of people coming to you, and you’re getting ahead, and that’s part of the activity, yes. All right. Hopefully you didn’t get knocked out by Sugar Ray when you told them the answers to all your questions.
Operator
That concludes the question-and-answer session. I will now pass the conference back to the management team for closing or additional remarks.
Jordan Kaplan
Well, thank you all for joining us, and we look forward to speaking with you again next quarter.
Operator
That concludes the Douglas Emmett Q2 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.
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