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Douglas Emmett (DEI) Q2 2021 Earnings Call Transcript

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DEI earnings call for the period ending June 30, 2021.

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Douglas Emmett (DEI -3.68%)
Q2 2021 Earnings Call
Aug 04, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, everyone, and welcome to the Douglas Emmett's second-quarter 2021 earnings conference call. [Operator instructions] Please note that this event is being recorded. I would now like to turn the conference over to Stuart McElhinney. Please go ahead, sir.

Stuart McElhinney -- Vice President, Investor Relations

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.

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Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings which can be found in the investor relations section of our website. [Operator instructions].

I will now turn the call over to Jordan.

Jordan Kaplan -- President and Chief Executive Officer

Good morning, everyone. Thank you for joining us. During the second quarter, we signed a record 253 office leases, covering an all-time high of 1.3 million square feet. That included our second highest quarter of new leasing since becoming a public company and a substantial increase in the average tenant size.

As expected, even record leasing was not enough to completely offset our abnormally high-lease expirations during the quarter, so we still had a slight decline in our lease rate. In addition, it takes time for new tenants to move in our leased-to-occupied spread is at its highest point in many years. Happily, we are once again recording straight-line rent roll-up and are continuing to see substantial savings in our retenanting costs. While our leasing pipeline remains healthy, we still face headwinds from our local government's response to the pandemic.

Los Angeles has extended its lease enforcement moratorium until September 30th and has returned to a mask mandate despite our submarkets vaccination rate of approximately 80% for people over 16 and over 65% for teens. Even with the moratorium extension, we have made additional progress collecting past due balances still without giving any meaningful rent forgiveness. Our aggregate rent collections for the five quarters affected by the pandemic is now 95%, including 96% of our residential rent, 96% of our office rent, and 63% of our retail rent. The next few quarters may be choppy depending on the course of the pandemic and the timing of the expiration of the moratoriums.

As I have said, we expect to collect much of our remaining unpaid rent once the moratoriums expire, although those collections will be spread over a number of quarters. In addition, some tenants who have not been paying rent during the moratoriums will move out once we can enforce their leases, though we do not expect the impact on our occupancy to be meaningful. Once the turbulence moves out, I'm excited about our future. We are emerging from this downturn as a stronger and more efficient company.

For example, I am confident that our new seamless leasing platform, as well as the diversity and strength of our markets resulted in this quarter's record leasing volume. I'll now turn the call over to Kevin, who will give you an update on our development efforts and recent balance sheet activity. Kevin?

Kevin Crummy -- Chief Investment Officer

Thanks, Jordan, and good morning, everyone. Our two multifamily development projects continue to progress nicely. We have leased all of the 174 apartments we completed at 1132 Bishop. Our 493 units downtown Honolulu office to residential conversion.

Our Brentwood apartment tower is ahead of schedule as we now expect to deliver our first units in fourth-quarter 2021. We plan to begin pre-leasing units in the coming months. During the quarter, we closed a new secured nonrecourse $300 million interest-only term loan that matures in May 2028. The loan bears interest of LIBOR plus 140, which we have effectively fixed at 2.21% until June 2026.

The loan is secured by three previously unencumbered office properties. We used $175 million of the proceeds to pay off our revolving credit facility balance. This new loan lowered our weighted average fixed interest rate to only 2.94%. We still have no debt maturities before 2023, and 46% of our office portfolio remains unencumbered.

Given the current attractive interest rates, we continue to pursue opportunities to lower our average rate and further ladder out our debt maturities. As I've discussed in prior quarters, although property sales in our markets remain slow, we have ample liquidity for acquisitions as they become available. I will now turn the call over to Stuart.

Stuart McElhinney -- Vice President, Investor Relations

Thanks, Kevin. Good morning, everyone. In Q2, we signed 253 office leases covering a record 1.3 million square feet. We signed 451,000 square feet of new leases and 846,000 square feet of renewal leases.

Our leasing recovery was initially led by smaller tenants, but in the second quarter, we saw progress with medium and large tenants. Indeed, the average lease signed in Q2 increased to 5,100 square feet, which is not only above the last few quarters but also exceeds our long-term average. As we wait for tenants to move in, our record leasing activity has increased the spread between our leased and occupied rate to 250 basis points. Our leasing spreads during the second quarter improved to positive 9.5% for straight line and negative 6.6% for cash.

Our net effective rents continue to benefit from lower leasing costs, which declined again in Q2 to their lowest level in almost a decade. At 99.4% leased, our multifamily portfolio is essentially full, with rents now increasing across all of our residential submarkets. With that, I'll turn the call over to Peter to discuss our results.

Peter Seymour -- Chief Financial Officer

Thanks, Stuart. Good morning, everyone. Turning to our results. Compared to the second quarter of 2020, FFO increased 14.3% to $0.47 per share.

AFFO declined 3.3% to $77.9 million, and same-property cash NOI increased by 0.7%. Compared to the first quarter of 2021, FFO per share increased by $0.03, primarily due to better rent collections and about $0.01 per share of higher business interruption insurance recoveries. It's worth noting that only 1.2% of our revenue came from noncash, straight-line rent, and above and below market lease adjustments. The decline in AFFO this quarter was due to higher TIs and leasing commissions, driven by the strong leasing volume in the last couple of quarters.

And with only 4.2% of revenues, our G&A for the second quarter remains well below that of our benchmark group. Turning to guidance. We expect third-quarter FFO per share to be between $0.44 and $0.46. This reflects the usual higher seasonal utility expenses, as well as additional interest expense from our new loan, lower office occupancy, and lower business interruption insurance recoveries.

We are not comfortable giving guidance for the fourth quarter as our results will depend on the course of the pandemic and the timing and immediate impact of the expiration of the moratoriums. As usual, this guidance does not assume the impact of future acquisitions, dispositions, financings, or property damage recoveries. I will now turn the call over to the operator so we can take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions]. Our first question today will come from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Ardie Kamran -- KeyBanc Capital Markets -- Analyst

This is Ardie Kamran on for Craig. I appreciate the color on the rent collections. But can you guys give an update on the cash rents outstanding on kind of a nominal dollar basis? I know last quarter, you mentioned it was closer to the 60 to 70 million range. But where does that kind of stand today? And as you guys continue to make deals with tenants, can you talk about what these deals look like in terms of timing and term of repayment?

Jordan Kaplan -- President and Chief Executive Officer

Yes. So well, depending on where you are in the month because that number rise a little bit, but if you go to the middle of the month, you're in the 50s, with the number moves, 50 to 60. Like you asked me how much cash like we snapped our fingers we would collect, if the moratoriums are off and everyone paid what they owed. The -- in terms of the deals that are being made, basically, people are making early deals to be able to extend their payments over more than three or six months, but four quarters, five quarters, six quarters whatever the case may be and they're also maybe extending leases or doing something else or putting interest on it.

Doing something to give us some benefit for being willing to do that.

Ardie Kamran -- KeyBanc Capital Markets -- Analyst

Great. Thanks. And just on the leasing front, you guys did a nice job in the second quarter. Can you comment on kind of how that momentum has continued into the third quarter, given some of the recent COVID-related rollbacks? And on the occupancy front, how should we think about occupancy? You guys mentioned the spread.

So it seems like you're going to get a little bit of a pickup in occupancy, but how should we kind of think about that through the remaining of the year? And how are you guys kind of underwriting the bottom in occupancy?

Jordan Kaplan -- President and Chief Executive Officer

Well, obviously, I started out my remarks talking about the leasing because I felt like over the last, I don't know, whatever it's been five quarters of the pandemic. People have been questioning the strength of the market, market coming back or tenants coming back or only small guys coming back or big guys coming back. Well, this -- if there was ever a question about the pulse of the market, I mean, the market's performing like an Olympic athlete, I mean I was really impressed. And that's aside from our platform and how well the platform is able to take advantage of that now.

So I'm really happy about that. In terms of moving forward, obviously, we've got some better quarters coming because we don't have as much move out in the next few quarters, and we're hopeful that we can turn things. What was your second question?

Ardie Kamran -- KeyBanc Capital Markets -- Analyst

Just kind of thinking about -- so you kind of mentioned the less move out, but like thinking about kind of how leasing has picked up in the last -- quarter to date, given how things have kind of rolled back. I mean have you noticed any sort of impact?

Jordan Kaplan -- President and Chief Executive Officer

Well, they'll be in -- yes, if COVID heats up again, I'm sure there's going to be an impact. But it's kind of interesting. And back to your question on collections, but that people are just sort of adjusting even to the moratorium being extended and whether the mass mandates back on, people want to get back so badly that as you've already heard, I mean, they're making deals. I think we've now made deals on something in the range of 25-plus percent of what was owed to us in the past, which is all in the face of more trying to be extended, though, I think people are realizing that the end is coming and they want to get back.

Ardie Kamran -- KeyBanc Capital Markets -- Analyst

Got it. And just last one for me. Can you guys talk about kind of the biggest pain points for tenants who have been leaving the portfolio? And as you guys are kind of thinking about the leverage you can pull between rents or occupancy and retention and lease term, kind of how you guys are thinking about that in your leasing process moving forward?

Jordan Kaplan -- President and Chief Executive Officer

Well, the difference between lease and occupied is almost totally a function of how much we do in the way of new deals. This was a huge new deal quarter. So when you do a ton of new deals, you're going to have a much bigger spread as compared to renewals between leased and occupied because they have to move in. We got the -- I'd like to leave some questions for some other people.

So let's keep moving. You've had a good list -- good run here. Let's move on from here. But thank you for asking all these questions.

Operator

And our next question will come from Elvis Rodriguez with Bank of America. Please go ahead.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Nice job on the leasing, and thanks for taking the questions. Jordan, are you able to share what your portfolio cash mark-to-market is today relative to where it's been in recent months?

Jordan Kaplan -- President and Chief Executive Officer

Yes.

Peter Seymour -- Chief Financial Officer

Yes, Elvis, so today, it's slightly positive. It's around 1% for the overall portfolio. That's stronger in our Honolulu and West Side submarkets, and softer in the Valley, as you might imagine. So still slightly positive.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Great. And then on your Brentwood apartment project, are you able to share where market rents are today versus your underwriting and your expectation for the lease-up of that project?

Jordan Kaplan -- President and Chief Executive Officer

Well, I wouldn't say -- I mean, we don't go into individual buildings. So I wouldn't say that. I would say, in general, the apartment portfolio is seeing real increases in rents, and you see that in the numbers that we present you with, the same-store numbers and you can see it in all kinds of studies about what's happening in residential market rents in all of our markets, both in LA and in Honolulu.

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Great. I'll leave some more questions for the others. Thanks.

Jordan Kaplan -- President and Chief Executive Officer

Thanks.

Operator

And our next question will come from Manny Korchman with Citi.

Unknown speaker

Hey, everyone. This is [Inaudible] on for Manny. Thanks for taking the question. My first one is just about the Macerich lease that appeared on your guys' largest tenant schedule.

I think that there's some space in the building that is currently out on sublease, but a little bit lower than what Macerich is currently paying. I was just wondering if you guys can talk about a potential rent roll down, as well as just your thoughts on whether that space is comparable to Macerich, just overall?

Jordan Kaplan -- President and Chief Executive Officer

I don't even know the sublease space you're talking about, and we don't talk about individual leases. Although, of course, just sort of the tide going out has caused the Macerich lease to show up on that schedule. If you go back a ways, it was on the schedule. And then as we leased up, it fell off the schedule.

Now it's come back on. But I don't have a lot of comments about the Macerich release in particular.

Unknown speaker

OK. Yes, that's fine. I guess, and then my second question is just about any differences that you guys saw from an industry perspective that came through in leasing activity this quarter just with it increasing so much?

Peter Seymour -- Chief Financial Officer

No. I think we still had great demand across our broad center industries, which is what we love so much about these markets is we do have such a diverse group here, and we did see that show up in Q2. No real trends to read through, although the one trend that was notable was the one I mentioned in my prepared remarks, which is we did see the average size increase significantly. So the larger tenants and the medium tenants for us were back transacting in Q2, which was great to see.

Unknown speaker

OK. Thanks. That's all for me.

Jordan Kaplan -- President and Chief Executive Officer

Thanks.

Operator

And our next question will come from Steve Sakwa with Evercore ISI. Please go ahead.

Steve Sakwa -- Evercore ISI -- Analyst

Hi. I guess it's still good morning out there. Jordan, I was just wondering if you could talk a little bit about the new leasing activity. I'm just curious were these tenants that were working from home and decided to take space now? Were these tenants that just had outgrown their old space and needed to move? Just trying to get a better sense for kind of the big surge in new activity and maybe how the footprint of the 450 compared to what they were in prior.

Jordan Kaplan -- President and Chief Executive Officer

Well, I can tell you that big tenants are coming back and they're grabbing space. And the size differentiation makes a difference. I will tell -- I myself was done by how much new leasing we did of over 400 -- I think it was 450,000 feet. That's wild.

I was so happy and impressed both that we were able to do that much. And I'll say again, I credit the platform for even be able to process 250 deals in the quarter and get them closed and reach out and getting all those tenants in, including some larger deals. But I also credit that the market is moving back in terms of wanting to get back in the space in a very aggressive way. Now will this continue, and I know there was another question about that because we seem to be going in the wrong way vis-a-vis the pandemic right now.

But the fact that the market has got that sort of pent-up growth or pent-up demand really made me extremely happy. The nature of the tenants was across all industries. Certainly, you saw more strength in the areas that we've always told you were strong. I mean, Hawaii has -- since we made our change, our Hawaii, it stayed strong and it's still strong.

And of course, West L.A. and a lot of activity along Ventura Boulevard in the valley. But all the way through, though, tenant size, industry all the cuts, all came in very well.

Steve Sakwa -- Evercore ISI -- Analyst

Great. Thanks. And then maybe secondly, I just wanted to follow up a little bit on the apartment question. We are seeing a pretty big rebound in many of the coastal markets.

You're obviously at full occupancy at 99.4%. So I'm not going to fill that up much more. But can you maybe just expand a little bit on the types of rent increases that you're kind of putting through to existing tenants in the current portfolio today? Or how are renewal discussions going with folks?

Peter Seymour -- Chief Financial Officer

Yes. I think we were super pleased to see great activity in the resi portfolio this quarter. Like you said, occupancy has remained strong. We're getting good roll ups.

You saw a 4% increase in revenues. Our average in-place rents are up. So good news across the board and activity remains strong.

Steve Sakwa -- Evercore ISI -- Analyst

Thanks. That's it for me.

Peter Seymour -- Chief Financial Officer

Thank you.

Operator

And our next question will come from Daniel Santos with Piper Sandler. Please go ahead.

Daniel Santos -- Piper Sandler -- Analyst

Hey, thanks for taking my questions. My first one is on the eviction moratorium extension? And whether or not you think that might impact deal flow going into the second half of the year? I'd say prior to this, all science pointed to a pretty busy second half. So I'm wondering if your view on that might have changed.

Jordan Kaplan -- President and Chief Executive Officer

Well, my first view is it was supposed to end June 30th. So that changed my view and they extended, I can tell you that. I think what's happening is the eviction moratorium is still certainly impacting us -- definitely impacting us from the perspective of collecting rent. I think we have some people, as I said before, that aren't paying and they'll move out.

I don't think there's enough of that, that will show up in any meaningful occupancy statistics, but it will like give us that space to lease, which we've been waiting to get back. I think it's -- I don't think it's per se what's gating the market as eviction moratoriums. I think what's gating the market is the just the whole COVID and going back to mask and then everyone wearing a mask even if they're vaccinated inside and all of that. That's more of the types of headwinds that push against us.

The eviction moratorium just impacts us vis-a-vis rent collection. As you may or may not realize, if someone signed something now during the pandemic, even during the moratorium, that's enforceable. So all the new leases, they're not -- they don't have eviction moratorium. It's only from leases prior to the pandemic.

Daniel Santos -- Piper Sandler -- Analyst

Got it. That's helpful. And then I was wondering if you could comment on activity up in the Valley. From our conversations with other management teams, it seems like the market is particularly strong.

Peter Seymour -- Chief Financial Officer

Yes. We had really good activity, as Jordan mentioned, on Ventura Boulevard and through the Valley. So that's always been a strong market for us. Sherman Oaks/Encino, we've kind of grouped that in with the core Westside markets.

And so great to see tenants coming back there and some larger deals in that market.

Daniel Santos -- Piper Sandler -- Analyst

Perfect. Thanks.

Jordan Kaplan -- President and Chief Executive Officer

Thanks.

Operator

And our next question will come from Rich Anderson with SMBC. Please go ahead.

Rich Anderson -- SMBC Nikko Securities -- Analyst

Thanks. Good morning. So do you guys -- I guess, I'll ask one question two ways. First of all, do you have a kind of a retention rate that you're working toward in the office space.

And more abstractly, when you're having conversations, are people changing their plans in any meaningful way about how much space they want to keep if their lease comes due? I'm just curious if you can speak kind of quantitatively and qualitatively about the leasing experience when you're renewing a lease.

Jordan Kaplan -- President and Chief Executive Officer

Sure. So in terms of the retention rates, I think what we've discovered over the last 30 years or whatever is that, even though we target higher retention, and I've actually seen Ken -- the retention rate seems to be extremely stuck at an average of 69%, between 69 and 70. And I've seen Ken go all out and try and move that number even like 2%. And it is just very hard.

Now it doesn't go down. I mean, that just seems to be the number. I don't know why all the forces hitting a quarter, but that seems to be not any particular quarter, but if you go over a series of quarters, you just keep landing around that number. So I think that, that's probably our target and what you should expect all at the same time.

What was your second question?

Rich Anderson -- SMBC Nikko Securities -- Analyst

So like when you're having -- doing a deal, do you consider a tenant retained if they go from 5,000 to 3,000 square feet? Or is your retention rate based on square feet or based on the actual just the tenant staying or leaving?

Jordan Kaplan -- President and Chief Executive Officer

So it would be 3,000 foot of retention instead of 5,000.

Rich Anderson -- SMBC Nikko Securities -- Analyst

OK. OK. So it's on a square-foot basis. So are you saying then that people are not readjusting downward much -- they are either making the decision --

Jordan Kaplan -- President and Chief Executive Officer

Yes. I think that -- I mean I know we've got a lot of questions trying to understand the psychology or the reasoning behind my tenants are leasing or not leasing or this or that. And I don't know that we could ever give it like a summary of that. I hear anecdotal stuff, but I'm really not anxious to give like one or two anecdotal stories and have everyone run away and go.

That's the reason people are now taking space again. So I think there's all types of reasons. But for the most part, I just think that the economy here is coming back and people want to come back into work.

Peter Seymour -- Chief Financial Officer

And, Rich, I talked, I think, a little bit about this on the last call. But as far as the way we're planning our space and our spec fleet program, which has been great for us and continues to generate outsized business on the new leasing front. That's in our kind of 2,000 square foot sweet spot in that range, 2,500 feet, where we do a ton of leasing. And we have not changed the way we're laying out that space.

It already provides good, call it, 225 feet a person, which we find still -- worked well for us for a long time and continues to work really well.

Rich Anderson -- SMBC Nikko Securities -- Analyst

OK. And then real quickly, on the 50 to 60 million rents that are still kind of outstanding, how much of that is in retail utilization? Or is that just office?

Jordan Kaplan -- President and Chief Executive Officer

There's -- so compared to our company, it's overweighted in retail.

Rich Anderson -- SMBC Nikko Securities -- Analyst

OK.

Jordan Kaplan -- President and Chief Executive Officer

Well, you have it -- I mean, right, we're telling you, 96% collection office, 96% collection resi, and 65% retail. So retail is representing too much of that number, more than it's fair share.

Rich Anderson -- SMBC Nikko Securities -- Analyst

I know I have a dumb question because you said that. But I guess my thought was when you said people might leave once the moratorium ends, are you kind of most worried about that in the retail part of the portfolio?

Jordan Kaplan -- President and Chief Executive Officer

I'm not most worried about that in any of the sections. I would say I don't expect a lot of that. Actually, the areas where -- and I'll say this again, anecdotally, I'm hearing that is in residential, not necessarily in retail or office. When I read the list of everyone, while more often in residential, I'll see something that says when the moratorium's over, this tenant is going to just move out and this is unlikely to be collectible.

I see that on the list.

Rich Anderson -- SMBC Nikko Securities -- Analyst

OK. Got it. Thanks very much. Appreciate it.

Operator

And our next question will come from Frank Lee with BMO.

Frank Lee -- BMO Capital Markets -- Analyst

Hi. Good morning, everyone. If we look at the average lease term on the leases signed in the quarter, it looks like the terms are over five years now versus 3.5 or so in the past couple of quarters. Do you get the sense that tenants are willing to commit to more term now that reopening plans are in motion? Or was there anything unusual in the quarter?

Peter Seymour -- Chief Financial Officer

Frank, I think mostly what that had to do with was the larger leases that we signed. So larger tenants tend to sign longer-term deals. And you saw that I mentioned the average lease size was way up this quarter, and that was really the driving factor to increase the average term of the leases that you saw.

Frank Lee -- BMO Capital Markets -- Analyst

OK. Thanks. And then you provided the remaining spend for the multifamily developments in the South this quarter. Just wondering if there are any changes to the total cost? Or are the construction costs still tracking within the initial budget range?

Jordan Kaplan -- President and Chief Executive Officer

I think that things are still tracking. We've got a lot of questions from people about what's our remaining spend. I know that at The Landmark project, we've increased our spend, but I don't think it's -- I mean, within 10%, for sure, because we're trying to move a little quicker. I don't know, nobody asked the question, nobody noticed that we had originally planned to start leasing next year.

We've accelerated things that hasn't been a cheap process, especially with the kind of supply chain crush. And so we've been willing to spend money to get open and be leasing this year. But beyond that, I feel pretty good about where we're coming in. I feel very good actually about where we're coming in on both projects.

Frank Lee -- BMO Capital Markets -- Analyst

OK, guys. Thank you.

Operator

And our next question will come from Bill Crow with Raymond James.

Bill Crow -- Raymond James -- Analyst

Yes. Thanks. Good morning. On the commercial leases signed during the quarter, have you seen any increase in the tenants relocating from downtown? And maybe any sense of how many of those new move-ins are coming from larger spaces?

Peter Seymour -- Chief Financial Officer

Well, I mean we certainly saw a lot of large tenant activity this quarter, which we hadn't seen kind of throughout the pandemic. We had been relying on very small tenants. I think our average tenant size a couple of quarters ago was only 3,100 feet, and it was up to 5,100 feet in Q2. So certainly, larger tenants showed up.

Your first comment about relocations from downtown. I don't know that we ever draw tenants from downtown. It's not something I ever hear from our leasing guy.

Jordan Kaplan -- President and Chief Executive Officer

Yes, I haven't -- I agree. I haven't seen us trade with downtown much.

Peter Seymour -- Chief Financial Officer

Yes. That's not a typical move. If you're on the Westside, if you live on the Westside and you're in submarkets, you've got a long commute downtown. So most folks tend to want to keep a short commute and they're somewhere in and around our submarkets and maybe they're moving between submarkets on the west side between buildings that we don't own and the buildings we do own.

But I don't -- it's almost like newsworthy to hear something going for -- especially newsworthy for someone to go from the Westside to downtown. But I don't think we trade often between those markets.

Frank Lee -- BMO Capital Markets -- Analyst

OK. And we are seeing that in other markets where as workers are working part time from home, a little bit of a shift in the location of office space. But, Jordan, how politically --

Peter Seymour -- Chief Financial Officer

I think, Bill, we may see that headed out to Warner Center. We've got guys that commute in from those areas into the Westside. And we've seen that in the past where people open satellite offices out toward Warner Center in the Valley, just to shorten the commute up that way. So that's something we're looking for.

Jordan Kaplan -- President and Chief Executive Officer

And I think that -- by the way, I know I've been reading that the same articles that you're talking about. And frankly, I think the Westside went through that sometime in the 80s or something when the traffic was so bad to get downtown that people just insisted on having their office space closer to their homes, and that's what really created the Westside.

Frank Lee -- BMO Capital Markets -- Analyst

Yes. Interesting. Jordan, how politically difficult is it going to be to actually evict residential tenants? I mean even though you have all the right to, once this moratorium ends, how tough is that going to be from a PR perspective?

Jordan Kaplan -- President and Chief Executive Officer

I don't think we're going to have very many tenants we're going to need to evict. I mean, first of all, only 4% is not paying. I think most of them are going to pay. I mean -- so you're talking about numbers that could be as small as single digits or 10, 20.

I mean it's not a lot. I mean I think --

Frank Lee -- BMO Capital Markets -- Analyst

Most of that's in rent controls spots. Is that fair?

Jordan Kaplan -- President and Chief Executive Officer

No, I don't think so. I mean, the ones I saw wasn't ranked 12 people with businesses and stuff, not rent control, actually renting pretty nice places that then something happen with their business or their -- or they played games and the games turned into the -- we don't even know if they're there anymore, but we can't get the space back.

Frank Lee -- BMO Capital Markets -- Analyst

Yes. All right. Appreciate the insights.

Jordan Kaplan -- President and Chief Executive Officer

All right.

Operator

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Jordan Kaplan for any closing remarks.

Jordan Kaplan -- President and Chief Executive Officer

Well, thank you all for joining us, and we will speak with you again next quarter.

Operator

[Operator signoff]

Duration: 40 minutes

Call participants:

Stuart McElhinney -- Vice President, Investor Relations

Jordan Kaplan -- President and Chief Executive Officer

Kevin Crummy -- Chief Investment Officer

Peter Seymour -- Chief Financial Officer

Ardie Kamran -- KeyBanc Capital Markets -- Analyst

Elvis Rodriguez -- Bank of America Merrill Lynch -- Analyst

Unknown speaker

Steve Sakwa -- Evercore ISI -- Analyst

Daniel Santos -- Piper Sandler -- Analyst

Rich Anderson -- SMBC Nikko Securities -- Analyst

Frank Lee -- BMO Capital Markets -- Analyst

Bill Crow -- Raymond James -- Analyst

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DEI
$15.46 (-3.68%) $0.59

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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