Douglas Emmett Inc (DEI) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's First Quarter 2007 Earnings Conference Call.

(OPERATOR'S INSTRUCTIONS)

I would now like to turn the conference over to Ms. Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you for joining us for our first quarter 2007 earnings conference call. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer, Mr. Bill Kamer, Chief Financial Officer and Mr. Andres Gavinet, Executive Vice President of Finance.

If you do not have a copy of your earnings package 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 beliefs of, assumptions made by, and information currently available to us.

The actual outcome 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 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 the risks please refer to the company's press release and the current SEC filings which can be accessed in the investor relations section of the Douglas Emmett website.

Please note that the market data sources that are referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office markets, [REIT] for the Los Angeles office markets, M/PF Research for the Los Angeles multi family market, and Property and Portfolio Research for Honolulu multi-family market.

With that I would now like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett Incorporated. Jordan?

Thanks, Mary. Good morning to everybody on the West Coast and good afternoon to everyone on the East Coast.

I'm pleased with our first quarter operating results and optimistic about the strength of our sub markets.

During the quarter upward pressure on rental rates is driven by the virtual absence of new supply within most of our sub markets as well as increased demand from tenants.

A new catalyst on the west side of Los Angeles is the addition of new and aggressive real estate investors. These property owners are implementing leasing strategies designed to support bullish acquisition underwriting assumptions.

Their presence has accelerated market rent increases and strengthened other economic lease terms, further enhancing an already strong landlord's market.

Overall, occupancy in LA County increased 40 basis points to 91.3%, while occupancy in the County of Honolulu decreased by 30 basis points to 92.1%.

For the 10 sub markets where our office properties are located, office occupancies increased to 94.1% compared with 93.8% at December 31, 2006.

Office rental rates continued to increase during the first quarter. Average asking rent in Los Angeles County increased 5.7%, and average asking rental rates in the Honolulu CBD increased 4.3%. Within our 10 sub markets average asking rents increased by 6.8%.

The rental growth metrics within our office portfolio continued to improve during the first quarter. On a mark to market basis, the spread between our asking starting rents to our in place cash rents grew to 26.7% in our Los Angeles office portfolio, up from 22.1% at the end of last year.

The spread between our asking rents to our in place rents within our Honolulu office portfolio dropped to 9.4% in the first quarter from 9.6% at the end of last year.

On a straight-line basis, the average rent from lease is actually signed during the first quarter compared to the average rent from leases expiring for the same space increased to approximately 31% in the first quarter from 23.2% during the fourth quarter of 2006.

On a cash basis, comparing the beginning cash rent from newly signed leases with the ending cash rent from expiring leases for the same space, office rental growth was approximately 14.7% in the first quarter, up from 8.1% during the fourth quarter of 2006.

We believe that the office fundamentals will continue to improve for the remainder of 2007, with minimal increases in supply.

There is no new office supply plan proposed or under construction to be delivered through 2009 in our Brentwood, Olympic Corridor, Century City, Beverly Hills, Westwood, Sherman Oaks, Encino, or Honolulu CBD sub markets.

As a matter of fact, excluding our Burbank sub market, where we anticipate no leasing exposure through 2019, only an aggregate of 736,000 square feet of new office supply is planned in all of our sub markets for delivery in 2009.

At the end of the first quarter our multifamily portfolio remained more than 99% occupied. In west Los Angeles our average asking monthly rent per unit rose to $2,509, which was a 2.2% increase over the prior quarter.

In Honolulu, our average asking monthly rent per unit rose to $1,602, which was a 2.5% increase over the prior quarter.

I will now turn the call over to Bill Kamer, who will provide more detail on our first quarter offering results and guidance for 2007. After Bill's remarks we will take your questions. Bill?

Thanks, Jordan. Yesterday we issued an earnings press release and supplemental financial package that disclosed our first quarter results. As Mary mentioned, these documents are accessible on our website or you may contact our investor relations department to obtain copies.

The first quarter of 2007 is the first full quarter since our IPO, so we are now able to report funds from operations.

As you will recall, our previously reported operating results for the periods prior to our October 30, 2006 IPO reflected the results of our accounting predecessor and do not provide meaningful comparisons for the post IPO periods, so we will not be providing year to year or sequential quarterly comparisons.

For the quarter ended March 31, 2007 FFO totaled $46.4 million or $0.28 per diluted share. Office rental revenue totaled $91.6 million. This was greater than expected, primarily due to faster lease up.

At the end of the first quarter our office occupancy relating to space where rent had commenced was approximately 20 basis points higher than anticipated.

However, due to expected lease expirations and tenant move outs during the second quarter, our rent paying occupancy is likely to decline from the first quarter level.

In addition, we had approximately $184,000 of unbudgeted lease buyouts, which also contributed to higher office revenue during the first quarter.

Office rental expenses totaled $33 million, which was lower than expected primarily due to the timing of repair and maintenance payments, which we believe we will incur by the end of 2007.

Multi-family revenue totaled approximately $16.5 million, which was a little lower than anticipated primarily due to the mix of units that rolled during the first quarter.

Multi-family rental expense totaled approximately $4.9 million and our G&A expenses were $5 million, both of which were on track with our expectations for this quarter.

In Q1 our recurring capital expenditures were $0.06 per square foot in our office portfolio and $80 per unit in our multifamily portfolio, which were substantially lower than a normalized 3-month period.

The lower CapEx expenditures during the first quarter were primarily due to timing. We anticipate that on an annual basis we will incur normalized CapEx expenditures as CapEx projects are completed during the second half of 2007.

Our debt at March 31, 2007 totaled $2.75 billion. Excluding our secured line of credit, all of our outstanding debt is swapped to an effective fixed interest rate of 5.09%.

On March 31, 2007 our debt to total market capitalization was 39.4%.

On the operational side we had considerable leasing activity during the first quarter. We entered into approximately 116 new and renewal lease transactions.

We leased approximately 438,000 square feet of office space as compared to 370,000 square feet during the fourth quarter 2006.

Our overall office portfolio was 95.2% leased as of March 31, 2007, an increase of 90 basis points during the first quarter.

Our leased square footage includes approximately 168,000 square feet that was leased but where rent had not commenced as of March 31.

Our net absorption for the first quarter of 2007 was approximately a positive 136,000 square feet whereas we had a positive net absorption of 63,000 square feet during the fourth quarter of 2006.

Our positive absorption of 2007, first quarter, includes a 30,000 foot fitness center leased during the first quarter that is currently under construction as a freestanding building. This fitness center represents an addition to our overall portfolio square footage.

Our tenant improvements leasing commissions and other capitalized leases and costs were $27.32 per rentable square foot for new leases, $13.33 per lease renewals, and $20.34 on a blended basis.

This represents an increase in the blended capitalized leasing costs from $19.48 per square foot during the fourth quarter of 2006.

Finally, turning to our guidance for the year. We are establishing FFO guidance between $1.12 and $1.16 per diluted share for the full year of 2007.

This range excludes impacts on operating results from acquisitions, dispositions, recapitalizations or outlier real property tax reassessments.

The primary factor driving the range in our estimated 2007 FFO guidance is the timing of our leasing.

While we anticipate that we will continue to enter into leases at a good pace throughout the year, we also recognize that the time lag between lease signing and rent commencement may act as a headwind in achieving the high end of our FFO range in 2007.

In addition, we do not want short-term occupancy targets to impair our long-term objective of maximizing the revenue growth opportunities that can be achieved from a rapidly rising rental rate market. With that, I will now turn the call over to the operator so we can take your questions.

Thank you, sir.

(OPERATOR INSTRUCTIONS)

Our first question comes from Michael Bilerman from CitiGroup. Please go ahead.

Hi, guys. Jon with [SumFun] with me as well. Can you guys give us just a little bit more granularity on the 404 - 440,000 square feet of leasing that was done in the quarter, it was up 15% cash, can you just talk about some of the significant leases that were done and sort of the mid by market?

Most - I mean to give you an idea on the markets. I mean, most of that is, as you can see, I mean happened in the Warner Center and at Sherman Oaks and the Brentwood sub markets, that's what was the gross ups happening that market.

And in both of markets I think we had a -- on Brentwood for example we had rent growth of about 9% and Sherman Oaks we were around the 20% level.

And Warner Center, we also just a little bit below that as well. So we had pretty good results from those sub markets this quarter.

Was there any chunky leases in that 440?

You know the Warner Center leases are always a little bit on the - they're bigger spaces but not, not particular that we would think that this is throwing off the trend for them, for this period.

Bill, you had mentioned that the CapEx was up from 19 and change to I think 23. What was the driver of that was it mix? You got big rent growth but I'm just wondering if it's coming at a cost of CapEx.

Yes, that - it is primarily the mix. As Andres was saying we got a fair amount of leasing activity from the Woodland Hills, Warner Center market which you can see the rise in our lease percentage there.

And actually if you exclude that - those projects there and if you excluded the Bishop Place project in Honolulu where we've been doing a fair amount of leasing the actual long-term trend is flat to slightly down.

The other thing, obviously, as well is that as our - as the rental rates keep moving up rapidly that does tend to drive leasing commissions up as well.

And another thing, I mean a couple of - like I mentioned a minute ago, I mean a couple of these larger blocks of space. I mean larger deals usually will have a little bit larger TI, what I think overall the trend should still be pointing towards down.

When you - your lock up expired during the quarter on - from the IPO shares, I understand that the shares area not registered so they can't sell them in the open market. Is there any way that you track whether they've sold them privately and if so what the magnitude has been?

We've had - I mean, we've had conversations with many of our old investors just because the whole lock up thing was so confusing to everybody and they wanted to understand where they're at.

And I haven't had a lot of them indicate that they were putting - they were - I think because the lock up being off isn't very meaningful to one of our typical investors since their stock is still not registered.

I haven't heard they're running to pull the level and shoot - and sell the share at all or even feeling like they wanted to, but that's the other information I've gotten.

thank you.

Thank you. Our next question comes from Michael Knott from Green Street Advisors. Please go ahead.

Hey guys, I'm just wondering if you can comment on why you didn't provide same store property NOI growth. I can appreciate the fact that there's not a GAAP comparable FFO and income statement from last year but it seems like that number should be able to be put out there.

I'm just curious you guys perspective on that and then if you cant give us any hard numbers, just what your thoughts were on how that number might have looked without having specifics for us.

Michael, we've looked at that number in the past and the truth is a year ago we were still externally managed.

Our properties were externally managed and that comparison just doesn't play itself out in the numbers that accurate.

And we thought that if we start putting out some numbers out there, we were still - we're going to be providing data that is not that useful, its really not going to be indicative of what the same stores should be going forward and unfortunately its going to take a few quarters for that statistic to develop.

But I think on an apples to apples, we will wait when we think it's the right number to put out there without misguiding people to - from a year ago.

What you want is very reasonable and believe me we tried to look at ways to compare the growth over the last 12 months since we've only been public for 6 or some.

But every time you try to do a comparison to a prior period and you want to fix the stuff that needs to be fixed because we weren't public and it was all separate entities.

You end up with this - one of the regulations, I don't remember which one it is, where you have to justify it to the number that you're trying to present, you have to tie it all out and you end up with a mess and we just kind of gave up on trying to present those numbers.

Okay, and Jordan can you talk about your appetite for sale, west side properties that have recently been on the market like the MTV building and 520 Broadway, just maybe some color on what you thought about those types of properties and maybe how you came out on the no side of participating in those?

Well, that's good knowledge by you what's been trading in our market down here. The - those were buildings which I mean - in my life I've seen 520 Broadway trade probably five times and none of those five times did I bid.

It's - it's not the type of building that we have in our portfolio and I think I could say the same thing for the MTV deal, its - while I've looked at the building before and it its in a market that's really come into its own down there on the 26th street market, it wasn't - it wasn't our type of deal so I didn't buy it. We're - prices are very high now, maybe justifiably high.

But when there's been the kind of price movement that we've seen recently, its best to cautiously do the deals that you know are your type of deals that fit perfectly as opposed to going outside of your comfort zone and those buildings were never buildings that I would have typically bought anyway.

Okay. And then my last question. Can you give us any update on your progress? We see there's a big lease expiration from one of your big tenants, an advertising firm in Santa Monica, have you guys - do you have any color on how that renewal process is going?

Bill Kamer. Yes, this is Bill Kamer. Let me just comment. That's part of the reason that we said in our - in the guidance and in our discussion previously about our leasing performance in the first quarter why we see, going forward in the second quarter, that we're going to have some period in Q2 and perhaps into Q3 as well where our percentage of occupied space where rent has commenced may be flat or down in that time period.

Rubin Postaer, one of the tenants you're referring to, its about 80,000 foot tenant. That lease expired on April 30th. They actually had relocated several years back and had subleased that space.

In anticipation of that, we've largely backfilled that space and leased it going forward but with the lag between leases assigned and rent commencement. We're expecting to see a gap over the next several months in terms of rent payment. Thank you.

Thank you. Our next question comes from Alex Goldfarb from UBS. Please go ahead.

Good morning out there. I'm actually filling in for Jamie Feldman. Just some questions that he wanted me to ask. First is just resolution on prop 13?

Well there hasn't been any resolution on prop 13. Its still sort of chugging along as - and I could describe to you the process I described on the last call, but it's a long complicated process.

Typically a property in California is subject to reassessment if more than half of it sells. We did not sell half of our interest to the public market.

So, from that perspective you know the position can strongly be taken, we should be reassessed, but of course the assessors like collecting income too.

So we're going to that level of a process as well as our properties where they do feel we should be reassessed, discussing with them what that reassessment should be since there isn't a straight purchase in sale agreement they can just point their finger to.

And there's a lot of property and it's going to be a long process.

As I've said before, I would be surprised to see it completely resolved in this year. I suspect it would take this year plus even part of next year.

Okay and then that's helpful on the timing front.

Looking at the acquisition environment, one of the real estate journals had a building on the west side for sale at $800 a foot. You've described a few deals and the richness of pricing.

I think last call you guys mentioned a $300 million acquisition target, how is that looking for this year?

I don't think I mentioned - I don't know what you're referring on a $300 million acquisition target. There's a - and the $800 foot building, I'm trying to think of which one you're talking about, probably 90 --

10900 Wilshire Boulevard.

Oh, you're talking about Murdock.

Yes.

Bill Kamer. Okay there's one in Beverly Hills to trade for $800 a foot. And what is your question, whether we're looking at the Murdock deal? No, not whether you're looking at the Murdock deal but the likelihood of acquisitions this year, given the aggressive pricing out there.

Well, it's a very tough market and prices are high but I'm still positive. In terms of the buildings that we've always tracked, no body's wanted to buy. I still believe that even with this high pricing we can get good value out of those buildings.

Now I'm not -not a lot of those have traded in. Matter of fact none of them are traded.

But I'm hopeful that this high pricing environment will flush a few of them out. Maybe we'll have a chance to buy them and of course the number of them were within the EOP Blackstone portfolio. So we're waiting and watching that too.

Okay. Thank you.

Thank you. Our next question comes from John Guinee from Stifel Nicolaus. Please go ahead.

Hi, Jon Guinee. How are you? Question for you, clearly the acquisition environment is leverage dilutive, for example EOP Blackstone was probably - Maguire was probably 150 bps leverage dilutive, at what point, on a price per pound, relative to replacement costs are you willing to get that aggressive.

For example clearly you wouldn't be that aggressive at $900 a foot, but you might be that aggressive at $400 or $500 a foot. Do you have a sense for how the - how that ratio plays out?

Well, I've never looked at led - I've never looked at leverage dilutive and how it relates to replacement cost per foot. I don't know that those two actually relate extremely well.

You're right in that the oddity of the market that we're in today is that interest rates on a sort of long term relative basis are very low, so you'd expect to make -- a purchase to be accretive and it isn't. If you even - even if you were buy off all that.

So that is a strange situation but its explained by the fact that cap rates are very low in the face of very dramatic rent increases going forward and rents in most building around here are way below market.

You just heard the stats on our deals. This spread - 30% spreads between the lease that's rolling off and the least that's rolling on.

In terms of replacement costs. That hasn't been a metric I've liked relying on very much for buying buildings.

Particularly in our markets because first of all, there's a big - land is such a huge variable that just moves kind of along with changes in rental rates. And also because most of these buildings can't be replace because of down zoning and things like that.

I mean you could - the building for instance that was mentioned earlier, the Murdock deal, that building could not be replaced today with the zoning that's in place on that site.

So, I don't know that -- I don't know how to come up with a point, which those two cross or even meet. But I don't -- I think that what we will continue to look at is IRRs and what part of the IRR is made up of the cash flow coming from growth in rent and what part of the IRR is made up from maybe reasonable or aggressive ending -- exit cap rates at the end of 10 years. And that's the way we make -- have always made our decisions.

Great. And one quick question, you may have answered this already. OpEx was light relative to a normal run rate. Did you mention how light it was?

It's probably about -- that's probably about 50% of the run rate that I think we would see, I think on the office side on a normalized quarter. I mean any one - three month period can be higher or lower than that but I think overall probably about - was about 50% short this quarter.

Okay. Thank you.

Thank you. Our next question comes from David Harris from Lehman Brothers. Please go ahead.

Yeah, thanks and good morning, guys. Jordan, I wonder -- I wonder if I could take you back to - in the cycle a little bit on the remarks you made about the new players in the market pushing aggressively rent.

But I think we asked this question before but you obviously added an interesting dynamic to the aggression, which is happening. Is that causing tenants to look elsewhere and if so, where are they going?

Good.

Well there's - okay, that's an auxiliary question. To me the one thing that's very interesting that's happened is real estate guys aren't famous for getting together and agreeing on anything and boy you have now a landlord group here in Los Angeles that is very aggressive about shifting the rent structures here to where they think they should be in light of the fact there's no new supply and it's a strong economy.

And so people are being pushed on many fronts. I mean rental rates, terms, speed with which they have to move in.

I mean there's a similar dynamic is going on to the dynamic that we saw shift six, eight months ago in terms of buying where you'd go to buy a building and you used to have a due diligence period and then you'd have a deposit that went hard and then you'd have to - some time to close.

Nowadays the - nowadays what's happening is you go to buy a building and the guy goes okay, you're deposit is hard immediately and you have no due diligence.

And that attitude seems to be moving toward tenants too. Take your space or guess what, the rate's up next month and if you haven't signed your lease by the first of the month then your rates going to be higher.

And guess what, its actually been happening and the guy comes back and says I thought you were kidding. No I wasn't kidding, here's your new rate.

Now, you're right, that's going to drive - that's going to push some tenants. It's not going to push some little guys because none of this is meaningful. But they're scattered around the market. There are still some big guys.

I'm talking about tenants over 20, 30, 40, 50,000 feet plus that you got to wonder whether the number is getting meaningful enough to them where they're not going to really kind of look broader.

Now a lot of - the finance guys and investment bank side guys and the - a lot of law firms and accounting firms that are out here, they're not going to move because they're so employee driven or not going to move much. It'd be rare. But I think you could see some guys move.

There is - I would expect them to look, in which case, you might have a sub market where all of a sudden there is 100,000 foot low because a tenant moved out. Now, over the long trend I don't see that that is going to create huge problems.

But I don't - I think it actually could be a little bit of a positive because it gives people some expansion space. But it is something that I expect to see with how fat rents have moved.

I mean other than being the beneficiary of a mark up in rents on your existing assets, how are you tactically seeking to take advantage of this exceptional - these exceptional conditions with the aggressions of the other landlords in town?

Well, we're moving rents up right along with them. And much more comfortably - I mean you know when we were on our (inaudible). I used to say, hey we're taking all the body blows because we're pushing rents and we have to be on the lead.

And now, I'll tell you, we're almost looking like good guys out there I mean it's - we're following along and just moving up rents and tightening up terms just like everybody else?

What's the top rent you've heard being paid?

Well I think - well its always in 100 Wilshire, the building we own down on Wilshire and Ocean and I think there the highest deal we've done at the moment is 680.

No, not in terms of price, in terms of rent per square foot.

That's $6.80 a month.

680 a month? (inaudible)

Yes 680 a monthly -- $6.80. $81.60 a year.

So I have to translate into my language.

We're in Los Angeles then, too complex.

And to your best knowledge, Blackstone looks as if its going to keep hold of the bulk of these assets if not all of them in the medium term?

I'm sure that they're going to sell eventually. But in the very immediate term they seem to be doing what a good seller would do and also a good member of the community here would do which is they are trying to get the rents up in their buildings and they're being very aggressive about it. Which has been great all the way through.

Right. I know we talked privately or one on one with you, Bill, about the impact of the housing market on your portfolio, can you give me a - give us an update publicly and just say if anything has changed over the last couple of months since we last had that conversation.

Sure it has - let me - the answer to that question is actually a few parts to that. One of them is the macro economic effect of the housing market and construction jobs on our economy and how that affects office demand.

We don't have very much of that in our portfolio at all, there's not really very many - very much tenant demand that's driven by housing related users.

Obviously one of our large tenants, KB Home, they're in Westwood -- and its their headquarters building, they're locked in long-term and obviously (inaudible) a fine company over the long haul so we don't see any impact there in terms of that specific one. In other related kind of housing tenants. We don't have - we don't have very much of that.

In fact the actual housing - just on the basic question, which is housing pricing. In our sub markets on the west side we actually have not seen much of a downward move in any of that and we didn't have previously a huge amount of new construction going on so there wasn't - really hasn't been a very dramatic change in our sub market.

Then getting to the narrower version of the question, which is impact of sub prime mortgage tenants in our portfolio.

We - the - our sub markets in the west side of LA and in the valley are not a major center for sub prime users, as is Orange County for example.

However, we do have scattered around the portfolio several sub prime tenants. We are anticipating that we will see a few defaults over the next few months.

But its not meaningful, certainly not meaningful over the long haul as re-tenant those - those leases that tend to be at, at least somewhat lower rents than the current market.

So clearly over the - over an extended period of time we don't see any negative impact of that.

Okay. Thank you. And by the next time we get to speak on the quarterly call we can - I can ask you a question as to how David Beckham and Posh is settling in your part of the world. Thank you guys.

Thanks.

Thank you. Our next question comes from Rich Anderson from BMO Capital Markets. Please go ahead.

Thanks, good afternoon, morning gentlemen.

Morning, Rich.

We're talking a lot about office competition for assets. What about multifamily side. Are you seeing a little bit less competition, maybe more opportunity at this point?

Well, there's - there aren't a lot of big multi-family good institutional projects in the market that we're in. so I haven't seen much of that trade. You can go after little deals that are literally 20 to 48 units.

But those probably aren't the kind of thing - I mean we own some of those, but they're not what we've been - of late what we've building a portfolio on.

Multi-families, in terms of pricing, multi-family has always been very aggressively priced in these markets. I'd say office is now similarly aggressively prices. But multi family is still very aggressively priced.

So, I don't think there's any - I mean opportunity and either multi family or office is driven by someone selling the building more than the particular pricing at the moment.

Okay. So you won't become 50/50 office and multi-family any time soon?

No that - no, not unless someone's going to find a way to build some big projects and sell them to us or we build them.

Okay. You mentioned the spread, the 27% spread asking versus market, where you're at right now and how that's grown over time. Is that a net affective rent comparison or a gross rent comparison?

That's a gross rent comparison.

Okay. So how have - how is the expenses sides changed and how would that spread differ if you looked at a net effective rent basis?

Expenses have gone up but they are not in any way that's meaningful in this discussion.

Okay. So it's still something like 20-something percent.

Yes, oh yeah.

FAS 41 income, can you maybe - maybe if not now but offline. Can you break out what is attributable office and what is attributable to multifamily unless you have it at your fingertips right now?

No, I can break it out for you right now. In Q1 the FAS 141 on the office side was about $7.6 million and on the residential side was, I think, just under $2 million, about $1.9 million.

Okay. And you gave FFO guidance. Do you have FAS 141 guidance so we can maybe get and FFO number which is much more meaningful to you?

Well, what I think on the FAS 141, these Q1 results are actually pretty consistent to what we expect I think for the remainder of the year so that gives you a good baseline.

Can you make the same comment about the other amortizations of - that have effect on the interest expense line item?

Yes, I think they should be pretty - they should stay pretty close to where the Q1 numbers were.

Okay, and then --

(inaudible) coverage.

Say again. Hello?

We got a question from Jordan here.

All right. I'll drop it, but I thought as one of our things came in AFFO our dividend coverage. We're using AFFO.

Yes, we have it in our Q1 right. Our coverage.

But you can back into it and get an AFFO number.

Right. AFFO obviously is - FFO is sort of a real funny number for you guys right now.

And then, finally on the lock out issue. You talked about how it's sort of a non-event right now. But have you talked to any about when it becomes a non non-event in December. And what your exposure might be.

I'm not hearing from any of the meaningful owners - I would have said, I'll say this in terms of tone. When I was asked that question a quarter ago or maybe - yes, it was a quarter ago.

I said, wow, I mean the stocks up. I assume that we had a couple hundred million dollars to hang over when we went public.

I assumed with the stock being up that number would have increased, not decreased. So I'd expect the number to be higher in terms of hang over and people wanting to get out.

And I have talked to people now that have called and saying hey, I understand the lock up is up, what is that exactly for - and I'll tell you, from the conversations I've had and from what's happened with underlying pricing of properties and with our stock price.

I'm getting the impression from many people, a few conversations which actually surprised me, that they're not particularly happy - they are now happy holding the stock and maybe the hangover that we had originally overstated where we'll end up.

So I don't know where we'll end up. I mean it's just - it's moving around.

So people have done the math to see where assets are trading on a p square foot basis and they look at the stock and they think that they're in better position right now. Is that what you're saying.

Yes, basically. Because they were asset - when we - when they came to us originally and we raised the money from them, they were investing at much more of the asset level, right. In a limited partnership that we put together and we'd buy assets and show the movement of the assets.

Well, assets have moved a lot in value, they can do the same calculations that you guys are all doing, dividing the stock and coming out with an implied price per foot on the assets that we own.

And then they're following the trades and what's going on. So now, all of a sudden, they're not as much of sellers.

Maybe they're buyers.

Seemingly -- who knows. Maybe they'll change their mind again at the end of the year. I don't know what they'll do.

Okay. Thanks very much.

Thank you. Our next question comes from Ross Nussbaum from Banc of America Securities. Please go ahead.

Hi guys. Good morning.

Hi, Ross.

Here with Mitch Germaine. Couple questions. I don't think I heard you specifically address this, Metro Cities Mortgage, what kind of a lender are they aren't you worried about them?

This is Bill Kamer. Hi, Ross. The Metro Cities, our understanding is that they have not for some time been in the sub prime business.

We understand they had a sub prime unit that they sold, I think over a year ago. At this point. They are one of our larger tenants, they have about 140,000 feet.

The - we're comfortable with our position because we've got a fair amount of security for that lease as well as the fact that that's one of - it's a somewhat older lease and that lease is considerably under market. So for all those reasons we're satisfied with our position.

And where are the? Specifically which building?

They're primarily in the Sherman Oaks Galleria.

Okay. And then with respect to the tenant you discussed earlier, is that Rubin Postaer?

Yes.

And, if I'm doing the math right, are they paying $45 a foot gross? Looks like it, $3.6 million in rent over 80,000 feet.

That's correct, yes.

Where do you think that is versus market?

We - we think actually that in this market I think its actually a little low. I mean we've already back filled some of that space and I think we're - that back fill came in actually just about 20% rollup from that number. So -- Yes, I mean $45 is - and I got to keep putting it into our numbers, but it means you're not even at $4.

Right.

And Santa Monica is way over $4.

Turning to another topic. Can you remind me, at the IPO did you step up the basis of the portfolio?

In what? I mean --

From a tax --

141 on a GAAP basis forces you to step up the paces.

Well, from a tax perspective. If you're sitting here saying --

It was stepped up to the extent of the portion that was sold to the public, there was a tax step up, yes.

Okay, so from a --

There's more depreciation and more coverage for the dividend if that's the question you're asking.

No, the direction I was going in is if you sat back and said you know what, this is a good time to sell a few non-strategic assets.

Is that something that you could potentially do without triggering significant capital gains or - and or are there any tax indemnifications that I've forgotten about.

There are no tax indemnifications. You would trigger a - some capital gains. I don't think taxes are how we're deciding if we want to sell or not. So - I mean that's not even in there - its not really a big part of the equation.

It has a lot more to do with actually before we went public we sold about - I don't know, nine, 10 buildings that we thought were not our good class A, properly suited for our portfolio.

We did that. Now of course today I wish I hadn't done that. I'd like to be selling them today instead of when I did sell.

But - so, most of what we have today is the stuff that we wanted to go long term, go forward with. So there isn't anything that would fit that description at the moment.

Okay. And just from a strategic standpoint. I'm just curious where, Jordan, you're spending most of your time these days.

Is it trying to chase down off market acquisitions? Is it looking at potentially trimming an asset or two or trying to get a development underway. Where are you focused right now?

Let's see. I am spending time - I'm having people hold up notes to me that are like comedy in here.

They're saying don't answer that question.

I'm spending my time mostly on acquisitions, working on various types of acquisitions because it is such a tough market and trying to surface some of those off market deals.

Trying to make deals both here and in Hawaii and just following a very fast moving market when you have to really be - if, when a deal comes up that you know you want, you really have to have the comfort of knowing exactly what happened in all the other deals around it maybe that you didn't do those deals, but you better know exactly what happened with them to have this good pulse on what's going on.

And so, I'm staying extremely involved.

Thank you.

Thank you, our next question comes from Dave Aubuchon from A.G. Edwards. Please go ahead.

Thanks. Bill, you mentioned in your prepared remarks about the multi family and the CapEx this quarter and that it would be more normalized the back half of the year. Can you care to quantify what that could be?

Sure, we were at $80 a unit and I think we're looking normalized a little bit under $150 a unit.

And as for - because of the specific role in particular markets or what was the reason or was it just timing?

No, the $150 is kind of a blended number for the entire - if you're taking kind of like the entire multi unit - multi family portfolio.

Okay. Great. That's all I had thanks.

Thank you. Our next question comes from Brian Legg from Millennium. Please go ahead.

Yes, hi. The same source that talked about the Murdock portfolio, talked about the Blackstone group and they're putting on the market the old Carr portfolio and 5.9 million square feet in San Diego, Seattle, some markets that you wanted to get into. Would you have any interest in bidding on that portfolio?

The - actually in LA there isn't a ton of that Carr stuff. In terms of the other market. I mean we're - as I've said before, we're following the deals in San Diego. We're following the deals in San Francisco. We're watching that stuff up and down the coast very carefully.

Would that be the type of portfolio you would want as this is probably lower quality stuff, but are they in the locations that you would like to be in and some of the markets that you're not like Orange County, San Diego, Seattle and a little bit in San Francisco?

Well, I've said before, Orange Country is not a market that we've ever really pursued. I think San Diego is a good market, both the downtown and the UTC area. I also liked San Francisco, downtown and to some extent the Peninsula, but definitely Downtown.

And specifically about that portfolio, are they trying to sell the portfolio in different groups, a San Diego portfolio, a Seattle portfolio or are they trying to sell it all as one big portfolio?

Well, I don't want to go into - one guys sale and their whole deal.

Yes.

But I mean I've told you from our perspective the market that we're interested in and the way we're following those deals.

Okay. Okay. Great thank you.

Thanks, Brian.

Thank you. Our next question comes from Michael Bilerman from CitiGroup. Please go ahead.

Yes, Bill, just a question on the 168,000 square feet of leasing that you said was signed but not yet commenced. What's the timing of those leases commencing?

This is a rough figure. Generally from the time of signing to the time of recommence is about three months.

So you expect most of the stuff to hit in midyear?

Yes. The - the stuff that was signed not commences of March 31 we would expect would pretty much all come on by the end of Q2. The issue that I was referring to before, like going back to the Rubin Postaer space.

Yes.

We discussed. That's all leasing that we expect - its largely signed for that - in terms of that blended space but we expect that rent to commence in Q3 primarily and not in Q2.

And where is the mark to market on that? Its 45 gross, where does that go to?

On, on?

On the Rubin space.

As I said, we're going north of $5.

Yes, yes --

North of $60.

We said a few minutes ago - we said I think for some of the back fill space we've already done has already been about 20% above that exploration level.

Now, is that included in the leasing stats that were three -

(inaudible) lease to vote for us to be about five.

We just - it's about 20%.

And is that - has that already been included in the leasing stats that you're presenting on page 20. This represents leases that were signed, not leases that were commenced.

Yes, that would be - yes, it's a snapshot as of March 31st, so that would not be in there yet.

The leasing states that you have in front of you is - with the Rubin Postaer lease in place because that lease didn't expire until April 30th.

Right. And then the leasing stats you present on page 20, that's the leasing activity that you signed in the quarter or leases that were commenced in the quarter.

Those were signed in the quarter.

Signed.

Signed in the quarter.

Yes.

Okay. And then just -

Can I add something in regard to you're - the beginning of the - your first question that 167or so that we have leased on an occupied.

Yes.

You want us to put a caveat in there that's 30,000 square foot tenant that fitness facility that is not going to take occupancy until the end of the year because we're building the space right now. So that is the only one that is an outlier that it would take about nine months to complete.

And then what's the net rents on the 168,000 - or gross.

No, we're not giving out individual.

Yes, individual.

We're not giving out individual.

No, on the total 170.

We don't have it blended on the sign - the sign but not commenced.

I don't know the number. Yes, we'll have to dig that one.

Okay.

(inaudible)

I think we priced it that way.

And then what - do you have the amount that you had accrued for prop 13 in the quarter?

We haven't been giving those numbers out at all because we're still in the process with the County and working that out with them.

But you're effectively accruing the full - what you believe the amount to be in your numbers.

Yes.

Okay. Thank you.

Thank you. And our next question comes from Michael Knott from Green Street Advisors. Please go ahead.

Hey, guys. I'm just wondering if you can comment on the leasing success you've had at Warner Center. Has that been faster than you expected? Getting that up from I think 84% around the time of the IPO?

Yes, that's right. It is - a little bit faster than we had anticipated. We - at the end of Q3 we - the lease percentage was 86.3%. That rose to 88.1% by year-end and 91.4% into Q1. So its been a very fast pace.

And then, one other leasing question. Can you just talk about Honolulu? It looks like the occupancy in that market, for the market as a whole seems to have come (inaudible) over the last couple of quarter.

Can you just comment on what's going on there and your take on tenant demand in that market.

Sure, Michael. This is Bill again. In Honolulu, what we've seen. Its true that that's a small market and it's a market that has come a long way over the last - we've been in the market now a little over two and a half years.

And its come a huge way since and rents have been up significantly. What we're seeing right now is what we think is probably a near term pause in terms of occupancy.

Although as I - I think Jordan noted in his prepared remarks. The sub market for the Honolulu CBD in terms of asking rents on a market base in CBD was up pretty strong, north of 4% number for Q1.

So we think the underlying market there is strong, but it's a small market and its come a long way. And so we're not too surprised that it's kind of catching its breath right now.

And then my last question is for Jordan. Jordan, you referenced how you guys think about IRRs when you're considering capital allocation alternatives.

How - if given the pricing market today, if there was an asset that you really liked or a portfolio and you thought the IRR expectation was - call it 6.5%, how would you compare that to your cost of capital and how would you go about making a decision as to whether go ahead with a deal that you liked conceptually or not from that standpoint.

Well, we do look at IRRs and the 10-year cash flows on the properties. But frankly, a lot of the time, when the property comes up, if it's a good property and good properties that would match up to a class

A portfolio here, you got to buy them when they come up. And so I'm very swayed when there's a very good property that comes available and I feel like there is something we can do with it.

And I get - if there's a great property but it has strange leasing circumstances where it has the rents in there are very high and its driving the price even higher than I think it should be, as opposed to just being a sort of market high price.

That's what knocks us out. And where we're able to do a good job is if it's a great property and you're not paying for leases, you're just paying for a great piece of property that tends to be when we make the decision to go forward.

In terms of how I compare it to our cost of capital, or cost of debt or whether it's accretive or dilutive.

I can't say that we spend a lot of time on sort of the impacts in early years of - on terms of making a decision on whether it improves or hurts FFO or something AFFO metric.

I mean we spend much more time trying to decide whether it's a good property and we could build good value out of it over the long term.

But it is not a - its definitely not a quarter by quarter decision. It's not even a year by - year-to-year decision. I mean we're willing to buy something and have it take a couple of years for it to bear fruit for us.

Okay. Thanks.

Thank you. And at this time we have no further questions in queue. Management, do you have any concluding comments?

We'd like to thank everybody for joining us and look forward to speaking with you again in a quarter.

Great. Thank you. And ladies and gentlemen that does conclude Douglas Emmett's first quarter, 2007 earnings conference call.

If you would like to listen to a replay of today's conference you may dial 1-800-405-2236 or 303-590-3000 and use pass code 11087756# to access the conference. We thank you again for your participation today and you may now disconnect.