Douglas Emmett Inc (DEI) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen, thank you very much for standing by, and welcome to the Douglas Emmett, Incorporated Fourth Quarter 2006 Earnings Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the conference over to Mary Jensen, Vice President, Investor Relations for Douglas Emmet, Incorporated. Please go ahead ma'am.

Thank you operator. I'd like to thank everyone for joining us today. If you do not have a copy of the press release, you may access it on the company's website at www.douglasemmett.com. During the course of this call, management will be making forward-looking statements.

We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by 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 inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of these risks, please refer to the company's press release and current SEC filings.

The market data sources that are referenced in managements prepared remarks are -- CB Richard Ellis for the Honolulu and Los Angeles office market, Reese for the Los Angeles office market, MPF Research for the Los Angeles multi-family market, and Property and Portfolio Research for the Honolulu multi-family market.

I would like to introduce the members of management with us today who will be providing remarks. Mr. Jordan Kaplan, President and Chief Executive Officer and Mr. Bill Kamer, Chief Financial Officer. Also joining us today from management is Mr. Andres Gavinet, Executive Vice President of Finance.

With that, I would like to turn the call over to Jordan for his opening remarks. Please go ahead.

Good morning everyone, thank you for joining us today. I am going to give you a brief update on the economic conditions in our markets and the related property fundamentals, followed by an overview of our current operating performance. Bill Kamer will then review our property results in more detail, and of course, you will have a chance to ask questions.

The economic climate in Los Angeles and Hawaii remains strong. Employment activity in Los Angeles has continued to grow at a strong pace. During the fourth quarter, the overall unemployment rate for L.A. County declined to 4.2% from 4.8%.

A major factor in the improved employment picture was job growth in the professional, business services, and financial services sectors. Hawaii's unemployment rate is the lowest it has been in 17 years, dropping further in the fourth quarter to 2.3% from 2.6% at the end of the third quarter. Hawaii's unemployment rate is now about half the U.S. unemployment rate of 4.5%.

The Los Angeles County office market is performing well. At the end of 2006, office occupancy for all of Los Angeles County was 91.1%, up from 90.8% at the end of the third quarter of 2006. The average asking rents for office space in Los Angeles County rose to $29.28 per square foot at the end of the fourth quarter, which represents a 2.1% increase compared to the third quarter.

In the fourth quarter, fundamentals strengthened within the 10 sub-markets of Los Angeles and Honolulu where our office properties are located. Occupancies in those sub-markets increased to 93.8% as of December 31, 2006, compared to 93.3% at September 30, 2006. Office rental rates increased dramatically in our Los Angeles sub-markets in the fourth quarter. Average asking rents increased 6.7% to $34.44 per square foot compared to the previous quarter.

Occupancy in the Honolulu central business district rose to 92.7% from 92.4% at the end of the previous quarter. Average asking rental rates increased to approximately $32.04, which is a 1.5% increase over the previous quarter.

The spread between our average asking rents to our in-place rents within our Los Angeles office portfolio grew to 22.1% at the end of the fourth quarter, from 17.7% at the end of the third quarter. The spread between our average asking rents to our in-place rents within our Honolulu office portfolio grew to 9.6% in the fourth quarter, compared to 3.8% in the previous quarter.

As of December 31, 2006, our overall office portfolio is 94.3% leased, up from 93.7% at the end of the third quarter. On a cash basis, office rental growth was 8.1% based upon the comparison between initial rent in newly signed leases to the rent at lease expiration for the same premises.

On a straight-line basis comparing the average rent of newly signed leases to the average rent of expiring leases, we estimate that office rental growth was approximately 23% in the fourth quarter.

As I have noted our office portfolio performed particularly well during the fourth quarter. We are also pleased about our future prospects. We do not anticipate the increase in the supply that has typically accompanied such strong improvement in the occupancy and rental rates in the past.

The pipeline for new supply in our Los Angeles sub-markets actually decreased with the completion of a new 740,000 square foot building in our Century City sub-market, which is already largely leased.

As a result, excluding our Burbank sub-market, where we own one building that is currently 100% leased to a single tenant thorough 2019, only 936,000 square feet of new office supply is under construction or planned or proposed to be completed in our sub-markets through 2009.

If all of these potential new projects are completed by 2009, they would represent only a 69 basis point per anum increase in supply over the three-year period.

Now, moving on to multi-family, at the end of 2006 our overall multi-family portfolio occupancy was 99.2% leased, compared to 99% leased at September 30th. In West L.A., our average asking monthly rent per unit rose by 50 basis points to $2,417, which represents a 10.4% spread over our in place rents, excluding units in Santa Monica that were leased prior to the 1999 change in law that allows landlords to reset rents to market upon vacancy. In Honolulu, our average asking monthly rent per unit increased 2.5% in the fourth quarter to $1,575.

Finally, I would like to say a few words about acquisitions. We believe that we are in a few of the very best sub-markets in the country. We are continuing to focus on opportunities to acquire attractive office and multi-family assets in our sub-markets and in comparable Pacific coastal sub-markets where we can obtain significant market share.

The qualitative advantages of the supply-constraint sub-markets along the West Coast have not been fully appreciated by the capital markets in the past, and this pricing mis-match has resulted in attractive acquisition opportunities.

However, in the last several months, most notably in the past month, the capital markets appear to have gained a better understanding of these premium sub-markets, which is apparently being reflected in a significant new spike in pricing.

Cap rates for the highest quality office projects in our sub-markets appear to have fallen an additional 75 basis points to the high 3's to 4%. Of course, cap rates a very blunt tool to use for evaluation. The acquisition climate has clearly become more challenging.

However, as I noted earlier in my comments, the underlying fundamentals in our sub-markets have also continued to improve during the past several months. We are continuing to assess this new pricing environment and will act on our acquisition opportunities that offer appropriate up-side potential. With that, I will turn the call over to Bill for review of our fourth quarter results, and then we will open it up for questions.

Thanks very much Jordan. First of all, let me apologize for everyone having to listen to my laryngitis this morning. I would like to begin by thanking everyone for joining our earnings call. Yesterday we issued an earnings press release and supplemental financial package that disclosed our fourth quarter results.

As Mary mentioned, these documents are accessible on our website, or you can contact our investor relations department. As Jordan mentioned, we are pleased with the performance of our portfolio during the fourth quarter.

As I go through the last quarter's financial results, I would like to note that the reported fourth quarter numbers represent both pre-IPO operating results from our accounting predecessor for the period from October 1 through October 30, and the post-IPO operating results from October 31 through December 31.

Therefore, we will not be able to provide meaningful sequential comparative results or to develop some of the other metrics that we will be reporting in the future.

For the period from October 1 through October 30, our accounting predecessor reported a net loss of $8.5 million. Please note that the results from our accounting predecessor are not comparable to the company's post-IPO results for several reasons.

First, the predecessor's numbers omit the operating results from some of the entities, which we acquired in connection with the IPO. Those entities provided management, leasing, and construction services, and as well, owned four office properties, three multi-family properties, and the sea interest in one parcel of land.

Second, the results for the entities that are included in our accounting predecessor's fourth quarter financials do not reflect a number of the significant changes in our accounting cause by our IPO and the related acquisitions.

These include the purchase accounting adjustments as of the date of the IPO for FAS 141, the straight lining of our rents, and for the value of in-place interest rate swaps. In addition, our predecessor's results do not reflect any potential future property tax reassessments resulting from the IPO transactions.

For the period from October 31 through December 31, the company reported a net loss of $20.6 million, which included various one-time charges, related to our IPO and related formation transactions. These one-time charges include approximately $27.7 million of non-cash compensation costs.

For the two months ending December 31, office rental revenue totaled $62.4 million, which included approximately $5.3 million of FAS 141 income and approximately $3.6 million related to straight lining of rents.

Parking and other income totaled approximately $7.9 million for the two months ending December 31, including approximately $500,000 of seasonal and one-time items. Multi-family revenue totaled approximately $11 million of rental revenues during the sub period, which included approximately $1.2 million of FAS 141 income related to the below market rents for units in Santa Monica that were leased prior to the 1999 change in law that allows landlords to reset rents to market upon vacancy.

Office rental expenses total $24.5 million, including approximately $1.5 million of one-time expenses related to accrued vacation and sick time that was assumed from our predecessor and as well the timing of some of our repairs and maintenance projects. G&A expenses of $30.2 million included approximately $27.2 million of one-time IPO related non-cash compensation expense.

On page eight of our supplemental, we lay out our balance sheet at the end of 2006. We have broken out our year-end balances in some detail in order to provide a better sense of our opening balances, particularly the purchase accounting adjustments reported at the time of the IPO.

We recorded approximately $70.6 million of un-amortized interest rate contracts at December 31, related to the swaps that we acquired from our predecessor.

As stated before, this balance will be amortized as interest expense over the next five and a half years. Conversely, the amortization of the $29.7 million in un-amortized debt premium that we recorded as a liability for debt assumed at the IPO will reduce our interest expense over the same five and a half year period.

We recorded approximately $34.1 million of above market leases as assets and approximately $263.6 million of below market leases as liabilities.

These amounts will be amortized into rents over the remaining term of the leases in place at the time of the IPO, with the exception of approximately $35 million of below market leases, that relates to the Santa Monica rent control units, and in that case, that amount will be amortized over a 10-year period.

Our debt as of December 31, 2006, totaled $2.76 billion, which includes $10 million outstanding on our revolving credit facility as of the end of the year. Excluding our secured line of credit, all of our outstanding debt is swapped to an effective fixed interest rate of 5.09%. As of December 31, our debt to total market capitalization was 38.6%.

We are pleased with our leasing activity in the fourth quarter. We leased approximately 370,000 square feet of space and signed a total of 110 new and renewal deals. Our overall office portfolio was 94.3% leased as of December 31, an increase of 60 basis points compared with the third quarter.

This includes 171,596 square feet that was leased, but where rent payment had not commenced as of the end of the year. Our net absorption for the fourth quarter was a positive 63,000 square feet.

Our tenant improvements, leasing commissions, and other capitalized leasing costs for new leases were $24.27 per rentable square feet, as compared to $25.13 in the third quarter. With respect to lease renewals, our capitalized leasing costs increased to $13.51 per square foot, from $10.14 in the third quarter.

This increase was mostly attributable to one large renewal transaction, which comprised approximately 35,000 square feet. If we exclude this one transaction, our capitalized leasing costs for lease renewals was $10.17 per square foot.

Before we begin taking questions, I would like to discuss our views on guidance because several of you have provided us with input on the subject. As a new public company, we are continuing to evaluate this issue. We feel that the most prudent approach is to defer making a decision on our guidance policy until we have gained several quarters of public company experience.

With that said, we have reviewed the published estimates of our 2007 performance, and if we felt that there was a material misunderstanding, we would provide advice to that effect. With that I will now turn the call over to the operator so we may take your questions.

Thank you sir. [OPERATOR INSTRUCTIONS] Our first question comes from the line of David Harris with Lehman Brothers. Please go ahead sir.

Yeah, high everybody, sorry to work your faulty voice here Bill, but on the last point with regard to no formal guidance revision. Are you in a position today to say whether you are comfortable with first quarter estimates for '07?

I think just repeating what I said in the script. If we felt that the estimates in the first call, which reflect the post-guidance, were materially different than what we believe, we would certainly advise you of that. Obviously, the published information that you guys have put out was reflective of material that existed at the time.

Obviously, in this call, the script, and our supplemented material, we have given out various components, but most notably we've long talked about the FAS 141 adjustments, interest rates amortization amounts, and straight-line. It all had to be redone at the time of the IPO.

We have provided you with those numbers, and presumably, you all will be adjusting your models to reflect that. Without focusing on the numbers, I think we are comfortable with the underlying assumptions that have been put out in the published reports.

Just so I'm clear on this, today you're not really expressing a view as to your comfort level with '07 FFO, for example. You're going to defer making that kind of judgment until you see as we work on numbers in the light of the disclosures around this quarter's earnings.

Well, we're -- David, how are you doing? This is Jordan.

Hi, Jordan.

We're expressing the view that we reviewed the first call estimates, and if we felt like there was something dramatically misleading or outside of the range going on there, we would right now say to you guys, "Hey, I think you're getting something wrong here." And we're not saying that.

Okay.

We're saying we're comfortable with where that's all at.

Right.

And beyond that we're not going to give any guidance, but we're giving you the comfort that we wouldn't let you go far afield without correcting it, and with what we've seen, that's been published, we don't think you've gone far afield.

Okay thanks. Let's give Bill's voice a rest just for a minute, and I'll stick with you Jordan, if I may. In the light of your comments with regards to the cap rate movement, which are obviously extraordinarily dramatic in the magnitude that you describe, is that causing you to rethink strategy?

I mean would you be more tempted to sell elements of your portfolio and perhaps swap? I mean obviously at 75 basis point shift from a very low starting point is rearranging the way you view the world I would have thought.

Well, things have changed dramatically recently, and the most significant thing that has happened are the sales Blackstone has been making around the country and then various markets including along our coast here, on the west, of portfolios, and seeing what's happening in those trades and where the capital marks on those trades, if you remember on our road trip I kept saying to people, "Hey, I'm still very bullish about buying. It's a slam-dunk. I'm going to be buying."

Because we saw where values were then, I have to admit I never thought values would adjust this quickly, and that these Blackstone trades would bring the life where things were at, so fast. Now, there's that, yes of course that gives us pause, and we're thinking hard about how to move forward, but at the same time, we're looking at our numbers, and we're looking at what's happening in rents in our sub-markets, and we're saying, "Wow, these things are really moving."

So, we're reconciling that, and maybe it reconciles you back to feeling like it's still a very good play here to make the deals. At least the types of deals we have historically made.

Are you in a position to accelerate any development into this marketplace?

We're looking at the various development sites that we have. Now, frankly a couple of them would do better as residential development sites and are set up better for that, and there hasn't been a kind of Blackstone [EOP] version on the residential side so maybe one of those will happen, and we will go, "Wow, residential cap rates are now a half a percent." Or whatever is going to happen there, we're watching. We haven't materially decided to accelerate any of that, to answer your question directly.

Okay, could I - just a couple of points of detail, which may mean going back to Bill. Is G&A if we ex the one office are we on track with what you'd previously indicated to the market, Bill? Anything on the upside or the downside that we need to be aware of?

David, you know we are charging you a dollar for every question past two questions. With that said, the information that was in on our performance back when we did our prospectus pre-IPO, that information we think ranges that we're still very comfortable with.

Okay, and on TI's again, I know you sort of referenced a one-off impact on the numbers which skewed it upwards for the fourth quarter. Is $20 a square foot blended for the year for '07, a reasonable number to use?

We think that the TI's release commission that we've seen, we should have been generally trending down into those ranges, which are ranges that we are seeing going forward. So yeah, we would be comfortable with that.

And then finally, in terms of '07 rent roll, have you - this question is for Jordan. Have you made much progress, and are you seeing people come early to you with regard to renewing in the face of what are obviously rapidly rising rents?

Well, yes. I mean tenants are coming and saying - obviously, the whole thing has shifted. It's becoming more of a landlord's market than a tenant's market. Which on the tenant side, it tends to be great clients of ours for years, and in an odd sense I almost feel bad for them because rents are moving up so fast. So, when they come to us

No not too bad -

Well, we try and be sympathetic to their situations, but obviously, we're moving rents up. Where you really see it is on the broker's side. I mean the brokers have almost leapt to the other side of the table, now, and they are sending us day two cards and Valentine's kisses when we make one of their deals where historically, they expected the flow to go the other way. So, that's been a dramatic shift in terms of what we see going on this year. We're looking out towards a very strong leasing year this year, I believe.

In terms of progress for this years roll, can you quantify how far you've made any progress?

You say roll?

Now David --

You've got 13.2% coming up for renewal this year; where are you at in terms of discussions?

David, we have 1.3 million or so square feet scheduled to expire, and then we hope to, of course, do that much of leasing and then do some more. Over the last couple of quarters our positive absorption has been 78,000 in the third quarter and then just over 60,000 in the fourth quarter.

We think that we are doing that level and if not better. The amount that is expiring and we hope that it continues to have some positive up-sourcing along those lines going forward. So, we do think we are making that progress and nothing that's happened over the last month or two months seems to be detracting from that trend.

Okay, thanks guys. Feel better Bill.

Thanks very much David.

Thank you sir. The next question comes from the line of Michael Bilerman with Citigroup. Please go ahead with your question.

Hi, guys this is Jon Litt, I'm here with Michael.

Hi, John.

I gave Michael $10 to ask questions, but I told him I want change.

Good then we're going to get it down to nine questions.

I think the two of you, and it's over. Go ahead.

You said you think about difficulty on the buy side, sort of re-evaluating, has the market, at least moving to these levels, altered your thinking about harvesting some of the assets in the portfolio, whether it be multi-family or the office side.

Well, you know our office portfolio, the buildings and our residential portfolio. They are very similar, and actually, before the IPO, we sold a number of properties that we felt like -- which anything anybody sold was a [inaudible], but whatever? We sold a number of properties that we thought weren't of a real high quality, proper mix to the portfolio.

So, we really don't have anything now. If you were to come to us and say -- if we were to look at one of our buildings and say all the reasons we might think it's a good thing to sell that building. You might as well think that about another 20 buildings, and frankly we're more going the other way.

I'm still leaning on the side of the feeling, I'm still feeling as though with what we have here, and with the properties we're hoping will become available in this market, like there's still good buys because that's how strong our feeling is about the market. Now, are the buys as good as they were a month, month and a half ago? No, they're not.

I mean the information age has been demonstrated to me in living color here in the last month. I can't believe how quickly people were able to pick up on what was going on, where it used to be our secret here. But still, I think there is some value to be had in certain other properties.

Okay, and then a question for Bill. I missed the office FAS number was how much?

The office FAS number was, for the two month period was just about 5.3 million.

5.3 million and then how much non-cash interest expense was booked in the two months?

In the two months, Bill explained this. The two components that will go in different ways. The swap component is about $2.5 million for the two months, that kind of bumps up our interest costs, and then there is the component for the loan premium that goes the other way, and that was just over 700,000 for the two months.

700,000 and there was nothing in G&A, I guess if you take the 30.2 and you back out the 20.7, you get to an annual or quarterilized, if that's a word, 4.3 million. I guess is that's a number that you're comfortable with heading into the beginning of the year?

Yeah, I think that may be about 500,000 or so that you may be lumping in that may be in some other line items. I think that the normalized G&A is probably about $3 million or so for the two-month period.

$3 million and I'm trying to think about it from January 1, what is your sort of level of G&A, so I took the $3 million and made it a quarterly number. That's how I came up with 4.3.

Okay if you take the $3 million and you get to a quarter number, that's about right. Then going into 2007, I think we feel comfortable with that, and then of course, we're going to have some more costs coming in 2007, such as SOX compliance and thing of that nature that were not during the two month period.

Which are all in, as I mentioned before, in the range that we previously discussed the $20.5 million to $22 million, that range that's still the range that we're looking at.

You're coming to 16 which is low compared to where we --

Yes, we don't have - we had no SOX compliance in those last two months of last year.

Okay, thinking about the lease rollovers scheduled for next year, or for this year; 250,000 is in Brentwood, almost 20% of your roll. Can you talk specifically about that market and where you think rents are?

Yeah, the other thing, Michael, the two sub-markets that we see on the report that have the largest amount of roll next year, are Sherman Oaks/Encino market and as you correctly say, the Brentwood market, and those are without question, two of our strongest sub-markets both in terms of occupancy and also demand. We're looking at good-sized spreads in both of those as we go forward.

We haven't - I know that we've discussed and there have been inquiries about us providing the spread between asking a place on a sub-market basis, and we're certainly taking it under advisement. We're considering providing additional sub-market information in future quarters and that certainly information that we're considering, but at this point, we're not breaking it out that way.

Would you say that between those two markets, that makes up about 43% of your roll next year, but only 37% of the portfolio, would those two markets be above or below the 22% number that Jordan threw out?

[Inaudible] You might want to jump in here Andres.

Yeah, I'm just trying to get a sense of --

I think Brentwood is probably very close to that number, and I think Sherman Oaks actually may be one that it may be just over that threshold so probably between the two that's a good average overall.

Directionally, we think it's above the blend for the whole portfolio, but again, how much above, we haven't broken it out that way.

Okay, anything on the Prop 13 process at all?

It's grinding along. As we talked about before, it's a very long process. We certainly are engaged in discussions and information and going back and forth. You know that we didn't actually transfer - for a real Prop 13 reassessment, typically you need to transfer over 50%.

We didn't transfer over 50%, so we're having those discussions. We're also having discussions about the fact that the value of individual properties are as opposed to what trade as a portfolio, and we're just working through that process, but I don't have any financial update for you, no.

How much was actually accrued in your two-month period, for increased real estate tax?

Because of what Jordan just mentioned, we're not going to get into the specific details about what we do there. Obviously, if you look at our coverage for the two month period compared to where they were in the past from our predecessor, you can see where the trend is going, and of course our Prop 13 number is what's driving that, but other than that I think we're probably going to work this process out and have some more concrete information in the near future.

Okay, thank you.

Thank you sir. Your next question comes from the line of Ross Nussbaum with Banc of America Securities. Please go ahead with your question.

Hi everyone, good morning.

Hi.

Hi Ross.

A question on the apartment side, can you tell us how many of your below market units actually rolled over, turned over in the fourth quarter?

Yeah, the number is, as we have discussed before our comfort with rolling about 20 of those on an annual basis, and that's such a small number when you break it down on a quarterly basis. It clearly can distort things either way. We're continuing to - but suffice it to say we've been rolling through the last several quarters consistently with the 20 per year number. We remain comfortable with that going forward.

Okay, next question is, I think this is following up on some of what was asked before, in terms of the change in pricing in your markets the past couple of months, does it lead you to start thinking about expanding your presence a little more outside of the west side of LA and looking down to Orange County or even up north to San Fran?

Well, you know we looked at that San Francisco portfolio and when the Blackstone deal came up, there was obviously Orange County, San Diego, San Francisco, Seattle, and all of those markets came up on the coast, which are all markets that we were toying around speaking to you on. Pre-IPO we were looking at those markets.

Pricing moved, adjusted so fast that we narrowed it down to taking a very hard look at San Francisco, and even there we got to the point where we felt like the pricing might not be wrong; we couldn't justify opening a new market for ourselves, which is sort of a wrenching experience to begin with, separate from - Just buying a property in a market that you're already in is easy; opening a new market is another story. There is just more risk associated with that, and with the shift in pricing and what was going on and looking at that market. It just backed us away from the process.

We need to get our feet a little better on the ground to add a market at a time when pricing is as volatile as it is right now. That's not the same for the market that we're in. We're a lot more comfortable here. We were at these numbers a long time ago and hoping to make some deals before this cat was out of the bag, but in terms of San Francisco and the market outside of our market; we couldn't get comfortable fast enough.

Understood. Next question, you had mentioned some cap rates when you were speaking previously. Were those specifically targeted towards West LA or are you suggesting that kind of pricing occurs in the Valley and Tri-cities as well.

You know frankly, anything about cap rates is honestly derived from anecdotal trades. I mean there is no cap rate average that you get out of the markets. I would not - I would expect - well, cap rates are usually driven by growth, expectation of growth in rents because cap rates really don't buy you buildings.

What happens is that they fall out of the cash flow analysis, and they pay a very low price because they expect the rents to go up fast. I mean a high price because they expect rents to go up fast. Rents are moving at a real good clip in the Valley and they are moving at a real good clip here. I would say Tri-cities, Pasadena, they are moving at a real good clip. Burbank there is some construction that might take the edge off of it, and Glendale I would say may not be moving as fast.

Yes, the Valley rents are moving fast; we just told you that Sherman Oaks/Encino market I think is one of the places where our rents are moving the fastest which would cause you to say the person would drop their cap rate very low there. Did that answer your question?

Yes, no, it does. It's helpful. Last question I have, this is either for Bill or Andres , I just want to make sure I'm understanding this. In terms of the non-cash adjustments that are being made to interest expense, those numbers sound a little different that what we were looking at during the IPO process. That just simply is the change in terms of the pricing of the debt market, in terms of the day of you IPO, right?

As we talked about, before the IPO those numbers were driven entirely by what interest rates would be on the date of our IPO so that gave some advice on how that would move, and it came out exactly where we thought it would be.

Okay, so nothing else going on there, just simply the timing. And then the other question I have regarding that is on the FAS 141; you have set that according to your IPO dates, such that the rental rate movement in your markets in the fourth quarters is not reflected in there?

Correct, it was - the temperature was taken at the date of the IPO and any growth subsequent to the IPO would not be reflected in those numbers.

Thank you.

Thank you sir. The next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead with your question.

Good afternoon guys. Are you going to pay us if we ask less than two questions?

Yeah.

Yeah maybe, depends on the questions.

Talk about your expectation of same property NOI look like in the fourth quarter.

On a same start basis, we've tried to stay away from that calculation because I think it would be misleading for us. The way that we were operating the properties in the past, to compare to operating them now, in apples-to-apples; I think would be a little misleading so we try to stay away from that statistic, and then just show things more on a go over basis.

That is something that you will include going forward.

I think going forward as things start - how they are going to play themselves out and as they start being comparable one to the other, I think we're going to put those out.

As we start building a data set.

Yeah, we need to have enough data to do a meaningful apples-to-apples comparison as we roll forward.

Okay, and then I might have mentioned this earlier, but Jordan it sounded like you said the embedded rent in market-to-market in LA County in your portfolio is 22% in Honolulu is 10%; are those the right numbers?

Yeah, I'm going to go back to that because there's - I'm telling you when you do these comparisons - you hear the percentage number, but it's so important to hear the beginning of the sentence because I know people have been confused sometimes when we have given them.

The spread between our average asking rents to our in-place rents within our Los Angeles office portfolio grew to 22.1% at the end of the fourth quarter, from 17.7% at the end of the third quarter. The spread between our average asking rents to our in-place rents within our Honolulu office portfolio grew to 9.6% in the fourth quarter, compared to 3.8 in the previous quarter.

That's average asking rents in place, so if you just, right now canceled everyone's rental rates that they are paying at this moment, and went to our asking rent, that would be what the spread would be across the board. Which is different from some other comparisons which we gave.

Okay, and then maybe this is what I missed earlier, but can you just talk about why the fourth quarter roll up number, looked like 8%, was below that average?

Okay, the 8% number is the difference between the ending rent on a particular expiring lease in a space, and the starting rent for the new lease on that same space. So, for instance if rents were going up let's say 4% a year.

The difference between the -- and it was a five year lease, the difference between the old lease and the new lease, if there was 4% bumps in the lease; you'd have a 20% difference in the leases, but you'd only have a 4% difference between the last rate of the old lease and the first rate of the new lease.

That number is 8%; now what we also gave in the little text here was, we gave you the straight line number of the old lease to the straight line number of, let's say the new lease going into place, and that number was - this one right 23%. That number was 23%. Does that answer your question?

Yeah, I think so, and then my last question. It sounded like you said the Honolulu multi-family rent declined, or the asking rents --

Yeah, I made a mistake, which Andres caught. He had two things to correct. A mistake I made; maybe they're both my mistakes.

Yeah, Jordan said there was a decrease when actually there was a 2.5% increase during that quarter. While we're at it, I think Bill mentioned a figure of the in-place value of our interest swaps of $20.6 million; it's actually $70.6 million that will be amortized over the next five and a half years.

Good catch, way to listen to the script.

The Honolulu was an increase of 2.5%.

Yes.

Yes it was an increase.

Okay.

It's annualized [penance].

You and Andres were the good audience on that.

You get another question, if you want, for catching that.

Thanks.

Do you have anything else?

No, I'm good for now. Thanks.

Okay, thanks.

Thank you sir. The next question comes from the line of Rich Anderson with BMO Capital. Please go ahead with your question.

Thanks and good morning everybody.

Hi Rich, how you doing?

Pretty good.

Hey Rich.

First question, if I could just go back to guidance real quick. You mentioned that you look at the numbers, and they look okay to you -- but the consensus numbers -- but I guess my question is if numbers were too high or too low would you be commenting with the same level of vigor if we were too low?

I didn't understand that question.

If numbers are too low if the consensus is $1.07 FFO for 2007, if that number was $0.10 too high in your mind, would you be coming to us with the same kind of - hey you guys are off - I mean would you - the point is, were you guys thinking when you were issuing your outlook when you did your prospectus, were you thinking about 22% rent growth in place versus asking rent or is it getting much better than you thought and the fact of the matter is more than likely we're going to be raising numbers over the course of the year?

I don't want to give any more guidance than the simple thing that we've said, but to answer the first part of your question. I have to say that things, I think, are better than we originally expected.

Okay.

But, I'm not saying that means anything about the little snippet about guidance that Bill gave at the end of his prepared text.

Okay, fair enough. Let me just make sure I have this right, FAS 141 for the two months ending 12/31, it totals $6.5 million? Is that right?

That's right. There is about $5.3 million on the office side and about $1.2 million in the multi-family side related to the rent control units.

Okay, commenting Jordan on the movement of cap rates over the past months, and saying that you still see opportunity to make some acquisitions despite that. Is it possible that you might start considering a joint-venture strategy in doing the whole fee business game? I know it's not been a part of your --

I'm sorry, our whole history of our company was essentially that strategy. So, that's our comfort zone, and frankly, in acquisitions, in new acquisitions that's exactly where we would consider going.

Okay, and then lastly, back to Honolulu, multi-family business in specific, it's no real working multi-family market as far as I could tell there; like there is an office market. Is that an area where you might consider sort of just hunkering down in the office space which is very interesting in the [CBD] in Honolulu, and maybe getting out of the multi-family area which is sort of a market that lacks some transparency, I guess I would put it?

Well, I like both of those markets a lot over there. Really, if you are just reading the press over there, you see that they feel like they're in a critical stage housing shortage, and we've made a lot of money on our residential, and we're looking forward to actually making a lot more. So, I wouldn't want to sell.

I've been working, and there are a couple other projects which we have been working on. I've been working to add projects. There's only four or five big projects on the island, and we've been lucky to pick up two of them, and if we're good we may pick up one more or maybe more than that, and that is a pretty reasonable sized portfolio.

Now, the decision about peeling out of that or not has a lot more for us to do with whether we see rents still moving very fast up there, or we think they're stabilizing, and we have a portfolio that we can sell for a higher value than we see in terms of the future cash flows coming out of it, and we watch it.

It's obviously the tail, it's not the dog of the company, residential over there in Hawaii, but I still really like how things are working over there, and I feel like we're on a good roll. So, I wouldn't think of selling it right now, no.

Okay, thank you very much.

Thank you sir. Your next question comes from the line of John Guinee with Stifel Nicolaus. Please go ahead with your question.

Yes so far. A couple questions. All of this cap rate stuff, can you add a price per square foot to some of these numbers because a 3.5 cap in West L.A. is very different if you're buying it at $400 a foot versus $800 a foot.

You're right the prices per square foot, you know, I'm not ready to do that right now. They are - they - price per square foot is a number that is a lot more specific to a building, to a particular building, and there's been a variety of buildings trading. I can tell you generally without giving you an absolute number on price per square foot. Those numbers have moved more that $100 a foot substantially more than $100 a foot. In the last six weeks.

Okay, second question, as I recall you had some hypothetical land inventory if you went through the rezoning, rain damage, and to create some development rights, can you quantify that number at all?

Let's see, in terms of -- I'm sorry could you ask that again.

What a lot of people are doing, some of your peers, in California, are they are creating buildable square footage, or they are creating development rights by going thorough rezoning, decommissioning, surface parking, et cetera, and you eluded to having some of that in your portfolio, which I think you said probably made more sense for residential. Can you elaborate on that, and if not, just do it next time, it's not a big deal.

Bill will elaborate on it for you.

John, [inaudible], as Jordan said before we do have a few sites which we're fortunate to have in our sub-markets and have viewed them as the highest use for them probably being residential and continuing to evaluate those.

In terms of broadening that out, again, as we've stated a lot of times -- the sub-markets that we're in are seriously anti-growth in both terms of community groups and legal restrictions, and if anything that climate has gotten even tougher in the last six months in terms of a lot of concerns over traffic and so on.

So, it's for us, it's not a climate where there's likely to be a lot of opportunity to come up with entitlements on that side. The good side is it's further reinforcing the fact that we've got a supply pipeline notwithstanding all this huge up tick in rents and occupancy that we've seen. It's actually going down. We're actually lower in terms of the pipeline now than we were six months ago.

Okay, good. Last question, I have in my notes somewhere, that you have a ground [lessor] position in a couple locations. Is that correct, and if so where does that show up on your income statement?

That's correct we are the ground lessor.

Is it $2.7 million a year roughly.

You know I think that number is a little bit lower than that, and I'll tell you that as far as a line item, it shows up in the parking and other income line item of our P&L.

Okay, thank you very much.

Thank you sir. Our last question comes from the line of Ian Weissman with Merrill Lynch. Please go ahead with your question.

Yes, good morning. I hate to beat a dead horse on this cap rate question, but Jordan you talked about sub for cap deals in your markets. Obviously a very similar situation to what we're seeing here in New York City, fundamentals in both markets are very, very strong.

New York's been a very fluid and active sale market, but my guess is that we just haven't seen as many sales in your core markets, most notably, let's say Wilshire area, Beverly Hills, Santa Monica. Maybe you could just address why, if the fundamentals are very similar in two markets, double digit rent growth, no new supply, why the sale market has been as inactive in your market as what we've seen, relative to New York.

Well, frankly a part of that is that we control so many of those buildings and we're not selling them. A part of it is that the next largest portfolio to ours was [EOPs], which is now controlled - which did sell, which is now controlled by Blackstone, but the world hasn't seen where those individual buildings are going to trade out.

There are some very nice buildings that are owned by - we have the billionaire class that just comes in and buys buildings, and there's some very nice buildings owned by them, and they don't trade out in markets like this because they see what's happening with rents.

Maybe we just don't have as many buildings that could trade as New York does, but you're right, there isn't - you guys can get your hands on New York a lot easier because you got a lot more trades you can look at. You can see how prices have moved.

I'm able to get some good information because I'm in the mix on everything, so I can see where it's getting to even if it hasn't traded. I can see where things seem to be happening, but there isn't a lot of sort of published information on the trades yet, which hopefully allows us to still make some deals.

Along the lines of that Blackstone issue, was that portfolio ever in the market, and they just didn't get the price, or was it that they pulled it because they saw where fundamentals were going?

I don't want to comment on an individual deal.

Okay, thank you.

All right, thanks.

Thank you, at this time there are no further questions. Please go ahead.

Well, let's see. I'm surprised. I was ready for a lot more. Well thanks a lot everybody for joining us today, and we appreciate your continued support and we look forward to seeing many of you in the upcoming weeks. Bye, Bye.

Thank you sir. Ladies and gentlemen this does conclude the Douglas Emmett, Incorporated Fourth Quarter 2006 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial toll-free 1-800-405-2236 or toll 303-590-3000. The passcode for today's conference is going to be 11082476 followed by the # sign.

Once again, if you'd like to listen to a replay of today's conference, please dial toll-free 1-800-405-2236 or toll 303-590-3000. The passcode for today's conference is going to be 11082476 followed by the # sign.

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