Douglas Emmett Inc (DEI) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's 2007 fourth quarter and year end conference call. Today's call is being recorded. At this time all participants are in a listen-only mode and a question-and-answer session will follow management's prepared remarks. At that time instructions will be provided to queue up for the questions.

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

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. Please note that this call is being webcast live on our website and will be available for replay for the next 90 days and by for the next seven days. Our press release and supplemental package have been filed on Form 8-K with the SEC and both are available on our website.

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 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 these risks please refer to the Company's press release and the current SEC filings which can be accessed on the investor relation's of the Douglas Emmett website. Please note that the market data sources that are referenced in management's prepared remarks are, C.B. Richard Ellis for Honolulu and Los Angeles office market, Reese for the Los Angeles office markets, NPS 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. Jordan.

Thanks, Mary. Hello everyone and thank you for joining us today. I would like to begin the call with a brief overview of our 2007 accomplishments, as well as some of the current market trends. Bill Kamer, our CFO, will follow with a more detailed account of the year and the fourth quarter. After our prepared remarks, we'll be happy to take your questions.

It goes without saying that 2007 was an extremely volatile year for the real estate industry. Despite the erratic capital markets, we are very pleased with the results of our first full fiscal year as a public company. Throughout 2007 our underwriting remained disciplined and we did not deviate from our historical valuation metrics. As a result we did not acquire many office or multi-family properties. Still, while facing 2007's very challenging acquisition climate, we were able to consummate two favorable off-market acquisitions. We acquired 1801 Century Park West and our Century City submarket during the second quarter and we acquired Cornerstone Plaza in our Olympic corridor submarket during the fourth quarter.

These acquisitions added approximately 224,000 care feet to our office portfolio. In addition at the end of December, we exercised our option and acquired fee title to the land under 1801 Century Park West. We also anticipate closing on a small off market acquisition very soon that we have been working on in Honolulu. Details of that transaction should be disclosed in a press release later this week.

We were successful in completing two significant financing transactions during 2007 on attractive terms. We increased our borrowings with Fannie Mae by $150 million at an effective fixed interest rate of 5.87%. We also obtained an increase in availability on our secured revolving credit facility from $250 million to $370 million in September. The interest rate ranges from LIBOR plus 70 basis points, to LIBOR plus 80 basis points, depending on the outstanding balance. Last year was a year of extraordinary strength in our leasing markets. Asking rents increased over 25% across our 10 submarkets in Los Angeles and Honolulu. For the first time in our Company's history, Douglas Emmett's commercial portfolio reached 95.7% leased. Looking forward, we are beginning to be increasingly optimistic about opportunities to acquire office and apartment projects in our markets on more attractive terms. Unlike other markets, our markets did not contain a significant number of buildings owned by overleveraged parties who are likely forced sellers. Nonetheless, we are seeing signs that sales activity will accelerate during 2008.

Now I would like to update you on the Los Angeles and Honolulu market statistics. During the fourth quarter, we continued to see increases in office rental rates. Los Angeles county rents increased by 3.6%, and Honolulu County rents increased by 1.1%. The rental rate increased within the 10 submarkets where our properties are located rose 2.3% during the fourth quarter of 2007, and 25.2% for the entire year. Office occupancy in Los Angeles county decreased from last quarter, dropping 30 basis points to 90.8%. Office occupancy in Honolulu county decreased 90 basis points to 91.5%. Within the 10 submarkets where Douglas Emmett's office properties are located, occupancies declined 50 basis points sequentially to 93.5%.

Our multi-family portfolio continued to be approximately 99% leased at December 31, 2007. Rent from newly signed leases during the fourth quarter is approximately 7.1% higher than rent from expiring leases for the same space. Excluding rent increases from rent control units that are subject to significantly below market rental rates.

As we mentioned last quarter, we have been experiencing a period of extraordinary rental growth which we believe is unsustainable. There was some decline in office leasing activity in January, but rental rates remained strong. The slowdown in activity could be attributable to the December holiday season. But there is the possibility that the well-publicized negative developments in the national economy are having some slight impact on our markets. At this point, it is too early to tell. Of course, there is still very little new supply in the pipeline and we are seeing well-diversified tenant demand across a variety of different industries. Our most recent leasing activity continues to include many tenant expansions which is also a positive sign for the underlying health of the Los Angeles economy.

With that said, I will now turn the call over to Bill Kamer, who will provide more detail on our 2007 fourth quarter and year-end operating results. After his remarks, we will take your questions. Bill?

Thanks, Jordan. Thanks everybody for joining us. Today I'll be providing details on our sequential quarterly results as well as our year end results for 2007. I will conclude with our guidance for 2008. For the fourth quarter, Douglas Emmett reported FFO of $49.2 million or $0.31 per diluted share. For the year ended December 31, 2007, FFO was $190.9 million or $1.17 per diluted share. Office rental revenues increased sequentially, 3.4% to $97.8 million in the fourth quarter, up from $94.6 million in the third quarter. Contributing to the $3.2 million increase in the fourth quarter were approximately $700,000 attributable to our purchase of Cornerstone Plaza, which occurred at the end of October, approximately $500,000 relating to lease buyout income for the quarter and an adjustment in the fourth quarter for a FAS 141 tenant writeoff for early termination. The balance of the increase is attributable to increased occupancy and higher rent. For the 12 months ended December 31, 2007, office rental revenues totaled $376.9 million.

During the fourth quarter, tenant recoveries decreased 21.6% to $5.3 million, primarily due to the seasonality of utility recoveries and timing issues relating to the reconciliation of tenant recoveries. Parking and other income increased 1.5% to $12.3 million during the quarter. For the year, tenant recoveries totaled $25.2 million, and parking and other income totaled $46.6 million. Total multi-family revenues increased 38 basis points over the third quarter, to $17.6 million in the fourth quarter. For the year, total multi-family revenues totaled $69.4 million. Our total FAS 141 income for 2007 was $40.6 million. We have previously indicated that, exclusive of new acquisitions, FAS 141 income will drop approximately 15% per year. We estimate that FAS 141 income for 2008 will be approximately $35.5 million.

On the expense side, office operating expenses for the fourth quarter were $31.8 million, down 2.9% compared to the third quarter, primarily due to the seasonality of utility expenses. Total operating expenses for the year were $382.7 million. G&A was $5.4 million for the fourth quarter. For the year, G&A was $21.5 million. We are estimating that G&A for 2008 will total between 23.5 million and $24.5 million. Interest expense rose to $42.5 million in the fourth quarter, up from $41.5 million in the third quarter. This increase is mainly explained by the use of our revolving credit line to finance the Cornerstone Plaza acquisition at the end of October, the 1801 Century Park land acquisition in December and our equity buybacks. As of December 31, the outstanding balance on our revolving credit line was approximately $180.5 million.

Total interest expense for 2007 totaled approximately $160.6 million. We anticipate that our interest cost for 2008 will be approximately $175 million, which excludes the impact of any future increase in debt and assumes consistent swap amortization. It should be noted that we do not have any debt maturities occurring in 2008. Fourth quarter recurring capital expenditures for our office portfolio average $0.19 per square foot, bringing the 2007 total to $0.46 per square foot. Recurring capital expenditures for our multi-family portfolio averaged $114 per unit in the fourth quarter, and $470 per unit for the year which was significantly lower than our prior 2000 estimate of $600 per unit. We anticipate that the 2008 office recurring capital expenditures will be approximately $0.50 per square foot and that the 2008 multi-family recurring capital expenditures will be approximately $600 per unit.

On the operational side, we entered into approximately 91 new and renewal lease transactions totaling approximately 462,000 square feet of office space, compared to 109 lease transactions, totaling approximately 326,000 square feet in the third quarter. Our overall office portfolio was 95.7% leased at December 31, 2007, which was unchanged from the previous period. However, rent paying occupancy increased to 95.0% at year-end, compared to 93.9% at the end of the third quarter. Our office PI, leasing commission, and other capitalized leasing costs during the quarter totaled $14.93 per square foot, as compared to $19.05 in the third quarter. This decrease is primarily attributable to one large lease transaction of no TIs that occurred in the fourth quarter which we believe makes the fourth quarter uncharacteristically low.

Our mark-to-market and roll-up metrics continue to be impressive. On a mark-to-market basis, the spread between our in place cash rent and our asking starting rent decreased to 35.4%, down from 37.2% in the third quarter. On a straight line basis, the average rent from our expiring leases compared to average rent from new leases signed in the same space, increased to approximately 55%, up from 53.1% in the third quarter. On a cash basis, the ending cash ramp from expiring leases compared to beginning cash rent from new leases signed for the same space increased to approximately 33.9%, up from 29.7% in the third quarter. As disclosed in our earnings press release yesterday during the fourth quarter we repurchased approximately 1.7 million share equivalents for approximately $40 million or $22.86 per share. Subsequent to the end of the fourth quarter, we repurchased 1 million share equivalents, totaling $21.5 million or $21.55 per share. To date, we have repurchased a total of 9.1 million share equivalents for a total consideration of approximately $215.9 million.

In conclusion, we are establishing 2008 FFO guidance between $1.25 and $1.29 per diluted share for the full year of 2008. This guidance excludes any impact from future acquisitions or dispositions, additional equity purchases, debt financings or other recapitalizations. With that I will now turn the call over to the operator so we may take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) One moment, please, for the first question. First question comes from the line of Michael Bilerman with Citi. Please go ahead.

Hey, guys. [Erwin Gossman] is here with me as well. Jordan, you referenced in your opening comments seeing signs of the transaction market maybe accelerating and didn't know if that was astrological signs or what you were sort of referring to. Maybe you can just give us a little more color.

Well, I said we saw signs. You mean for sales of buildings?

Yes.

Congratulations on your new job.

Oh, thank you.

Yes, we're starting -- I mean, I see deals. No, it's -- we follow the pipeline. We follow a lot of deals that are out there. I'm seeing -- there are deals now that we're working on. So I'm a lot more excited. Where I think -- where I'm feeling positive about our chances. So it's true that there aren't a lot of people under significant pressure as a result of dramatic overleveraging, but still it seems like maybe the economy or just deal fatigue has brought more people to the table that are considering trades now and we're now carefully following a few of them.

What sort of volume can you characterize and have you already -- is your fund discussion still under way so that when these things do come to market, you'll be able to do them in a fund rather than on balance sheet?

Those two are in a race with each other. I'm hoping the fund's in place in time. I'm not going to let the fund not being in place stop us. Then we'll just do the deals at the REIT.

And the level of -- are we talking about 500 million? A billion? What sort of transactions are you following?

I would say we're following transactions up in that range.

All right. Erwin had a couple of questions also.

Good morning.

Hi, Erwin.

Good morning, Erwin.

Can you quantify what the mark-to-market is specifically on your 2008 lease role?

What's the mark to market.

We don't normally give out what we're anticipating the mark to market is going to be on our roll. In the supplemental, as you know, we have the prospective four quarters showing the lease expirations that are coming up and we can make assumptions about where we think the rents will be signed during those time periods.

Well, since you lowered the overall portfolio mark-to-market, how much of that or how much have you lowered your overall asking rents for the portfolio, roughly?

Well, that can be a result also of the fact that our rents are up, right? We're signing leases at higher rates now so, I mean, in fact, I don't think you've seen any real lowering of our asking rents. You've just seen our rents in our portfolio going up. And you guys are seeing it obviously in the performance of the portfolio on a very real time quarter by quarter basis.

Okay. Do you guys feel comfortable disclosing the cap rate on your acquisition in the quarter and the one you're expecting to close on this quarter in Honolulu?

We haven't been giving cap rates for a couple reasons, but primarily because I don't think cap -- what we would consider a cap rate to be same as what you would consider the cap rate as. Also I don't think cap rates are very -- they're very weak weak tools for figuring out what's going on or the quality of an acquisition or even frankly, the direction of a market. But I know they're widely used but we haven't been using them or referring to them.

Okay.

And the Honolulu deal we'll, I think we'll be giving you some information, it's a slightly complicated deal but we'll be giving you some information on it as soon as it closes, which will go out in a press release but literally days away.

Okay. Thank you. That's it for me.

Thank you. Next question comes from the line of David Harris with Lehman Brothers. Please go ahead.

Yes, good afternoon or good morning, I should say. Jordan, do you have any sense that the media tenants are starting to feel the pain when you talk to them about their business and the space requirements going forward?

Well, you mean pertaining to the writers strike?

Well, that, but also obviously with a lot of fear about recession, there must be a lot of concern that advertising revenue is going to take a bit of a downturn here and that obviously is the lifeblood of the profitability of the media industry to a large extent.

Yes, I mean, I know a lot of -- because a a lot of media people happen to live in my neighborhood I do know a number of them. I can't get as much from tenants because I'm not talking to tenants but I could tell you this. Everyone is -- there's almost a more I would say a feeling of euphoria that the writers' strike is over. They're a pretty excited bunch now to get back to work. So I would say that if you're looking for some impact on the -- from the economy on media, they're going to be overshadowed by people's excitement of getting things going again because I think they feel like they've been held back, obviously, during the writers' strike. We haven't seen anything like that. Now, who knows. After they get going, maybe they're going to like not be writing as well and things will be off a little bit. But I haven't seen anything like that.

Okay. I know you answered a question on acquisitions just a minute ago. Is it possible to get a bit more granular. Would there be anything in the Arden portfolio that's currently for sale that's of interest to you?

That is a good example of a deal that's out there, good example of not an overleveraged portfolio where I guess GE has said to Arden I want to see trade here this quarter. But I'm not going to talk for ourselves about specific transactions.

Okay. What's left in terms of your share buyback capacity?

I don't think we've ever given out exactly -- I mean, we have a lot of cash. We could buy back a lot of shares. It's not easy -- technically speaking, it's hard for us to buy -- if we want to just go in a market and buy shares, you can't buy at the beginning and the end. I think it's 25% of average 30 day volume. So you can't really move the needle much in that sort of kind of fire fight fashion so more of what we've been doing on share buybacks is looking for when the larger opportunities come and making purchases at that time. And then of course we're balancing that against the feeling that -- I tried to communicate in the script that I think we're going to be making some deals. I'm pretty excited about the deals that are coming up, especially that there are some coming up that work extremely well with our portfolio where I think we'll give people -- we'll get some good returns.

What metric are you using to judge whether you should allocate capital to acquisitions or to share buyback? I know that's a big picture question. If you could give us an idea of your thought process.

Well, there's not a -- I wouldn't use the word metric because I don't feel like there's a mathematical calculation that we're doing. We are looking in the same way that we make a decision between buying an office and residential, we look at the deals that come up, that come available and then we make a decision at that time about that deal. So we've had a number of opportunities come up, as you guys know with the release of our investors to purchase stock over the last whatever months and you've watched us many times say hey, that's a good opportunity and make that purchase. We haven't gone in and bought on the stock market. Now at the same time as we see a building purchases come up, we see those purchases and we say to ourselves that's a great deal, we should make that deal. What we see coming in terms of property acquisitions in the future as caused us to get a little more excited and to say to ourselves, listen, say to ourselves, we need to make sure we have plenty of capital available to make those deals. Which is what caused us to decide to go and do this fund business and have the REIT take a very large piece of that fund. Because now we're starting to feel like there could be some great opportunities there.

Okay. All right. Thank you.

Thank you, sir. Next question comes from the line of Jamie Feldman with UBS. Please go ahead.

Thank you very much. Can you talk a little bit about what your assumptions are for the '08 guidance in terms of occupancy and same store growth?

We've given a lot of guidance on the areas in our model where we thought it would be hard for you guys to figure out and Bill gave, I don't know, six, seven things in his piece, interest and FAS 141, et cetera. For now, I think that's as far as we're going to go in terms of giving those assumptions and obviously we have a range of assumptions for a lot of the other things because we gave you guys a range of where we thought we were going to fall out. So I think you can, within your model, you can play games with occupancy and some of the other large drivers and make a decision about where we're going to come between $1.25 and $1.29. But the things that we were worried that it would be hard for you guys within your model to narrow down because of accounting or whatever, or calculating truly what we're paying in terms of debt service, we went ahead and just gave you those number so that's as far as we're going to go for now.

Can you just give a little bit more color on what you're seeing by sub market in terms of demand and maybe what markets are concerning you more than others?

So far, I think we're feeling pretty good across all of our markets. Let's see. Hawaii is still suffering a little bit from stuff we've talked about on other calls where we said that they need housing. I mean, they just need more housing. Maybe another tourism thing is going to be impacted by things going on in the economy there a little more. But so far, they're sort of sitting pretty stable, extremely full employment with us having the feeling if they could get housing going, that economy would even get a bigger boost. Out in a market share in Los Angeles, the only market that I would say is even a little bit on our watch list would be the stuff out in the West Valley where there's still some larger tenants. You would expect larger tenants to be a little more impacted than the smaller tenants on the West Side. With that said we're still getting very strong performance in both those markets.

Okay. And then the occupancy dip in -- on the residential side, is that seasonal or is that more of a sign of things to come?

Jamie, this is Bill Kamer. The occupancy drop in the fourth quarter in the multi-family portfolio, the 60 basis points, is entirely attributable to the Hawaii market, which was as a result of the fourth quarter, there were troop deployments during the fourth quarter and there was a temporary drop in the fourth quarter of occupancy that's come back in the first quarter. We're somewhat sensitive to those moves because we get -- we have a fair amount of housing demand that's generated from the military side there.

So we should expect similar drop every fourth quarter?

No. It's more random than that, based on when the Commander in Chief chooses to deploy.

I would expect it during every war.

Hopefully we don't see that too much then. All right, thank you.

Thank you, sir. Next question comes from the line of Chris Haley with Wachovia. Please go ahead.

Hey, Jordan, I really appreciate that neighborhood, that local knowledge. Two questions. First, what type of success rate are you getting at least over the recent period on 5% bumps, what kind of concessions are you making in terms of up front rents?

We're having very, very good success on the 5% bumps, which is smart of you to ask about because it would be a leading indicator of trouble and we're still strong. And of course holding onto that, we aren't seeing concessions at all.

Are you making any rent concessions up front?

No, we're not making them and we're not -- no, we're not.

Did you mention anything in terms of expected timing related to fund, JV fund announcement?

Well, it's a process of going out and talking to many of our old investors and some new investors and sort of rounding up the troops and making a decision about the liability and their receptiveness to it and we're going through that right now. I'm hopeful that we can conclude that that's a good move and get that put together quickly and be able to use it for acquisitions but it won't stop us. If there's deal we want to do, we'll do them.

The last thing is a question on share buybacks. I think either last quarter or prior periods you may have mentioned that you guys were bantering around the -- some additional detail on how much the buyback activity was between common versus unit. Have you offered -- can you offer any color on that?

You mean where we've been making the buybacks?

Yes.

No, we still don't -- I don't want to go into because it's too easy still for people to figure out what's going on. I don't want to go into where they're coming from but you're right in your assumption that it's (inaudible) from all the investors is where we're finding the opportunities to make those buybacks and so that's -- you can see, I mean you can do your own -- you can follow-up the numbers and make some judgment about where it's coming from because you see where our new share count is and what we've bought back.

Is there any way, just in terms of future -- assuming the fund gets done, I would guess that, or I would believe that there would be a fairly good level of conversion from the unit holders into potentially a fund given the success you've offered them in the past. I think it might be helpful to provide some indication as to what type of repeat buyers you've got or repeat contributors on this fund if in fact you do have several entities that go into it.

We're hopeful that we will get a good number of our same old investors into the new fund. I mean, quite frankly, there's not that many people we're focusing on and having discussions with. They of course are typically more accustomed to investing with a non public general partner as opposed to a public one and we're talking to them and hoping that we can get over that hurdle and get them comfortable. But they are certainly for us our best -- they're our -- if we can build the fund out of that group of investors, that's our best group to go back to and make that deal. They work well as a group. They all kind of like the same sort of incentives to be in place and we've all made a lot of money together so we're hopeful that we'll have a lot of success in the going back to them.

Thank you, sir. The next question comes from the line of Michael Knott with Green Street Advisors.

Jordan, on the last call you had said your expectation for an increase in sales volume was that asset values would flatten out. Is that still sort of implicit in your current comments?

Yes. I mean, well, I guess the reason why I'm feeling better about us being able to make acquisitions is that if you were to think of it, think of it this way. We haven't had a lot of trades. I know I sound like a broken record. So it's very hard to pinpoint where values are in our markets. But if you were to take sort of the huge numbers that people were thinking of that were considering selling properties in the midpoint of '07, and therefore not a lot of deals were happening because they had some wild number in their head because maybe they had heard about the New York deal or who knows what, now I feel like people are coming or becoming more realistic about the returns that people need to get and so from those numbers, they've come down. They've come off. And they're coming back down to a set of numbers that I -- I think just where people's head is is back down to a set of numbers where we can make some money and kind of make some hay out of those deals.

Mike, the other thing is, this is Bill, the other thing is when we talked about the likelihood being more optimistic. There's two components, one Jordan just mentioned, which is we think the pricing is stabilized at a point that is very attractive. The second is having trades occur that we can take advantage of and it's that latter point that we're feeling better about at this point.

What kind of unlevered returns are -- is the market at today on the West Side? Are we at 7%? 8%?

It's hard to say because really today there really haven't been any trades. So we'll see after some trades happen, but we have never been very comfortable as a Company buying down at an 8% unlevered return. So I think we're feeling that things are going to come out at higher numbers than that on an unlevered basis.

Okay. And then did you mention whether the Honolulu acquisition was office or multi-family?

No. Should I? It's office. Have to ask Bill to get permission to give information.

Okay. Can you just talk about why you can't share with us what the authorized buyback capacity is? Every other company to my knowledge does share that.

Well, I guess it's because we in general aren't interested in sharing any information about the conversations that we have with our Board or any instructions that our Board particularly gives us and that would be part of that.

But should we assume that from a capital allocation standpoint you sort of have carte blanche to buy back stock or is it limited from the 215 million you've already done? What sort of a--?

I think it's reasonable to assume that we and our Board together have been comfortable with all the transactions that we've done and I can't imagine they would be uncomfortable with any further transactions we would want to do. But of course they're our Board, we talk to them about what we're doing.

Mike, this is Bill, just so you understand our viewpoint on this, we don't want to be in a situation where we're making announcements of capacity that we may or may not exercise on and give a false impression of the market. We're announcing transaction that we do and we've consistently said and we're saying now that our approach going forward is to have a balanced view between property acquisitions and equity. So it would be -- we don't want to suggest that we're pursuing an extensive equity buyback program when we may not. It depends on the opportunities that present itself and how we balance our capital.

Okay. And then my last question is can you just talk a little bit about the rollover schedule in '08 in Valley and whether the concentration there is single tenants that have large spaces rolling or whether those are 20,000 and 30,000-foot tenants each quarter.

In the valley, of course the size of the tenants are a little bit larger, Michael. But nothing in particular. I mean, this is kind of consistent with what we've been -- what the normal roll-out year-over-year is.

I don't think we have any excessive roll-out there. And in terms of the large tenant size I was more just talking about the West Valley, not that Ventura corridor.

Okay. Thanks.

Thank you, sir. The next question comes from the line of [Matthew Conrad] with FBR Capital Markets. Please go ahead.

Good morning, gentlemen. The majority of my questions were answered, but following up on David's question, I know that you can't comment directly on the Arden transaction but did it surprise you that such a bulk of property would come to market right now when there just isn't much transactional velocity.

There's other stuff coming to market too. So no, it's not surprising. I mean, I'll tell you, and I said this a lot in the past, I think we had an incredible shortage of transactions over the last couple of years in our markets. So I thought there's been sort of a backlog and then where there were transactions, it mostly they transactioned into the hands of groups that are kind of financial engineering types and short term holders so I've always felt like we hadn't gotten our fair share of trades in the markets that we're focused in. So I think that there's going to be a swing of the pendulum back and there will be quite a number of trades that we'll be able to take advantage of.

With that said, has the type of buyer reverted to the mean. Have those financial engineers kind of moved away to the next picnic? Is it the more traditional and have you seen an influx of foreign money come in?

Foreign -- well, I'll answer the first question first. I think we've shifted back to operating buyers. So you need to have an operating platform to buy because you need to actually run the building, get cash flow out of it and make it work. If you're buying today, you're still buying a building with rents as you heard from our portfolio, that are 55% below where you're renewing leases at and the difference between doing a good and bad job there can make a difference between the property and the investment being successful. You need a good operating platform. We're in markets that are very hard on the organization running the properties. It's small demanding tenants. So when you take away the ability to do sort of financial engine your way and do a quick high IRR and you get back to needing a good operating platform to make real gains in terms of the NOI on the property, you get back to kind of our heyday which is dramatically eliminating the amount of successful outside buyers that could come into the market. We already have, as you guys know a very well -- large and well oiled machine operating our properties here and that's given us an edge and made us the primary buyer in the past. We're feeling pretty good about where things have gone back to.

In terms of foreign buyers, they need a way in. I mean, we've never -- we haven't historically seen a lot of situations where a foreign buyer will come in, other than the round of Japanese in the '80s. They have come in and just direct buy properties. They need to come in through an organization that can run or set up the deal for them. We hope maybe we'll tap into some of that equity in setting up the fund. The tougher buyers and we're back to kind of the world that we were operating in before, the tougher buyers for us to compete with are the local billionaires or let's say the Southern and Northern California billionaires because when they want to buy something, they're a lot less sensitive to return than we are and we're typically both going after the same very high class properties. I don't have a good feel to what extent they're backed, but certainly they've always been the biggest -- the toughest people for us to bid against.

Fair enough. That's great color. And then as far as property transactions, you've said this before. I guess everything that you're looking at continues to be in your existing markets.

Yes. I still think -- I mean, I think North and South, I think the whole Coast is still good. I think all the underlying economics of the West Coast are positive. But right now, with what we're doing, we're focused on our markets. We're focused on Los Angeles and Hawaii.

Great. Then just one other quick one. I know that you've been asked this as well. Now that you've got a competitive year under your belt, whether you think you'll provide same store NOI on markets and future supplementals.

We definitely will, whether that's next quarter or after that is yet to be decided but we definitely intend to as we get a few more quarters under our belt.

Perfect. Thanks a lot for your time.

All right.

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

John Guinee here. Very quickly given prop to you we would expect to see very few starts in your primary markets. Can you walk through what's going on at West Hollywood with Cohen Brothers, Playa Vista and then in Woodland Hills.

Okay. I don't know if that's a lot of detail. Let's see. (Inaudible) do you have--?

I do. Starting out in Woodland Hills, let's start with that, the last -- it's been in our numbers for a while. The last building there in the LNR project, which is a multi-phase project, is coming on line right now, 200,000 something feet. Not as familiar with the situation going on in Hollywood or West Hollywood. I don't think there's much supply there. Down in the Playa Vista, and it's Playa Vista, Culver City, El Segundo, down in that area, there's been about 800 to 1 million square feet that's sort of planned and/or under construction down there that's presumably going to come on a bit slower at this point and over the next four, five years not very much coming on stream the next couple of years. We don't really view those areas as directly competitive. We view them as a indirect safety valve for some of our larger tenants that we can't accommodate, as they expand in our markets to stay generally in the West Side. So we view it more as a complementary market than a competitive market.

Great. Thank you.

Thank you, sir. Next question comes from the line of Mitch Germain with Banc of America Securities.

Good afternoon. Jordan, how would you characterize the type of assets that are trading? Value add or more on the stable side?

Well, I guess there's two ways you can add value. You could completely rehab a building or -- and you could re-tenant it. I think a lot of assets are -- there are some rehab needed but I think it has a lot more to do with retenanting. When you're dealing with a situation of 55% spread from an old lease to a new lease, comparative on a straight line, if you want to get that like we're getting it in our portfolio, you've got to be good and you've got to be prepared to just shoot it out, at the skirmish level and retenant a building and get the rents up with all those little guys. So that's where I'm feeling real good, because if we could buy some good buildings that have very low rents, which we've always said give us a good building in a good location, we'll deal with the occupancy. I don't care if it's vacant. We can then rely on our skills to get the income up on that building. Then once we do that, we create value and that's what we're good at. That's exactly what's out there today and you combine that with the fact that the capital markets are dislocated. People have trouble getting debt. And then you compound that with the fact that right now coverage is everything and if you have low cash flow on the building, knowing you can get the rents up, maybe a guy can't bid very much for that building because he can't get very much debt, he doesn't have enough equity or he needs to get higher equity returns. So that also in turns plays very well into our hands where we've always been comfortable taking very low cash flow early on and building the cash flow for properties that we know are good and we do have access to debt. And have a lot of kind of debt capacity within our portfolio.

Those assets trading at a current or a stable cap rate? Obviously previously they've been trading more at a stable cap rate.

I don't know. Because I don't know -- cap rates are not -- I can't--.

All right. I understand. One last question for Bill. The seasonality of the operating expenses, I mean, is 2007 a good proxy of the seasonality?

Yes, it should be. Okay. Great. Thank you, guys.

Thank you, sir. Next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Thanks. I'm here with John Litt. Just kidding. Just a couple of quick ones. I know it's running long. The last call I was just on, HCP, a healthcare REIT, mentioned that they're having some pushback or some retreating going on in the JV market as they sort of figure out how they're going to finance themselves. Are you seeing any of that in your world? That the market has just changed and that there's sort of a resetting of returns and all the rest?

I hope there's been a resetting of returns because as you heard, we weren't very competitive in buying buildings before. In terms of the -- well, we haven't ever been big in the JV market. As a private company we were in the fund business and we essentially raised the fund almost every year. Now we're out as a public company raising a fund and I think it's too early to tell. It's never easy.

Has the market changing made it more difficult than you thought it was going to be to get something done?

I actually think it would have been more -- to the type of investors that we go to, it would have been more difficult in '07 than it is now. They're pretty -- they have a lot on the ground knowledge and if we would have gone to them in '07 and said come on we want to raise a bunch of money, we're going to go make deals, they know what's going on. They would have had said how are you going to make deals that are good deals? They would have had the same problem that obviously we had making deals. And so I suspect that the climate today is working in our favor in terms of getting some of those guys back in because it's a lot more apparent now that we'll be able to place the money well into good opportunities.

You mentioned the slight decline in mark-to-market early on in your comments, I think it came from Bill. Was that more of an L.A. impact or a combination of L.A. and Hawaii?

I think that the mark-to-market decline is--.

Cash.

Probably more -- probably more L.A., isn't it? Okay. Yes, it's more L.A.

It's more in the L.A. side, but again, primarily a function of the increase of the in place rents, that percentage rising faster than the asking rents rose during the quarter.

And then last question, if you pull off a big deal of some size, would you -- do you think it would be additive to your FFO guidance?

When -- in this type of environment, when rents are very low and then you buy a building and you get this mark-to-market on rents, I think it almost always is on an FFO metric I think it's almost always accretive. But I wouldn't put much credence in that. There will be good deals and normally on a, let's say a real estate cash flow look, it will have very low cash flow.

Okay. Thank you.

Thank you, sir. Next question comes from the line of Steve Sakwa with your Merrill Lynch.

Good afternoon.

Hi, Steve.

I just wanted to come back to the IRR question. I know you guys have historically targeted kind of 9s and obviously deals up until this point haven't made sense to you. You're obviously feeling more optimistic. Is that more because the going in yields are better, or because you feel more confident about the growth you can get?

I think it's hard to tell what -- I think overall, I think the -- you can apply it to either one of these, but I think the prices we'll pay, or the expected prices from the sellers now are back in a range where I guess, I guess that theoretical going in yield from the mid-'07 to what I think now people will are feeling like the going in yield is that they'd be willing to sell at, I think that would probably be better. I also think that the predictability of rental growth that our predictions with respect to rental growth are more in line with what people are predicting. I mean, we were sitting in the middle of the year, of 25% rental growth. I am telling you, I saw packages where they we're acting like you were going to get that for years to come. It was just crazy. It was the only way that it would have made the deal work. So I think people had a little dose of reality and I think their expectations have become more realistic and especially without the financial structure and borrowers in town, I think that we're going to be successful bidders again on some properties.

And is 9 the right hurdle for you or have you moved that number up in the last six months?

When we look back, all the way to the bottom of the '90s, all the way through, it was surprising that we were always around a 9 on an all cash. There's a lot that goes into that and the conservativeness of our assumptions and other things. But we have really stuck with -- that's just one data point but we have stuck with those original metrics and now I'm going to knock on wood. I'm glad we stuck with it through last year, because I think some trades could happen where people aren't as happy about the trade, now seeing where we are in '08.

And just to make sure I understand the fund, to the extent that you do it, I guess will all acquisitions going forward be done in that vehicle or will that have special parameters around it?

I would say generally, everything, all acquisitions would go through it. There are some very limited exceptions that relate to the REIT like the REIT needing to do a tax free exchange or needing to actually give equity to make a deal happen. But I mean, our intention is to make all acquisitions through the fund, the fund's strategy is going to be exactly the same as the REIT's strategy. I will expect to achieve external growth for the REIT through the fund.

Okay. And then maybe just one more. Just new markets, I mean, Orange County, San Diego, I know kind of long-term you have some interest in expanding outside of your existing markets. Just given the I guess turmoil that's happening, do those present any opportunities today?

Well, [Don Brent] is still grazing around San Diego, so it's hard to get into you his pasture. He's very good, aggressive, one of those billionaire bidders that when he wants it, you're not going to beat him. You saw that he bought the OP stuff, he's done other stuff down there, although I'm going to say, that's a great market. Okay. Up in San Francisco, I think for now we're allocating -- not think, I still think long-term there's some great opportunities up there. There might be some opportunities on the Peninsula. There might be some opportunities across the Bay. But I think for now, we're focusing ourselves on opportunities. We're feeling good enough about the opportunities that are coming up here in Los Angeles and Hawaii that we're staying pretty focused here.

Okay. Thanks.

Thank you. Follow-up question from the line of Michael Bilerman. Please go ahead.

Just wanted to come back to this mark-to-market. You went from 37 to 35 and the lease I think you signed in the quarter were at 34. So I guess you had to decrease your -- what your estimate of market rents is? Is that fair?

No.

No.

I don't know what the 34 is coming from.

34% was the actual leases that you signed in the quarter. So if those got into the base, then?

Those are -- they're different -- as we've been saying, that's one of reasons why we've been giving out all the metrics over time, because of the fact that people kind of want to look at them all but they really get -- they're slicing things very differently.

Right.

The deals done in the quarter, the 34% roll-up on leasing, those are the -- the differences in cash on leases actually signed during the quarter, compared to the expiring rent in leases from the same space. The mark-to-market is a portfolio-wide look on cash unrelated to transactions, actually done in the quarter and as I said before, it's the relatively slight decline in that mark-to-market in the quarter is a function of the fact that we had very, very large increase in our in place rents in the fourth quarter, resulting from the fact, as you know, our rent paying occupancy increased significantly during the quarter. Those are all brand-new leases, signed to current market that weren't in the data in the prior quarter. Plus the contractual annual bumps that occurred as well as the renewals on existing leases, where there's a significant roll-up. So we -- the product really of what's been building over time, which is we're starting to see some significant increases in our in place rent. That pace in the fourth quarter outstripped the increase in market rents in our portfolio.

Okay. That makes sense. Looking at the spread between occupancy and your lease percentage, it obviously has narrowed through the years, a lot of the leases that you had done previously starts to take occupancy. How does that trend and what's your sort of forecast into 2008?

Yes, we've said before, Mike, that we believe over a protracted period of time that on rent paying occupancy, that it will be hard in any market, no matter the strength of the market, to have rent paying occupancy average much more than 95% over any period of time. And -- in terms of following that. The delta between rent paying occupancy and our lease percentages over the last seven quarters has averaged between 70 basis points and 250 basis points so that number is going to move a around a lot and be volatile, depending on a number of factors. But I think the expectation should be that rent paying occupancy over a period of time won't be significantly higher than it is today.

And your same store -- so your outlook for '08 on the same store basis is what?

Again, we're not providing same store, either looking backwards or looking forwards at this point. Hopefully we'll be able to give a better look looking backwards in another quarter or two.

You said you purchased land underneath one of the assets. What was the dollar amount of that?

We previously announced when we bought -- it was HNO and Century Park West the acquisition we did in the second quarter. And as we announced when we bought it we had a fixed option to -- fixed price option to buy the land. It was a lease-hold with a fixed price option of $800,000. We exercised the option and bought the land for 800,000 in December.

The last one was just dollar-wise, the Honolulu acquisition at the end of the week?

Well, I think we'll wait until we do the press release later in the week. But don't get too excited. The emphasis in our remarks was small off market transaction and frankly the only reason we noted it is because it's so close in timing to this call that we just wanted to give people a little heads up.

So we're talking 25 to 50 versus 100 to 200, a much smaller?

Small.

A deal we couldn't pass up. We'll announce it soon. We didn't want to look stupid, and have a huge call and then two days later have an announcement and people go why didn't you mention anything about it. You'll see in the press release.

Okay. Thanks.

Thank you. We have a follow-up question from the line of David Harris. Please go ahead.

Yes, just very quickly. Blackstone is still pushing rents aggressively or have they laid off?

That's a good question. I think by their nature, they can't help but push rents aggressively. It's the nature of the beast. With that said, I also think they're settling in to becoming more of operators and they're focusing a little more on occupancy and renewal. But they're still leading the charge and taking the early blows on the shoulder ahead of us.

Are they managing all of these assets themselves or are they using third party?

Well, I think they're generally using the structure that they purchased from EOP in this area, as well as the cost. So they have some management companies, if you will, that they purchased and they're using those people and operating platforms.

Okay. Great. Thank you.

Thank you. Last question comes from the line of Michael Knott. Please go ahead.

Jordan, can you just give a little more color on a little while ago you made some comments on the acquisition market and financing and coverage is everything. Can you just expand on what the -- maybe the maximum loan to value is today, given that if you have a initial yield that's below the cost of debt, are we talking 50% loan to value? 60%?

Mike, this is Bill. I don't really know that -- the sweet spot for the best pricing for some -- for years in real estate loans has been between 60 to 65% LTV, depending upon who in the market. I don't think that that's changed. I think what has definitely occurred last number of months is that debt is -- there's less debt available overall. I think that's really hurting some people at this point, and I think in the cost and the underwriting standards. Costs have gone up. Underwriting standards have increased. We are extremely happy in the sense that we think that on a competitive level, our decision over the number of years to stay away from the securitized CMBS market, we focused on relationship lending, we think that that gives us a bit of an edge. But having said that, the market is tough for everybody. Costs are going up and we're working through that process with our lending group.

Will that factor potentially slow the increase in the sales market that you guys are expecting in terms of the increased volume you expect?

Well, I'm hoping that at some level it will speed things up because if someone owns a building and even if they don't have their back to the wall from over leverage, they might have refi'd out some cash and maybe they don't feel like they can replace that investment, so they feel like well, I better just sell, even though they have equity and they made money. I'm hoping that helps to accelerate things, not decelerate them.

Thanks.

Thank you. There are no further questions. I would like to turn it back over to management.

Okay. Thank you everybody for joining us and we look forward to speaking with you again next quarter. Good-bye.

Thank you. Ladies and gentlemen, this does conclude the Douglas Emmett fourth quarter 2007 and year-end earnings call. You may now disconnect and thank you for using the teleconferencing center.