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Douglas Emmett Inc
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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 listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session.
Now, I'll turn the conference over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead.
Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.
During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.
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.
Good morning, everyone. I know we're competing with the election news. Don't worry, if either candidate for president concedes during the call, we'll let you know.
Our third quarter results still reflect major challenges from the pandemic, but we did see some incremental improvement in rent collection, tenant utilization and leasing activity compared to second quarter. As of today, we have collected 91.4% of our combined second and third quarter rent, including 95.9% of our residential rent, 93.7% of our office rent and 39.7% of our retail rent. Once the eviction moratoriums in our markets expire, Oregon just come in line with other major U.S. cities, we expect current collections to improve and to collect the large portion of the past due amounts.
In prior downturns, the impact of personal guarantees and small business owner's commitment to their companies have kept our defaults very low. Compared to last quarter, we increased our deal flow from 125 deals to 175 deals with increases in both new and renewal transactions. We accomplished this despite the fact that many tenants are deferring their decisions during this uncertain period. We have not observed a trend toward tenants giving up space to work from home, and in fact we are seeing more tenants coming back into the office. Our small tenants don't face significant mass transit, parking or vertical transportation concerns, making it much easier for them to reoccupy their offices.
While cash rent spreads are down and straight line growth is slower, tenants have become less focused on TIs which has enhanced our net effective rent. Having managed through three prior recessions, each of which seem unique, we are confident that we will emerge from this downturn stronger than we entered it.
With that, I will turn the call over to Kevin.
Thanks, Jordan, and good morning, everyone. Lease enforcement moratoriums remain in effect in California and are considerably more restrictive than those in place in most other major U.S. cities. While we continue to work towards making these orders less onerous, they are likely to remain in place for the foreseeable future.
Turning to construction, we remain focused on our two large multifamily development projects, which are progressing nicely. We are now fully leased in our first phase of 98 units at our office to residential conversion project in downtown Honolulu. The demand for this new high-quality product and that's entered the CBD has been outstanding. We hope to complete the next phase, which is comprised of 76 units and building amenities in the next few months. Our Brentwood High Rise apartment construction remains unscheduled to deliver our first units in 2022. We also continue to work on securing additional entitlements to build more apartment units on sites we already own. In September, we successfully increased the allowable density at our Waena [ph] apartment community in Honolulu. The 12-acre parcels into short walk from the CBD and currently has 460 apartment units. The new zoning increased our height limit to 400 feet and allows us to build up to 2,800 additional units on the site.
As I discussed last quarter, property sales in our markets remain significantly below normal levels. Reflecting today's low interest rate environment, we have seen a few smaller trades at record prices for long-term leased office properties.
I will now turn the call over to Stuart.
Thanks, Kevin, and good morning, everyone. In Q3, we signed 175 office leases, 40% more than during Q2. These leases covered 735,000 square feet, including 171,000 square feet of new leases and 564,000 square feet of renewal leases.
As Jordan mentioned, we are seeing tenants more willing to trade tenant improvements for competitive office rents. As a result, we reduced our annualized office leasing costs per square foot this quarter by 30% from a year ago and 20% from last quarter. Leasing spreads for the third quarter were 14.7% for straight-line rent roll up and negative 0.7% for cash roll out. While our tenant retention was in line with long-term averages, our office lease percentage declined 1% to 89.8% as new leasing volume remained below pre-COVID levels. On the multifamily side, our leased rate declined from 98.7% to 97.5%, as continued university closures and military deployments in Hawaii have caused slightly higher than usual vacancy at a couple of our properties.
I'll now turn the call over to Peter to discuss our results.
Thanks, Stuart. Good morning, everyone. First, to show the gross impact of the pandemic and very tenant-oriented lease enforcement moratoriums in Los Angeles, I'll compare this quarter to Q3 2019.
FFO was $0.40, down $0.11 per share from Q3 2019. Major items contributing to this decline were the following: write-offs from slower office collections reduced our FFO by about $0.08 per share; parking utilization though up from last quarter reduced our FFO by about $0.045 per share. Lower office leasing resulting in lower occupancy reduced our FFO by about $0.02 per share. Uncollected insurance recoveries related to this quarter from an apartment fire reduced our FFO by just over $0.01 per share. These negative FFO impacts were offset by about $0.03 from higher average in-place rent and about $0.03 from operating expense savings. AFFO declined 26.6% to $69.2 million and same property cash NOI declined by 15.5% as lower revenue was partly offset by office operating expense savings.
Now, I will compare Q3 2020 to Q2 2020 to highlight the most recent trends. FFO was down a net $0.01 per share from last quarter, largely as a result of the following: better office collections, lower write-offs and slightly higher parking income increased our FFO by about $0.04 per share. Normal seasonality in our utilities and higher insurance premiums reduced our FFO by about $0.04 per share. And the uncollected insurance recoveries reduced our FFO by just over $0.01 per share. At only 4.4% of revenues, our G&A for the third quarter remains well below that of our benchmark group. Given the continuing uncertainties around the pandemic and local government ordinances, we are not providing guidance. Although it's still early in Q4, the trends in cash collections and parking so far appears to be consistent with the trends in Q3.
We expect occupancy to continue to decline until leasing volume improves. Once the eviction moratoriums in our markets are allowed to expire or come in line with other major U.S. cities, we expect collections to improve and to collect some of the past due amounts that is unlikely to have a material impact on the current year.
I will now turn the call over to the operator, so we can take your questions.
We'll now begin the question-and-answer session. [Operator Instructions] First question comes from Dave Rodgers of Baird. Please go ahead.
Yes, good morning out there. Jordan maybe to start with you or Stuart, I wanted to talk a little bit about pricing power and the pricing that you saw in the quarter. You guys talked at length there just about how customers were trading the TIs and LCs, I guess, for the lower face rent, but what do you expect to see in terms of pricing power as you move forward both on the renewals and the new leases? One, I guess, overall, and then two, I guess, as you divided up between the Valley, the Westside and maybe to lesser extent Honolulu, what type of pressure do you expect to see in those particular areas?
Well, I mean pricing power, that's a great way to put it. I hope we have pricing power. I mean we're always react in the market that we're facing. But just to back up a little bit, in general, what we want to do is keep occupancy as high as possible, because that puts pressure on rental rates, right. I mean vacancy, but pressure off, occupancy keeps pressure up. We're in markets that are relatively well occupied. So that has allowed us to hold our own pretty well. We're doing even better than that in Hawaii. But it - so put Hawaii aside, where it's very tight market, but if you look at our markets here in L.A., we've been able to do fairly well in terms of rent - I think your client [ph] rental rates, but you're seeing a little bit of slippage each quarter and that's as a result of the fact that, while we're holding our own on renewals, it's hard to get a new deal flow all the way up to where we need it to be.
Now I would say, and I say this all time, I mean, I'm just so happy with the response from our operations because we were off about a 1.5 in the second quarter. We've now started narrowing that and working that number down. Hopefully we can keep working it down because that's kind of the game until I think turns around and heads back up, which I am optimistic will happen sometime in 2021.
Maybe ask that slightly differently. Just in L.A., what's the difference in your new rents on a new versus renewal basis? If you had said that or give that, I didn't see it, but is there a meaningful delta between those two right now?
Well, it's very - since you don't do an office lease two years in a row, the best stats that we can give you that are based on stats, not a feeling are the roll up, roll down stats which we give and we are still obviously rolling on leases, I think the straight lines about 14%. So if you were to say, wow, it used to be up in the high 20s, now it's 14% that is giving us some instinct that things are moving off a bit, which is why we tried to say during the call, which you would expect that they are, but in fact, the overall lease economic seem to be holding up pretty well, because as you heard in Stuart's section, our other leasing costs are down dramatically compared to last year and even down compared to last quarter.
Okay, thanks. And then maybe just a follow-up for Peter. Can you break down the write-off that you talked about between anything accounts receivable related, the straight-line rent write-offs, and then any security deposits you applied in the third quarters. Those details will be helpful. Thank you.
Yes. So a lot of the impact - I mean, we said it was $0.04 better than the previous quarter. There's - that includes the better collections, it includes a small amount of write-offs for new tenants. There's very little straight line in that number this quarter. And it also includes small positive impact from improved margin.
Thanks.
Thank you. The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey, good morning. Good morning out there.
Good morning, Alex.
Hey, how are you, Jordan. So just a few questions here, or two questions. First, on the rent collections. You know as you guys look at your portfolio, especially now that you've been through two quarters of the COVID, what percent of the depressed collections are people just ghosting you like choosing voluntarily to not pay the rent versus people who literally have gone under? So I'm assuming on the retail side, there are probably a lot of tenants who will be either closed or just don't have literally the means to pay the rent, but they are still occupying the space trying to provide amenity and then there are probably a bunch of other tenants who have decided, hey, we don't need to pay, we will just keep occupying and we'll settle up with the house whenever the moratoriums are lifted. I'm trying to understand from a rent collection what the snap back would be once the eviction moratoriums end?
You probably got it pretty good. So, first of all, I would say, if you go back and we believe that means numbers will hold for this recession. If you go back to the last recession, which was in 2008, our actual default loss was ran around 2%, okay. If you look at what's going on right now, and you look at the collections that were missing from our office tenants, we have a very strong feeling that we'll be able to collect that money - most of that money, but we'll see, it's very hard to see through the fact that the moratoriums, and you can tell people just have a horrible attitude towards units like stop bothering [ph] me I told I don't have to pay and their I'm just planning not to pay. All right, so we're definitely getting that.
On the retail side, especially small retail not large retail, it's pretty easy to see what's going on with them, and so - and they represent, as we've told you in the past about half of the money that we aren't collecting and you might take a guess at some portion of that we're going to make deals now, and that's where we're trying to make deals because most of that retail act as an amenity to our office, and retail is only 5% of our portfolio anyway, and there - we want to protect that protect that growth, right because we don't want to lose the amenity.
Okay. So on the office side, Jordan, it sounds like most of the people who aren't paying were just ghosting you, whereas on the retail side it's legit?
I don't know how much of retail sites legit, but I could tell you, if you look at our office buildings and our tenants, I'm - I suspect our collections would be dramatically higher if we do not have the moratoriums. I mean, I see the people that are not paying us [indiscernible]; some of them are managing more capital than - many of them are managing more capital than we are.
Okay. Second question is, Peter, on the effective rents, can you just give us a sense of the impacts of lower TIs for lower rent. But when you boil it down on an effective rent basis, where do you stand for third quarter leasing versus prior quarter. So our net effective debt improved a little bit a lot the same, just trying to get a comparison for the net effective now with the new lease economics versus prior periods?
We were talking about - Peter can answer, but I can just tell you quickly, we were talking about that looking at it, and I think, our net effectives are still as strong as they were like pre-pandemic, we'll call it. So if you look at the net effectives before any pandemic, end of last year or whatever, we're hitting those numbers because of the big drop off from the - on the TI side.
Okay. Thank you, Jordan.
Thank you. Next question is from Jamie Feldman with Bank of America. Please go ahead.
Great, thanks. So, I guess, as you talked about how you think occupancy continues to slip, so you see - and so you see leasing volumes pick up. Where are tenants going? Obviously, that implies that you're just going to continue to see move-outs. What are you hearing from people that are moving out and why?
Jamie, I think, what we're seeing is kind of a normal course of business from our retention - from a retention standpoint. So we've had a drop off in the volume of new business that we're doing relative to what we're used to, and we kind of just have our normal course of move-out. So we're not seeing any trends, like we said we're not seeing trends of, hey, I want to go work from home or anything like that. We're just seeing the normal level of move-outs that we would normally see, and we're seeing less backfill on the new side that we usually rely on to hold on the occupancy and grow occupancy.
Okay. And then, if you read some of the press reports or the broker reports, there is definitely different pockets on the West side that seem to have larger spikes in sublease, can you just talk about across the different markets where you think things are maybe better or worse in L.A.?
Yes. We've seen those reports - definitely sublease space, if you read those reports is picking up. But from everything we're reading through that's largely concentrated in the larger spaces. So it doesn't tend to impact the smaller tenants that we service. There are some - we have seen some product to market space in Santa Monica and Century City taking up a little bit but again those are concentrated in a very large tenant spaces.
Are you seeing any of those get broken up though to become more competitive with smaller?
No, I mean they tend we're nearing you know four floors, multiple floors come back, stuff like that in bigger spaces, but I don't think people are proactively breaking up space. I mean, that tends to be something that we do that most of our competitors do not is breakup larger spaces into office [ph].
I think some of that space is also in buildings that would not be very breakable.
Okay. And if I could just ask a follow-up to one of the earlier questions, like what would you say your current mark-to-market is in terms of portfolio rents to market rents?
It's about 6%
Below? Portfolio is 6% below?
Yes. We have a 6% mark-to-market. Yes.
Okay, all right. Thank you.
Thank you. Next question comes from Frank Lee of BMO. Please go ahead.
Hey, good morning, everyone. Jordan, you mentioned in the past that 1132 Bishop conversion was going to cause some disruption in the market and possibly create some tightness from the office vacancy standpoint. Just wondering how you think that is playing out or is there anything else to read into at least percentage being done in Honolulu during the quarter?
Well, I don't know about these percent reduction, but I could tell you the 1132 Bishop plan that we been going through in terms of occupancy and downtown Honolulu has worked spectacularly. I mean, maybe one of the few best ideas that's come out of this company quite frankly. I mean it completely changed the market metrics in terms of office leasing in that downtown market, but even more importantly it's starting something - I mean, we are - obviously we're in front of the City Council law, we're talking to them about what we're doing, and it's starting to change the face and feel of downtown because of not just that project that work there, but other work we're doing around that building and now what's happening more in the center of town.
So it's been just spectacularly successful, and both on the upside and I mean boy we brought out almost 100 units, and at least, all of them within a quarter. That was, I have to almost say, unexpected. It moved so fast. So our feel for demand or feel for rental rate all extremely well confirmed. Our feel for the impact on downtown extremely well confirmed. There is a little bit of movement from tenants moving in and out in that market, but still the occupancy is high and the pressure on rental rates is good.
Yes. We still need to move out from 1132 to way more office tenancy that we have availability in our remaining buildings. So you are going to see some timing noise quarter to quarter, but there is been a good affair [ph].
Okay. And then second question, have you noted some incremental increase in office utilization rates from last quarter? Do you have a sense of what percentage of your tenant base are back in office now and where we can see that increased as we close out the year?
Well, we think - I would tell you, we think it's around 30% to 40% is the utilization numbers, but it's 40% and on/off and whatever. But more importantly, and I mean I particularly see, and I think we all see it is that while offices are not maybe formally opened and all showing after 8:30 or 9 and maybe we're seeing at all different times people coming into the office including weekends and all the rest of it. So if you were to say or maybe do a consensus count at a specific time in the week and see where we stand, you're going to come with a 30% to 40% number. But if you said to me across our portfolio of office tenants, how many of our tenants have some people coming in at different times, it seems like we - at one point, we're able to turn one elevator off. We have floors where we've been - being addressed. I mean, now we have people who are also in the buildings.
Okay, great. Thank you.
Thank you. Next question comes from Manny Korchman of Citi. Please go ahead.
Hey, it's Michael Bilerman here with Manny. Jordan, I was wondering if you can talk a little bit about sort of your eagerness for external growth and look I - and recognize that your stock price doesn't allow, you can sort of go raise capital today to make those deals accretive. But can you talk a little bit about sort of how private landlords are sort of dealing with the struggles that you have as a large organization, a public company, you can weather the storm pretty well, but I got to assume a lot of your private landlords that may have leverage, may have rent collection issues, may have CapEx issues, may have a larger desire to flip those assets into an entity like yours and you've done OP Unit deals before, the difficulty is your stocks is at $25, $26. And I think you believe the NAV they held a lot higher. So is there some way to structure transactions for - where one is greater than two, or is that just not really a focus of yours today?
We are working, I can't tell you how hard. So the foundation of what you're asking is do we still believe in the market so much that we want to continue to grow in the market. And the answer is absolutely, yes. And we're doing everything we can to acquire assets. And believe me, every trick, every figure out a way for - obviously, I don't want to - I don't want to do an OP Unit deal, I'm selling my building for $500 a foot, and I'm buying this for $1,000 a foot. But we are working on that on every front that we can.
Now, I will tell you, if we're successful that the market, and as would be the case for you or anybody else, right, if you own a building in this market and you've weathered a lot of recessions, you know about the sort of long-term strength of the market and you're not going to sit there and do a deal on the recession that you feel has what I'll quote on recessionary pricing. But even if we can just break these people lose at the normal good pricing, we would do it. And we are working on it, but it's even slower now than usual. But yes, we're doing our best. I don't think we have the stock being down; it hasn't been that big of a problem. People with OP Unit deals they understand that and we have plenty of other ways to access capital. But we're working on it the best we can.
Certainly, there are some other families that could be wearing out, but they also have been involved and by living through many recession. And especially this one where they feel like, wow, why would I take any kind of discount or anything at a time when - I'm pretty sure next year we're going to be back to where we were in 2019. And so, which is fine. I'm not going to take those assumptions, if we can get them to make deals. So we're doing our best.
I guess if you take those two comments, one just your enthusiasm for staying invested in the market, but then also potentially sellers wanting to hold on because they sort of view the other side positively. Why aren't you using some capital more aggressively to buy into your portfolio? Would you know extraordinarily well and you know on the screen where trades on a per foot and a yield basis?
We are just saying why aren't you buying back stock. And I would say this; I don't believe the way you're kind of implying. It's that simple of a decision for a company to buy back its own stock. It has a lot of other ramifications, what your debt levels are. And frankly, when you buy back stock. If I was to buy back stock at 25 and it went to 20, would you say I was a smart guy at 25, probably, not right? So it puts me in the business. And I'm not saying, I'm against buying back stock. By the way, but it puts me in a business in your guys' business right, not making a decision about the stock price and where it's moving around as opposed to decision about real estate where I have a lot more confidence. I'm not against buying back stock, I brought, personally I've been buying the stock, but it's a very different decision for the company, than it is for me personally and so, I mean I'm slow and careful to make that decision. And I'm not necessarily against that either.
Right I guess, the difficulty is if you do find an acquisition, the story about it right, if you're not going to be paying $500 a foot, right? You're not going to be paying where your stock is trading. It's going to be something higher, right, where you said, I want to get good pricing not pre-recession pricing, it's going to be able to demonstrate the value of that acquisition to the Street relative to purchasing your own portfolio. So, I think that their capital allocation decisions are linked together.
I don't think that linked just tightly as you're saying but I mean that would be a longer conversation. I mean, I would always add good quality real estate in the markets where we're focused, which I think we get great long-term gains on and I think it's a - you would have to have tremendous extraordinary confidence to trade within your stock against where not - where my real estate is going, but where the stock markets going.
Right.
And the stock market trades. You know it remarks [ph] to its own drum, not the drum of a real estate market which I have a lot more confidence around directionally in supply demand characteristics and industry is driving demand and all the rest of that.
Just last one, I assume joint venture capital is one of the areas in your quiver that you can use. Can you talk a little bit about their desire to partner with you, do they need to buy office assets?
They have a high desire to partner to buy office assets and it's killing me that we're not able to provide them with more product. I want to provide them with more product. We're trying to provide them with more product and when you hear me discussing the - you're saying, I know you're trying to buy assets believing in our conversations with them, we're staying that double. I mean, we're going to get it. We are doing our best. We're trying to shake anything which we can.
And I think it's great that you're buying stock. Personally, I don't want to make it seem as though that's not a good thing. That's certainly demonstrating your obviously focus - you obviously owning a lot of the stock already. So it was just much more talking about sort of capital allocation at the firm level. So thank you and have a great afternoon.
Thanks, you too.
Thank you. Next question; Steve Sakwa of Evercore ISI. Please go ahead.
Hi. I guess two quick questions. I noticed the income at multifamily was down, the other income, I guess and Peter talked about the insurance payment. I'm just curious sort of what happened there and if it's just a timing issue. Was there a reason that wasn't booked in the quarter? And I guess what are you expecting for fourth quarter? Is there kind of a catch-up payment? We will get too or how does that sort of work going forward?
Yes, it's Peter, insurance is always unpredictable, things moves a little slower than we would have liked, and we hope it moves fast and we catch up but it's too early to tell.
So we should not expect any additional payments or this was just a kind of an off-quarter?
No. We are going to recover this, it's just a question of what, when and this quarter and as you know, do we double up this quarter. We do we end up with one quarter's worth. Yes. So...
You realize we can't book at until we get it.
Yes.
So we know each quarter monies owed to us. But then you have a bigger negotiation with insurance coming by getting checked out of them. So.
Right.
And the checks become way to go [ph]. This is for your work on the units, not for the rent, you're still arguing about how much rent they owed you. So it's not such an - I mean it just comes in and I don't think a bad way. But in a way that wouldn't be smooth to match it perfectly with the quarters of incumbents, you go to, because you can't book it, until you get it. Yes, so it's coming, it's just a question of when.
Got it, okay. And then I was a little surprised that your office expenses were up. They were a lot higher than what we were assuming. And I know there's some seasonality in the business on expenses, but given still the low utilization rates of the buildings. Any thoughts on maybe what expenses due in the fourth quarter and maybe in the first half of next year? I just - I guess I would have thought they would have been a little bit lower.
Well, so I mean, to start with just the seasonality, we typically get about 30% of our utility cost in the third quarter, it's the summer months, right. So you got July, August, September, people are running air conditioning and asset utilization rates that we've been talking about in 30% to 40%. You can't run the air conditioning, just for one person, you're running for the entire suite. So that kind of pushes us. The numbers are down versus the prior year. So, we're still saving money versus prior year on utilities as far as the fourth quarter goes. Yes, I mean, typically we see utilities come back down, but we have, we have other things, we've got some political spending. I would expect to see about $0.02 impact or so that in Q4. We also had in those expenses an increase in our insurance premiums and we only had two months' worth in the quarter. So, we'll get the full impact of that in the fourth quarter. So, we're going to see some offsets there on expenses in the fourth quarter.
Okay, thanks.
Thank you. The next question is from Nick Yulico of Scotiabank. Please go ahead.
Thanks. So just first question is on the write-off, the $0.08. I just wanted to be clear, if that was - that's a new receivable write-off in the quarter and what drove that happening third quarter versus the second quarter, how we should think about going forward the chance that there would be additional write-off on the office side?
Yes. So what we did is, what we gave you with the $0.08 is the comparison to last year and what we're really focused on there is - I said it earlier in the call that there is very little in terms of new write-offs of new tenants. So, and most of that is just the impact of continued non-collection against the people that we wrote off last quarter.
Okay, that's helpful, thanks. My second question is just about your portfolio and I guess any lessons you're learning or hearing from tenants as they are doing renewals or contemplating changing their space now in a COVID world going forward, I mean what you're kind of learning about your buildings and whether, do you think they are well set up and well positioned for the office environment that could change now post COVID?
I have to say, I mean one of the things that's - lot of us concerned. Obviously, we listen other people's calls and we hear occupancies of 15% and lesser numbers. And one of the reasons I think we're at such high numbers is that in general, not the very large tenant, giant floor plates. But in general, our tenants across our portfolio. And I think, actually, most of the Westside since it's a small tenant market, they're already built out like 225 feet per person. So, I don't think there is a lot of GI or rebuilding meaning to go on and you're seeing it in our renewals, they're not coming in saying, I need to renew and I need to rebuild my space, I think people's space has been pretty much built for little bit of a more relaxed environment and it already accommodates the 6 feet or 8 feet or whatever you want to go to you in terms of occupancy.
So I mean, I think frankly if I was guessing, the occupancy would be even higher, if we were in markets where they were saying, people could go back into work in the office and even without that, they seemed to be coming in.
Okay, thanks it's helpful. Just last question is on Prop 15. What have you guys spent - some of you guys are spending money to fight this, what have you spent? Have you already incurred any charges to FFO? Is there another charge to come in the fourth quarter? And then I guess the other question is, are you guys still, I mean suited [ph], let's say there is a scenario where this does pass. So you guys still going to take the approach of not giving an estimate on what your tax liability would be fixed assets?
So, all right; all is answerable. So the question what we spent which Peter said in the last call, it's probably about $0.02 on that and some other political stuff in the fourth quarter and maybe like a little less than $0.01 in the third quarter. In terms of not giving an estimate, it's not that there is a number we know, and we are keeping it close-in because we don't want to make it out. We really don't think even when people do give estimates, there is any way to give any kind of estimate. I don't think functionally it's operational. I don't think they are functionally would be able to do it at the past. So to start out with how many - for how many years is it going to be before someone figures out some way to do this or does someone come up and say, hey, this just doesn't work and as another proposition or something like that, that's number one.
And then, number two is, across all these properties telling me where you're going to end up in a board of - board of three judges figuring out a new value for it, when there hasn't been any market transaction related to that property, there's huge swings in that process all the time. Right now, even without all the properties, we need to be reappraised. So I just don't think it's reasonable to make any kind of an estimate. It's not that we have a secret estimate, we're not giving it out.
Okay. Thanks, Jordan.
Thank you. Next question comes from Rich Anderson, SMBC. Please go ahead.
Thanks. Good morning. So on the issue of moratoriums, I guess, it's true that there is no credit impact if they take advantage of it regardless of their circumstances, but is there a kind of a credit black market where you know their reputation would proceed them among the landlords in the area. Is that a real dynamic that could happen to folks that are sort of playing this card?
You can only hope, right. I mean, there is not going to be any great way to know until we end recovery and to see to what degree landlords start to saying to people, yes, I got it, you're saying your credit, but we saw the way you acted and therefore we're going to require whatever it is, a bigger LC, a bigger this, a bigger that. You will see the market reconcile that, you'll probably see some reaction from long-term owners may be short-term owners you'll see less of a reaction. That's always been the case. I would say for Douglas Emmett, we've always been such a hawk on credit anyway that it is unfortunate that it more speaks to the morality of these people than anything that they are choosing not to pay.
But I do think in the end, they'll end up paying because confidence in the way we evaluate credit and when I look at the tenant base. So, I'm not sure how - whether there is a shadow mark on their credit profile or not, we'll see what happens.
Okay. And then your commentary about work from home, not being kind of a factor in your tenant's decisions. And I guess you're seeing that in the numbers just by the way the cadence of your renewals and all that sort of stuff seems kind of normal. But are you asking the question, I mean are you - I mean you got all these tenants that are - that can provide you a lot of information about just mindset or centered around work from home and how it might change? I know all your peers are kind of saying the same thing and I happen to agree that work from home will perhaps be the exception not the rule, but maybe an option here or there, but not as big as the motions at the moment are suggesting. I'm wondering if you're really asking the question to sort of form a really informed opinion about it.
So we track when we lose a tenant out of our portfolio, and we also track new tenants that we chase and don't get. Okay. And what you saw in the prepared remarks was we're - nothing of what we're seeing as any kind of trend of work from home is playing a factor in that, okay. Obviously new tenants; I mean they are saying, we're looking the lease space, we're trying to get mono portfolio and we don't get them, they went somewhere else, right. And on the renewals, I mean, you said it yourself. There is a lot of levels of work from home. Our people are going to just take - I don't think many people are so extreme to go, office market is going away if everyone is going to work from home, but you see stuff as well. We will be a little less because there is some kind of - some percent of people work from home or some percent of people do this thing of sharing office for hot seating.
And I have to tell you, the only mechanical thing that makes sense when you address work from home at least in our markets would be for tenants because we're not hearing anybody say you know I'm going to have a group of people working for me that are never going to come in the office. So mechanically, the only thing that makes sense is there is going to be a complete conversion of people that are going. We've really embraced hot seating, even when it comes to offices, which is that, you know, Kevin, you are in Monday and Tuesday; Peter, you are in Wednesday and Thursday and Stuart have added on Friday, okay. So and everything we're hearing is the opposite. I mean like everything, like people don't like sharing space, they want their own space and people want them in the office, the entire week. And certainly COVID doesn't encourage people towards a hot seating type of environment.
So, when you look at the mechanics of - for some percent reducing the amount of office demand, just speaking for our markets, there are mechanics that nobody likes. I mean nobody. So I don't know how work from home scenario would have more - would be particularly impactful. In fact, I think it might be the reverse a little bit of people appreciating the space being back in their office, wanting to be back in the office, when they feel like they could come back, and I think you will have, people looking forward to getting back to that routine is going to work. I think a lot of people miss it.
And I don't want to be the one - because I don't want to be the one to lights all the seat after Stuart has been sitting in any way. So...
Absolutely, but also you don't want to be the one that gets told, hey, everyone is coming back except for you. I mean I actually people take that poorly.
Yes. All right, I agree. Thanks very much.
Thank you. The next question is from Craig Mailman, KeyBanc Capital. Please go ahead.
You guys were very successful at keeping CapEx down the renewals this quarter and you kind of mentioned that that on a net effective basis, you're still kind of positive here. I'm just curious as new leasing kind of revs back up here and the market may be getting used to kind of lower face rents, I mean what's your prediction or expectation on your ability to maintain positive net effectives even in kind of a negative phase rate environment.
I think that - I mean, I think that all depends on how long, how many quarters we go with a negative number and how well we're able to hold our own in terms of occupancy. If we - if the world start, if we go through fourth quarter or first quarter next year and then things got backing - improving again and people sort of come out and start focusing on growth. I think we should be able to do pretty well. I mean if this thing becomes all of 2021 experience, then I don't know how any markets hold their own against it, it's going to be very tough. But I'm optimistic that, especially considering the performance of the company, particularly operations, leasing, property management, the way it's operated, and second quarter, third quarter, I see going on right now that we certainly can hold our own well for the next couple of quarters and be very well positioned to come out of it with a lot of strength and that's what I'm hoping
That's helpful. And then maybe taking the other side of Prop 13, assuming maybe it doesn't past today, do you think this issue ever dies or does it just come back in the new iteration at the mid-terms and maybe next presidential election. And the market ever - will California kind of shake this overhang?
Yes, I think you can. Yes, I think advocates beating then I think that it will not be something that you see again and again. But I hate to make a prediction about and who knows, there is certainly a trend towards taxation, but at the moment it's so heavily discussed it might be an overstated trend. We actually have to see what happens. I think people are even more on guard than what the reality will be, but I don't know
Okay. And then, just one other quick one.
And then, California - California was in a very - before the pandemic, California was in a very strong cash positive position in terms of taxation, like we were adding money to savings. I think we were at like $25 billion plus in terms of taxes versus the expenses. So we're not a state that we need to recover from what we've spent on the pandemic, but we're not a state that has a permanent negative - It's a permanent negative or deficit spending situation where the federal government is.
Understood. And then, just one quick one. Peter, did you say the $0.02 of political spending was in operating expenses or G&A?
I expect that to run through operating expenses in the fourth quarter, yes.
Okay. So margins should get better once all this spending in the election goes away.
We would hope so. We would hope so.
All right, thanks.
Thank you. Next question comes from Venkat Kommineni, Mizuho. Please go ahead.
Hi, good morning. On the eviction moratoriums, is there any update in terms of carving out exclusions for office tenants in Santa Monica and Beverly Hills? And it seems like commercial tenants in Santa Monica are now required to pay 50% of rent owed - sorry, 50% rend due during 4Q, if that applies, do you think that leads to an incremental improvement in rent collection in 4Q?
Well, Santa Monica - look our collections in Santa Monica is very good. Santa Monica frankly is our ready carved out most office. Beverly Hills is a place where we have our largest problems because they have included all office and of course, so has - functionally so has L.A. And then our collections are good again in Hawaii, which has much less of the moratorium. So I don't know about the 50%, I think you might be talking about residential, but that in terms of the office collections, we don't need any improvement in Santa Monica, they're already - they're still little bit covered, but basically what's covered now in Santa Monica is retail.
Okay, that's helpful. And in the multifamily segment, it looks like Santa Monica seems to be outperforming LA in terms of occupancy and rental rate. Any color you can provide there?
I talked a little bit about it on the call. I mean, we're having some university closures and some military deployment issues in Hawaii. So, those are in fact those are impacting kind of the properties that we have closer to UCLA and obviously the Hawaii stuff more.
Okay, thank you.
Thank you. Next question comes from Bill Crow of Raymond James. Please go ahead.
Hey, good morning. Jordan, I want to get back into the political question and ask if - by looking at prop 15 and work from home, we're not miss in the bigger picture, which is higher state income tax is potentially well tax may be an exit tax, you've been outspoken on these things in the past. I'm just - the number of headlines indicating move-outs from California is picking up speed. I just - could you give us a picture of the environment out there and the challenges that may pose?
Well, I'd - I think the - I know there was talk about a wealth tax and we're not even going to let people leave. We're going to track that well. I mean I saw some of that. I think that talk was bigger than the walk. In terms of people exiting or leaving, I think there is more anecdotal people that are leaving out of frustration, maybe making more noise about it than people - than people that are coming and working. I - I just have a hard time believing economy as large as ours, but still has pretty strong population growth is going well. Everybody's frustrated by the tax situation. But I also think that the state is focused on business recovering and getting back to me and will employ people. And so, while I know there's been a lot of conversation about additional taxes and focus on taxes, I also think that - that in every area, people are focused on creating a better environment for jobs and employment recovery.
So that's why I just don't think it's so obvious, what's going to happen in the next year or so following as the pandemic really is relieved and following the election. I just don't think it's that obvious.
Okay, I appreciate that. And then my follow up is focused on the multifamily portfolio. You kind of give us an estimate of what percentage of your tenant base is in the kind of restaurant retail hospitality or any other been particularly hard hit?
About 5% of our tenants are retail.
Bill, I think you're asking of our multifamily tenant, how many of that...
Correct, correct.
In the industries; I don't know that we have a good - I don't know we have a good feel for that. My guess is that the rent levels we're talking about in Santa Monica and West LA that we're not - most of our tenants are not in the service industry.
No. No, they're not. If you're saying like working in Starbucks and stuff, I'd say we have very little of that.
Yes, okay. That's it. Thank you.
Thank you. Next, we have a follow-up question from Jamie Feldman of Bank of America. Please go ahead.
Thank you. I think you guys said, your rent collections are improving and then you provided rent collection data that's 2Q and 3Q combined, if I heard that right. Do you have a breakout for 2Q versus 3Q versus even October?
Jamie, it's Peter. We actually combine them because you did a lot of noise based on - I mean when you collect the cash and putting it against the old balance, April balance, the July balance, the September balance so on and rather than do that and then try to explain why one month looks like this in another month looks like that we think the best picture is just to do the average since the pandemic started. And you can see that if the average as a whole is slightly better than actually it gives a sense that we're trending better.
We did give you that we're collecting more cash, but it does get applied backwards and so if you get beyond just did you collect more cash, it gets very complicated.
Okay. So, I guess to pull it all down, how much better is it like, can you say basis point wise or gut feel which has improved?
Yes, Jamie, it's Peter. We probably collected about $6 million more cash this quarter than we did - did the previous quarter. So it's moving in the right direction, but obviously there's a lot of work to do.
Okay, all right. Thank you.
Thank you. [Operator Instructions] Next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Just a quick one from me. Can you talk about any interesting trends you're seeing in your valley markets? Are you seeing any incremental demand from companies that may want to have a location in less of an urban environment or kind of less density, is utilization any higher in the valley than what you're seeing on the Westside? And I guess just generally, how do you - how do you see those submarkets faring throughout the pandemic and the recovery relative to the Westside?
I don't think we've seen big differences, quite frankly. I mean there are maybe a few, but not many anymore larger tenants in our Valley portfolios than there are in the Westside portfolio, which is overwhelmingly small tenants. But, when you say utilization and kind of responses to the pandemic in terms of kind of the market, I don't think there is a big difference.
This concludes our question-and-answer session. Now, I'll turn the conference back over to Mr. Jordan Kaplan for closing remarks. Please go ahead.
All right. Well, thank you all for joining us this quarter, and we will speak to you again in three months.
This concludes the conference. Thank you for attending today's presentation. You may now disconnect.