[Rather than Beatrix, Eustace is watching how Iris is behaving around the woman, noting how she really seems to be enjoying her company. He won't tell Beatrix this, but it's similar how she behaves around him, so yes, she definitely can tell that they're both softies at heart. He can also hazard a guess that Iris also wants to make Beatrix happy, so Beatrix will just have to suffer the puppy cuddles as he's going to make no move to help her.

In fact—]

Oh? You seem to be doing well so far.

[—just going to make things "worse."]

And you have plenty of time here. I was in a similar position as yourself, and now...

[Well. Even he never would have dreamed of himself taking care of all these dogs and building a dog park.]