Douglas Emmett, Inc. (NYSE:DEI) Q4 2022 Results Conference Call February 8, 2023 2:00 PM ET
Company Participants
Stuart McElhinney – Vice President of Investor Relations
Jordan Kaplan – President and CEO
Kevin Crummy – CIO
Peter Seymour – CFO
Conference Call Participants
Blaine Heck – Wells Fargo
Michael Griffin – Citi
Alexander Goldfarb – Piper Sandler
Steve Sakwa – Evercore ISI
Nick Yulico – Scotiabank
John Kim – BMO
Dylan Burzinski – Green Street
Tayo Okusanya – Credit Suisse
Dave Rogers – Baird
Rich Anderson – SMBC Nikko
Operator
Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s quarterly earnings call. Today’s call is being recorded. At this time, all participants are in a listen only mode. After management’s prepared remarks, you will receive instructions for participating in the question-and-answer session.
I 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; and 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 Web site. 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 maybe 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 Web site. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up.
I will now turn the call over to Jordan.
Jordan Kaplan
Good morning, everyone. Thank you for joining us. For Douglas Emmett, 2022 was a year of real accomplishments in the face of notable challenges. In our markets, during the first three quarters, the impacts of COVID dissipated, we leased 3 million square feet and office utilization rates rebounded to over 80%. During the fourth quarter, as economic concerns grew, we saw a slowdown in new and renewal demand from large tenants. Fortunately, we continue to see good activity from the small tenants who dominate our markets and leased 770,000 square feet during the quarter. Overall, our absorption was slightly negative for the year. Given the macroeconomic climate, we believe it is prudent for our guidance to assume no meaningful recovery in office occupancy during this year. During 2022, the value of both our residential and commercial leases increased. Our straight line office rates were up 5.8% and our residential rents increased an average of 7.8%. In addition, our two multifamily development projects added 505 units to our portfolio. The current state of the national economy is challenging for all of us, but remote work, oversupply, the reliance on large tenants and concerns about reduced urban appeal seem to pose additional obstacles for some office CBDs. Fortunately, our markets, supply constraints, smaller tenants, short commutes and low reliance on public transit have supported relatively high leasing volume and utilization during the pandemic. This recent experience, combined with our industry diversification and strong operating platform, gives us confidence in the long term prospects for our markets.
With that, I’ll turn the call over to Kevin.
Kevin Crummy
Thanks, Jordan, and good morning, everyone. Our multifamily development projects continue to exceed pro forma. In April, we delivered Landmark, Los Angeles, a new 376 unit residential high-rise in Brentwood, and have already leased over 60% of the units. In addition, we have now delivered and leased over 350 of our eventual 493 units at Bishop Place in Honolulu, and we expect to substantially complete the conversion by year end. Asset sales in our markets have remained slow, but we continue to search for opportunities. Regarding our balance sheet. We have no outstanding debt maturing until December of 2024, and almost half of our office portfolio remains unencumbered.
With that, I’ll turn the call over to Stuart.
Stuart McElhinney
Thanks, Kevin. Good morning, everyone. We did a substantial amount of leasing this quarter, primarily driven by the small tenants that support our markets. We signed 218 office leases, covering 772,000 square feet, consisting of 244,000 square feet of new leases and 528,000 square feet of renewal leases. For all of 2022, we signed 924 office leases, covering 3.7 million square feet, including 1.3 million square feet of new leases and 2.4 million square feet of renewals. Nonetheless, during 2022, our leased rate declined by 53 basis points to 87% and our occupied rate declined 83.7%, driven mostly by the slowdown in activity during the fourth quarter and recapturing space from nonpaying commercial tenants as local moratoriums expired. Our leasing spreads during the fourth quarter were positive 1.8% for straight line and negative 9.9% for cash. As I’ve been saying in recent quarters, we remain focused on occupancy at this point in the cycle and expect rent spreads to remain choppy until our lease rate climbs back near 90%. Our leasing costs this quarter of $5.80 per square foot per year in line with our recent trends and well below average for other REITs in our benchmark group. Our multifamily portfolio remains essentially full at 99.4% leased. We saw continued strength in rent growth during Q4 with average rent roll up for new tenants over 5%. We assume that extraordinary 7.8% increase in multifamily rents during 2022 will moderate somewhat in 2023. We are pleased that the residential rent moratoriums in our markets are ending, although the payback periods have been extended into 2024 for some of our residential tenants.
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 fourth quarter of 2021, revenues increased by 6.4%, FFO increased by 7.2% to $0.51 per share. AFFO decreased 11.1% to $81.2 million, reflecting more tenant improvement expenditures as a result of our robust leasing in Q2 and Q3. And same property cash NOI increased by 1.4%, primarily as a result of higher rental revenue and parking, partly offset by inflationary impacts on expenses and lower office occupancy. For all of 2022, FFO increased by 9.4% over the previous year. Our G&A remains very low relative to our benchmark group at only 4.4% of revenues. Turning to guidance. As Jordan said, our guidance assumes that office occupancy growth may not start in 2023. We elected to allow interest on one loan to float when the related interest rate swap expired on January 1st. Our guidance also assumes we will do the same when two other swaps expire in March. Due to increasing interest rates, expiring swaps and the new residential acquisition loan, we expect interest expense in 2023 to be between $192 million and $196 million. Overall, we expect FFO to be between $1.87 and $1.93 per share with higher NOI more than offset by approximately $0.16 per share of additional interest expense in 2023. 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] Our first question is from Blaine Heck with Wells Fargo.
Blaine Heck
Just starting with guidance, can you guys provide the assumptions for retention in 2023 and rent spreads on executed leases during the year, if possible?
Stuart McElhinney
Blaine, we have never given guidance on those particular items. I think for retention, our retention rates have historically stayed in a pretty tight band in kind of mid 60s. So I think you could assume that this year we’ll probably be like most years before it. And trying to predict rent spreads, it’s been impossible. We’ve tried that in the past we were not very good at predicting them ourselves, and it’s nothing we’ve ever provided guidance on. As I said, we’re focused on retaining occupancy and growing occupancy. So I think you should expect spreads to be kind of how they’ve been, but it’s hard for us to make predictions quarter-to-quarter on how they’re going to play out.
Blaine Heck
Second question, Jordan, I think you’ve been pretty focused on getting your development team working on some new projects now that Landmark is done and Bishop is wrapping up. Is there anything you can talk about on that side of your initiatives, have you identified the next project or projects? And does the increase in cost of capital make you any less likely to move forward with development projects at this point?
Jordan Kaplan
So the next big thing I think we’re going to be focused on is construction at Barrington Plaza, where some years ago, we had a fire, we’ve gone through a lot with the city, trying to get it worked. We have a lot we’re going through and have gone through with the city on insurance and — with insurance companies and with the city to get positioned to be able to start work there and do all the work that we need to do, including putting in fire sprinklers. And so that’s probably the next big step there. Although, I will say, this may not be the exact right time to do this, but some changes in state law have made it much easier for many of our sites, very good sites that we have in Wilshire — whether Wilshire, Beverly Hills and in the Valley, to made it more cost effective, less time consuming in terms of entitlements. I mean it just fixed a lot of stuff. But those changes to make sure we really understand their impact. We’re waiting — we were waiting — we thought we were actually going to get some guidance like this month or next in terms of how it’s actually going to be executed, but then we heard we weren’t going to get any guidance until June or July, sort of waiting to hear that. But there’s no version of guidance isn’t going to come out pretty positive for us on some of those sites.
Operator
The next question is from Michael Griffin with Citi.
Michael Griffin
I wanted to ask on the Warner Bros Discovery leases expiring over here in ’23 and ’24. Just curious the demand that you’re tracking on that space. I know the lion’s share expires in 2024. Is there a sense that that’s weighted toward the first or the second half of ’24 for that? And any other color you can provide would be helpful.
Jordan Kaplan
So I think there’s only two leases and one of them is a whole building, which is the 3400 Riverside Drive. And that building is about 450,000 and the lease expires in the second half of ’24. And as I know — I mean, everybody thinks just to know what they’re going to do, I’m anxious to know what they’re going to do. I mean, I’m not — I’ll tell you I’m not optimistic considering what’s going on with the economy today when you talk about the economy two years from now, and I don’t know what they will do or will want to do, they don’t have any more options. But of course, I don’t think they even know what they want to do at this point. I mean the real estate group that we made the original deals with, which I think did have an expectation of keeping the building, all of them are gone. I mean — so we don’t even have a good way to get us — I mean, we’re reading the same stuff you’re reading, they’re cutting expenses, and I know that, but I don’t know where they’ll be in two years.
Michael Griffin
Then I wanted to turn to your thoughts just on capital allocation for ’23. Obviously, with the announced dividend, reduction in share reauthorization program at the end of last quarter. I mean could we potentially see you being more acquisitive if the right opportunities came about, be they for either office or multifamily or do you think it’s more pragmatic to stick to potential share buybacks?
Jordan Kaplan
Well, just a general answer because share buybacks, multifamily as points are all being acquisitive, I guess, acquiring. And I think it’s a good time to acquire. I think we’re well organized to acquire. Certainly, the dividend cut gave us even more firepower to do that. We have unleveraged buildings, cash. I mean we have a whole list of things. And my goal is not to allow the opportunities in any particular recession, particularly one that’s this extreme to pass it out us taking advantage of it, and I want to do that.
Operator
The next question is from Alexander Goldfarb with Piper Sandler.
Alexander Goldfarb
So two questions. First, just going back to the Barrington fire, the project. Jordan, you and I have discussed this on the last call, but just — so I understand how it impacts FFO. Is any of that project in the guidance that you laid out for this year, or just based on timing, it’s probably not something that would really impact FFO until next year?
Jordan Kaplan
No, there’s some in the FFO guidance for this year. But it’s hard depending on the pace at which we work things out with the city and with insurance, it’s hard to know how much will impact this year, and I suspect the largest impact will be next year. Even if everyone says like open, do it everyone, everyone do whatever you want, you have a lot of groundwork to do in terms of installing core equipment that may not impact units as much before we can go in and start impacting the buildings.
Alexander Goldfarb
So it’s in guidance, but the bulk of the impact is really a 2024 event, that’s the way to understand it?
Jordan Kaplan
Yes. And even that, yes, that should be true. But this all relies on like what kind of deals we make also with insurance and the pace at which we move people out, and those are like giant numbers, right? I mean we make a deal of insurance vis-a-vis the revenue, that’s one thing, that maybe you guys have never seen an impact and then, of course, the speed at which we move people outside. So if I’m guessing now, yes, ’24.
Alexander Goldfarb
Second question, appreciate your comments on the changes from the state level. Always good to hear positive things for landlords. But obviously, LA passed their good cause eviction recently. So as you see the groundwork for your potential apartment pipeline in — which I think is mostly LA and Santa Monica, net-net, between the advantage that the state gave you versus the negative from LA’s recent regulation change. Overall, does it change any of your underwriting one way or the other, does it make it a little tougher, make it a little better or is it sort of a wash when you figure those two policy changes?
Jordan Kaplan
I mean, I don’t like any limits on rent or any of the rest of it. But quite frankly, the good cause eviction stuff, I don’t think runs a foul of any of our habits. I mean someone is less than a month to link with, we collect the money — I mean we don’t keep — or if you’re telling me raising rent on someone that’s in their unit, more than 10%. I mean anybody — and certainly anybody institutional, it’s been the apartment business for a long time, that’s smart enough not to do that anyway. And I don’t think I’m getting ready to pro forma more than 10% of your rent growth, and I’m trying to figure out or I’m going to buy something. So I mean, I don’t think you can — yes, I don’t like what the city passed. I’m not sure it’s going to have a big impact on us or any impact, quite frankly. But I mentioned the stuff at the state level, because it’s like a giant impact on. I think it’s — I went from telling you guys it’s years to get anything in title to potentially, if this thing goes right that we could just kind of go at our own pace. I mean, it’s a crazy change. I’m surprised it even passed.
Alexander Goldfarb
Maybe they don’t know that they gave you guys a gift.
Jordan Kaplan
Well, if they had known that, they wouldn’t have passed it because there’s no love for developers in Sacramento, but that’s done.
Operator
The next question is from Steve Sakwa with Evercore ISI.
Steve Sakwa
Jordan, I know that you guys were guiding to sort of average office occupancy. But within that range of 82 to 84, could you maybe just give us a little color on what you expect for new leasing volumes in ’23? I know the fourth quarter was probably the lowest quarterly volume on new leasing in about two years. So just any thoughts on the pace of new leasing and the pipeline that you’re seeing today?
Jordan Kaplan
Well, we’ve really been whipsawed by the changes in people’s sort of economic outlook. I mean, I was really surprised going into the fourth quarter that things shifted so quickly as kind of attitudes went towards — and I think you saw that in a lot of people, attitudes went towards we’re going to go into a recession and how quickly the leasing shifted. And one side of absorption and leasing is obviously roll and we give you that for every quarter what the roll looks like. The other side has been so sensitive to people’s kind of point of view on the economy. I mean three incredible quarters and all of a sudden the news turns negative, and we drop off 25%. I mean that’s wild, right? And so guessing about what next year is going to be. I mean, I’m feeling a little burn. So we didn’t try and decide — we didn’t try and say people are going to regain confidence in the economy and the leases are going to pick up again. And we also said for ourselves, we’re probably kind of where we’re going to be. The fourth quarter has kind of given us an example of where we’re going to be or an idea, but I think there will be changes next year. And so it was a very hard number to put out, quite frankly, because there’s still — you’re talking about something where there still is — I mean even that rough fourth quarter, still a lot of activity, over 700,000 feet.
Steve Sakwa
And Stuart, I know you sort of guided broadly to interest expense. I know you have a couple of swaps that are coming up, the debts not due, but the swaps are burning off at relatively low rate fee, and I think they’re burning off relatively soon, one in March and one in April. So do you have a sense given where the market is today on kind of where that debt would reprice today?
Stuart McElhinney
Well, the debt is not repricing, only the swaps burning off.
Kevin Crummy
So Steve, no, we’re not super excited about swapping in the current environment. And we think that when you look at the forward curves that things are going to start coming down. And so we’re monitoring the market every day and when we find the right opportunity we’ll swap. We set up our debt specifically for this where we have a two year runway to refinance an asset. And we’re entering that with these where we’ve got 24 months to figure out and replace the loan.
Peter Seymour
Just to be clear though, we are assuming — that those loans float and that’s included in our guidance.
Jordan Kaplan
The same loan, so it’s not repricing, but it’s just — we’re just doing standing you could do, which is you just look at the forward curve on floating rate, and we just put that in our model.
Steve Sakwa
I just wanted to clarify. You’re just going to let them float for the time being, and so they’ll just go to the SOFR curve plus their spread.
Jordan Kaplan
Yes, I mean it’s not — there’s a lot of insecurity right now around where rates are going. And so there’s just too big of a margin to be paid in terms of swapping to cover people’s kind of conservativeness. And so I think even though it’s painful and expensive for a little bit to be unswapped, I think this is the right thing, at least to watch for another little bit of time.
Operator
The next question is from [Camille Deville] with Bank of America.
Unidentified Analyst
Following up on your occupancy outlook from another angle. Relative to the amount of expiries you have coming due this year, the midpoint of your occupancy guidance isn’t really implying a steep drop off, which I assume is partially supported by the leases that have not yet commenced. So just curious, like what are you seeing on the demand side that gives you comfort here that occupancy doesn’t trend below these levels?
Jordan Kaplan
So the demand side is driven by the — it’s our quarterly leasing. And I think as I — I mean we’re always guessing a little bit about demand. But I think as we warned you guys going into the fourth quarter, during that call, we said, hey, while we’re seeing a real change in the pipeline in terms of leasing — it’s never nothing. I mean, there’s always a lot of activity, but we’re not a company that tracks individual leases, everything we do around this issue has to do with flow more than to do with an individual deal. And so as we saw the flow slow down, and as you saw, moderated about 25%, that is noticeable to us. Now we’re looking at the activity and we’re going, okay, well, we seem to be at that level at the moment and we’re looking at that and that’s the information we’re giving you in this guidance.
Unidentified Analyst
And more specifically, thank you for the update on Warner Bros. Are you able to provide any comment or indication on the UCLA lease that’s coming due and their likelihood to renew there?
Stuart McElhinney
So I think UCLA has like 25 or 26 leases with us. They’re all different departments at the university, different functions, they don’t act in a coordinated manner. So we’ll literally have quarters where they’ll sign a new lease with us and then give back some other space. So those are a bunch of smaller leases. We don’t have specific guidance on any of them, but they’re not — it doesn’t act like a large tenant.
Operator
The next question is from Nick Yulico with Scotiabank.
Nick Yulico
First question is just in terms of various reports, everything we hear about the downtown LA office market being very weak and firms considering moving out of that area. I guess I’m just wondering if you’re seeing any impact to your portfolio, realizing that’s maybe more of a larger tenant issue, but law firms or others looking to, let’s say, move back to Century City, Beverly Hills, or any benefit you’re seeing from a leasing demand standpoint from that?
Jordan Kaplan
Well, Nick, I mean, you know the issue incredibly well for a guy in New York. So yes, people seem to be kind of finishing moving out, it’s larger tenants and they’re finishing moving out or they’re moving out of downtown. I think the primary beneficiary of that move to date has been Century City. There might be a little bit of activity in Beverly Hills. But the hope would be that we could pick some of that also up in — Westwood and Century City have been the two markets that have like catered to those larger institutional type tenants. But Century City, I mean, has been an overwhelmingly happy beneficiary of that move. I can’t — we don’t — I mean, I don’t even know that we have space in the portfolio that could accommodate some of those more high profile moves that have been in the press recently.
Nick Yulico
And then I guess just a second question is going back to the buyback, Jordan, maybe just talk a little bit about how the Board is thinking about deploying that? I mean, it doesn’t look like there’s anything assumed in the guidance or really anything that was done so far unless I’m missing something. But how you’re thinking about that? Are you waiting to find a JV sale or some source of funds that would go towards that buyback? And presumably, you think the stock is cheap because you put the buyback in place. So any thoughts on that would be helpful.
Jordan Kaplan
Well, the buyback is one of a number of options. They all use some type of capital, you have access to capital. So that’s probably not really that much of an issue. But we just have to look at a variety of things and it’s on the list. I think while it’s compelling, I mean, we obviously would rather lean towards making some great real estate deals because that sticks with the company — that adds a great piece of real estate forever, which is always very valuable. But it’s hard to ignore the stock buy, so everything is on the list. I mean, that’s where we’re at.
Operator
The next question is from John Kim with BMO.
John Kim
I wanted to get your updated views on resi conversion opportunities. If there are any assets or maybe some markets contemplating offering incentives that would make it more economically viable for you to pursue the change of use of the building?
Jordan Kaplan
It’s funny because residential conversion is basically a matter of looking at the spread between office and resi rents and then you can get down to as particular of a single building. And you would say, well, resi rents are way up and office rents are suffering. But we’re not in markets where they’re suffering extraordinarily. So maybe there could be something but it’s not very obvious, and it’s not something where you can walk into a market the way we did when we were looking in Hawaii and just say, this is obvious, we should do this as one of the fill. It’s going to be a little more — it’s much more nuanced than that. But it’s great that we had that experience and a great job was done, pat on the back of that. That team, both the construction, the lease up and everything of the 1132 Bishop building. So that gives us a lot of confidence around that area. But you need to convince yourself or be convinced that the economics are right and the building’s right, it’s not simple like the Hawaii deal.
John Kim
I was thinking more like a market like Warner Center, which you’ve mentioned in the past was perhaps a noncore market for you, and it sits today at…
Jordan Kaplan
Yes. And although Warner Center — the rents are — I mean, the market there has not been destroyed. As a matter of fact, there’s so much new development is in that area. I probably put on my list of a good — starting to show whole another round of great promise. Remember, there are buildings being pulled out of that market right now for other reasons, right? I mean one guy for the [Rams] just bought a site that had $500,000 of billing, that’s not going to be an off selling or he’s building practice fields, right? So that’s out of the mix. I think there’s some buildings there that are going to be out of the mix. And frankly, you might end up at a market that’s back to where it was before the LNR project was built, which in any normal economy, that was one of the best markets in LA. It was only until LNR added 25%, 30% to the size of the market that, that market started suffering. So if we do this reversal, everything else about that market if you were just sort of evaluating it for office or residential investment would be a big plus. It’s got some — the most residential is being built there and the rents are held extremely well, and all those projects are leased up. And then in terms of amenity base, they’ve seen — one of the more dramatic conversions, their big mall has been broken up with two pieces of the mall that was there having been sold to [Crocky] as well as just other sites that I was talking about. One mall that — I think, is going to run two pieces, two other full size blocks that he’s building this Rams practice field and kind of sports center, right, for visitors and stuff. So there’s like a lot of amenities, a lot of housing all going in at once. So it’s a pretty good bet.
John Kim
My second question is a follow-up to Michael’s question on retained cash flow from your dividend cut and the use of proceeds. You talked about buybacks as an opportunity, multifamily, but you didn’t mention the office. And I was wondering if you…
Jordan Kaplan
I didn’t — not mention office, whether it’d be office, residential, I mean, all of those are opportunities. And I think the opportunity — and I think there’s actually a reasonable chance that opportunity could be better in office than residential. I guess — just acquiring. I probably definitely put off on the list and I definitely — maybe residential, definitely office, but remember, residential has held up better, and stock on everything as almost.
Operator
The next question is from Dylan Burzinski with Green Street.
Dylan Burzinski
I guess just sort of on that acquisition piece. When you look at it or in your discussions with JV partners, are they interested in deploying capital in today’s environment?
Jordan Kaplan
Yes, they are. We’ve been in contact with all of our partners and explained the situation and explained to them what’s going on in our leasing pipeline and why we’re bullish on LA. And we consistently get a positive response, it’s great. If you find an interesting opportunity, please show it to us. I think they had confidence in the fact that — we put a lot of money to the deals, and they go, well, if you like it, we like it, basically.
Operator
The next question is from Tayo Okusanya with Credit Suisse.
Tayo Okusanya
Thank you for the earlier comments about Warner Bros. Just curious for some of the larger — other larger leases are expiring starting in 2023 into ’24, like UCLA and also William Morris, kind of some initial thoughts on those.
Jordan Kaplan
So we really only have two big leases in the portfolio, it’s Warner Bros. and then William Morris that you mentioned the act like large tenants. The rest of that list is multiple leases. I already spoke about UCLA. I think they have over 20 leases with us. They don’t act as a single entity or unit. But it’s Warner Bros. Jordan already kind of gave you his thoughts on prospects for that. William Morris has a bunch of years left. So I don’t think there’s anything to talk about with them for a while. And then everything else, like I said, all the other tenants on the list act like smaller tenants, they aren’t super material, it’s a bunch of leases.
Tayo Okusanya
And then also from a leasing perspective, again with your tenants, anything changing in terms of type of terms they’re looking for, is it taking longer for them to make decisions. Can you just kind of talk a little bit about just kind of what you’re seeing in that respect?
Stuart McElhinney
I think the notable change that we already talked about was that the average lease size for the Q4 results that we just published was down. It was smaller tenants that really held up our activity in Q4. We saw larger tenants not as active, not surprising given kind of what’s going on with the economy. Our tenants tend to generally zero in on a five year lease because they’re smaller and most of them are personally guaranteeing the leases, they don’t tend to feel comfortable going longer than that. Usually, what happens in a cycle is when the economy is down, they’re nervous and they tend to go a little shorter term. And then when the economy is doing well and they’re feeling good about their prospects, they’re a little comfortable going a little longer. But we’re almost always still zeroing in around that five year average, and that’s still what we saw last quarter.
Tayo Okusanya
And I mean since smaller tenants, they’re using more of your prebuilt product or are they actually building out space on their own?
Stuart McElhinney
We always prefer to build space for them. We’re very good at it. We do a lot of prebuilt suites, wwe call it our spec suite program. So we’ll go in and make a suite totally move-in ready. We’ve had a lot of success with that product. So that’s something we continue to ramp up on. But yes, these are small tenants, they don’t have real estate departments. So as much as we can help them with the process, make it easy for them and get the space built for them, that’s a much better turn out. So we do that as much as possible and the tenants appreciate it.
Jordan Kaplan
And they also don’t have large TI demands. So our TI costs are substantially lower than when you lease into large tenants.
Operator
[Operator Instructions] The next question is from Dave Rogers with Baird.
Dave Rogers
Maybe one question for me. Just in terms of the evictions, the tenants that haven’t been paying. I know last quarter, you were down to the last handful, maybe 100,000 square feet or so of tenants that you were still working through. Can you just give us an update on where you are there? How much of an impact you’re anticipating maybe to occupancy and where most of those blend and extend kind of done by the end of the year? Just so we can kind of think about the run rate for that group of tenants.
Jordan Kaplan
That group is done, it’s in the numbers, it’s dealt with. So there’s no more people that weren’t paying are out and the other people are paying. There’s money still owed to us by some people that are paying, and we work out deals that they pay over time.
Stuart McElhinney
And there’s money still owned to us by some people that are out that we’re still pursuing [Multiple Speakers]…
Jordan Kaplan
But in terms of occupancy, you have this strange impact on occupancy of people that were in occupancy, but they weren’t paying. So that was weird, right, you’re used to if they’re in, they’re paying. And that’s what COVID and the moratoriums did, and that’s resolved [Multiple Speakers] residential, it’ll be resolved by the end of March.
Dave Rogers
In the occupancy number, okay?
Jordan Kaplan
Yes.
Operator
The next question is a follow-up from Blaine Heck with Wells Fargo.
Blaine Heck
Jordan, just circling back to the state legislation that opened up residential zoning in certain areas in LA. I guess, do you think that change is going to trigger a lot of additional supply in the market? And have you seen any projects announced as a direct result of that legislation or is it just too early to tell?
Jordan Kaplan
I hate to say that I don’t think it’s going to open a lot of new supply simply because they sort of — we happen to be a developer that happens to own a lot of land in those areas. I don’t think a lot for infill type product we’re aware from that perspective. They didn’t make it cheaper, right? If you want to — if you just went, I liked that rule, now I’m going to go buy a piece of land because I know about that rule. I don’t think that they need to make that land any cheaper, probably going to be more expensive. They just kind of enhance the value of our land because so we can now kind of develop it as residential without having going through as many hurdles. So at least in the areas where we own all this property, I don’t — I mean, say this to them, I don’t want them to repeal it, but I don’t think it really did anything other than for someone like us that happen to have so many sites. They didn’t do much to boost the production of apartments.
Blaine Heck
And then last one from me. There were some reports that came out earlier this year that Regal Cinema was looking to close the Sherman Oaks location there, I think, leasing from you. Can you just comment on that situation, the potential earnings impact and any plans you may have for that space?
Jordan Kaplan
Well, I don’t want to talk about individual tenants. And it’s true, we saw that too. I don’t know in the end whether that’s what happens there or not. But I don’t want to — I mean, we don’t talk about individual tenants.
Operator
The next question is from Rich Anderson with SMBC Nikko.
Rich Anderson
So I was intrigued by your comment in the call here, Jordan, where you thought that there was more opportunity, I think I heard you right, more opportunity in office than there was in residential. First of all, did I catch that comment correctly?
Jordan Kaplan
Yes.
Rich Anderson
And then — so the answer to the question is why? I mean like when we’re in a world where hybrid office is sort of the thing, it’s not a need based situation, but a want based in some cases, whereas residential is quite different, you have a very unique residential platform. What is it that’s making it more interesting on the office side from an investment standpoint from your line of sight?
Jordan Kaplan
Well, I’ll tell you, I spend — we had this one paragraph in my prepared remarks that was at the end of my prepared remarks. And Ted called it the overwork paragraph, which you said you overlook some more, because I just want to get it right so much. But basically, what that paragraph said, which was trying to give people a feel for why I’m so positive on office in our markets is while we have gone into for real estate, at least a recessionary economy, the things that you just mentioned and the things that I’ll reiterate for you, which is whether it’d be work from home or people not being so interested in urban office or commutes or public transit, all those things that seem to be additional obstacles for people that own office buildings across the markets, I just don’t see them being here. They’re not here. And so when COVID finally lightened up a year ago, you saw our leasing booming. I mean we were in full recovery, and I was extremely optimistic. But not optimistic because I’m just optimistic guy, optimistic because we have like some of our strongest leasing quarters of our company’s history, and we have multiple of them in a row in new and in total. So when you go that’s happening, you certainly posted time that these discussions about these other items are there. I go, okay, that gives me a lot of confidence. That’s number one, okay? So put that as a giant number one, though, because I don’t think that those are issues our markets are dealing with.
And then add to that, for number two, which is we’re one of the only big gateway markets that has true diversity around the tenant base, right? We’re not just tech, just entertainment, or just finance like New York or whatever, just cards like Detroit, whatever you want to talk about, we really have a lot of industries that drive demand here. And then that is the last thing is that all through this pandemic period and plus-plus and probably our whole careers for me and Ken, we’ve been strengthening our operating platform. And now our operating platform, I mean, to say it has no equal is an understatement. I mean, it’s really an understatement I mean in our market, in our market. So I just feel like that platform, the diversity of tenants, the fact that these larger issues that I’m not sure they’re even going to be correct for other markets, but I know 100% they’re not correct right now for our market, okay? That those issues are living, that’s creating probably a buying opportunity against a backdrop where I am totally confident long term in the performance of our office portfolio for the reasons I just said. So that’s why right now apartments, which people still have a lot of confidence around apartments, so maybe they’re not going to be discounted as much, but there’s a lot less confidence around office. So I suppose with the confidence I just told you I have, which is that over rework paragraph that I had said in my speech, makes me go, that’s probably where there’s going to be more opportunities.
Rich Anderson
And so kind of related to that, you had a couple or three quarters in 2022 where things were moving along nicely and then you had this hiccup in the fourth quarter, and that experience kind of did a lot to inform you about 2023 guidance and the flat occupancy scenario and so on. So that seems like a really kind of sensitive topic in the sense that it could turn back on pretty quickly, right? Like if the Fed gets it right…
Jordan Kaplan
It turned off quickly, and that’s what I tried to say when I was asked about our occupancy guidance.
Rich Anderson
That’s my point. So maybe the very fact that it moves so quickly in one direction, is your confidence behind office, and I guess I’m kind of parodying what you just said, but so setting flat occupancy is the absolute probably worst case scenario and more likely, you probably see occupancy lift as the year goes on as long as we kind of get the macro right and we don’t have like a really disruptive economic scenario from Fed activity and so on. Is that the way you’re thinking about it, setting a floor?
Jordan Kaplan
Well, one thing — so real estate is not designed to be judged quarter-to-quarter. I know that’s the word we’ve bought into and that’s what we’re doing. So that’s what people probably more care about. As I just said — which you just said so we both said, so both in agreement. In the long term, I’m very optimistic about our market. I’m not so optimistic, if you’re bringing your point of view back to the quarter-to-quarter view to where the economy is going and that the Fed is going to be so quick that we’re like, okay, we’re done and wipe off the hands and move off the table. So we have to see how this year plays out and probably a lot of our guidance. Our guidance is not trying to give you messaging around what we think of the long term prospects for our market or our ability to lease up our buildings. It’s giving you messaging around — we don’t have a good idea to how much the Fed is going to keep increasing rates and keep tamping down. I actually think the fact that the employment numbers came in so strong and all the rest of that probably means that’s going to be unless even harder. And the beating from the Fed is certainly having a much bigger impact on real estate than some other industries. Maybe it’s also beaten down on tech. But somebody is doing a bunch of hiring and growing, some are out there, and therefore, that’s probably going to give them confidence to beat on us even more, and that’s what concerns me.
Rich Anderson
So you’re ready to start acquiring, if you can, sooner rather than later before there is any sort of recovery when entering more competition and so on, right? Like you want to get moving before all that starts to happen again.
Jordan Kaplan
When we do something, it has much more to do with the opportunity that’s presented than my time line in my mind. I mean, I need a good opportunity. Look, everything on — first of all, it’s not a public call and secondly, it’s no secret that people don’t own office building. If you own an ounce building in West LA, you’re not sitting there going I’m dead forever, because you’re seeing activity. So we need the right opportunity to come up.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Jordan Kaplan
Thank you for joining us. And we look forward to our call a quarter from now. Bye-bye.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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