Douglas Emmett Inc (DEI) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's 2008 first quarter earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. A question-and-answer session will follow managements prepared remarks. At that time, instructions will be provided to queue up for questions. I would now like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer; and Mr. Bill Kamer, Chief Financial Officer. Please note this call is being webcast live on our website and will be available for replay for the next 90 days and by phone 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 at DouglasEmmett.com.

During the course of this call, management will be making forward-looking statements. We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by known and unknowns risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe our assumptions are reasonable, they're not guaranteed to future performance, and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of these risks, please refer to the company's press release and current SEC filings that can be accessed in the Investor Relations section of the Douglas Emmett website. Please note that the market data sources that are referenced in the management's prepared remarks are CB Richard Ellis for Honolulu and Los Angeles office markets, [Reese] for the Los Angeles office market, NPF Research for the Los Angeles multifamily market and property and portfolio research for the Honolulu multifamily market. With that, I would 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 will begin with a brief overview of the company's external growth program followed by an update on our markets. Bill Kamer will provide a more detailed account of the first quarter financial and operating results.

While internal growth prospects remain strong, changing market conditions are permitting us to move more aggressively into the acquisition arena. As we indicated last quarter, we continue to be increasingly optimistic about opportunities to acquire office and apartment projects in our markets on attractive financial terms. Shortly after the quarterly earnings call, we acquired a small office building in Honolulu, Hawaii with our local partner. More significantly, at the end of March, we acquired a 1.4 million square foot office portfolio consisting of six class A office properties for a contract price of approximately $610 million or $428 per square foot. The properties are located in four of the company's core Los Angeles submarkets: Santa Monica, Beverly Hills, Sherman Oaks/Encino, and Warner Center/Woodland Hills. The majority of the acquisition was in Beverly Hills, where it increased our market share from 7.8% to 18%.

Each of the office buildings is located near and in some cases next to an existing Douglas Emmett office asset, permitting us to realize significant marketing and operational efficiencies. The tenant mix is similar to ours, small tenants with no significant exposure to any one industry. The properties were 86.5% occupied as of the end of the first quarter, compared to 94.3% for the rest of the Douglas Emmett portfolio. We expect that a number of additional large attractive acquisition opportunities will develop in our markets, so we have undertaken a series of capital programs to generate liquidity. Bill will outline our most recently debt initiatives in his prepared remarks. As you know from our last call, our primary equity initiative is to raise a $500 million to $1 billion closed-end fund. We anticipate that the initial closing of the fund will occur by the third quarter of 2008. As we have stated before, barring any unforeseen circumstances, our intention is to contribute the recently acquired six property office portfolio to the fund.

Turning now to the leasing markets, 2007 was an incredibly strong year for both rental growth and occupancy levels in our portfolio. As we have discussed in previous quarters, those metrics are unsustainable and as we anticipated, leasing was less robust in the first quarter of this year. During the first quarter, the ten Douglas Emmett office submarkets experienced a modest increase in office rental rates and a modest decrease in occupancies. Thus, we see the office leasing markets as predictably flattening. Still, we feel the outlook for our office submarkets remains healthy and strong both in the near and long term. Tenant demand is supported by diverse and vibrant businesses, such as those in the increasingly technology oriented entertainment industry. There is very little new supply coming online in the foreseeable future, with only modest deliveries expected even in peripheral sub markets such as Howard Hughes, Playa Vista, El Segundo, and Carver City.

Now I would like to update you on the Los Angeles and Honolulu market statistics. During the first quarter, office rental rates within Los Angeles County increased 12% year-over-year while dropping sequentially 34 basis points. Honolulu county rents increased 6.2% year-over-year and increased sequentially by 33 basis points. Rental rates within the 10 submarkets where our office properties are located increased 19.2% year-over-year and increased sequentially 1.7%. There was no change in office occupancy in Los Angeles County last quarter, holding at 90.8%. Office occupancy in Honolulu County increased slightly in the first quarter to 91.8% from 91.5% in the fourth quarter. Within the ten submarkets where Douglas Emmett's office properties are located, occupancies declined sequentially, 1.1% to 92.4%. Now, I will turn the call over to Bill, who will provide more specific details on our first quarter operating results. Bill?

Thanks, Jordan. Today I will be providing details on our quarterly financial and operating results. I will conclude with our updated guidance for the year.

For the first quarter of 2008, Douglas Emmett reported FFO of $53.4 million or $0.34 per diluted share compared to $0.28 per diluted share in the first quarter of 2007 and $0.31 per diluted share in the fourth quarter of 2007. Total revenues increased 5.4% to $134.8 million in the first quarter of 2008 compared to $127.9 million in the first quarter of 2007. Office rental revenues increased 8.1% year-over-year to $99 million in the first quarter. Multifamily rental revenues increased 4.3% year-over-year to $17.2 million for the quarter compared to $16.5 million for the first quarter of 2007. Our total FAS 141 income from the first quarter of 2008 was $10.2 million. While we're still finalizing our FAS 141 amounts for the properties we acquired in the first quarter, our preliminary estimate for FAS 141 income is that it will range somewhere between $36 million and $38 million for the entire year. On the expense side, operating -- office operating expenses for the first quarter were approximately $31.4 million, down 3.5% sequentially. Multifamily operating expenses for the first quarter were approximately $3.9 million, down 3.6% sequentially. The sequential decreases in operating expenses are primarily due to the timing of repair and maintenance and administrative expenses, which in the first quarter ran approximately $1 million below their expected annualized rate for 2008.

G&A in the first quarter totaled $5.3 million, which was down 3.2% sequentially. We continue to estimate the G&A for 2008 will total between $23.5 million and $24.5 million. Interest expense totaled approximately $41.2 million for the first quarter of 2008, down 3% sequentially from $42.5 million in the fourth quarter of 2007. The decrease in interest expense is explained by our swap amortization expense being approximately $1.8 million lower than anticipated for the first quarter. The $1.8 million decline was caused by the adoption of FAS 157 during the first quarter which required us to offset swap amortization by approximately $1.2 million as well as variations in the yield curve which accounted for the remaining $600,000. The values of our preIPO swaps will be amortized to zero over their remaining life. So the $1.8 million swap amortization expense savings in the first quarter will be reflected in higher swap amortization interest expense in subsequent quarters.

First quarter recurring capital expenditures for our office portfolio averaged $0.07 per square foot compared to $0.06 per square foot for the first quarter of 2007. Recurring capital expenditures for our multifamily portfolio averaged $92 per unit in the first quarter of 2008 compared to $80 per unit for the first quarter of 2007. We continue to estimate that recurring capital expenditures for our office portfolio in 2008 will total approximately $0.50 per square foot and that recurring capital expenditures for our multifamily portfolio in 2008 will total approximately $600 per unit.

Switching gears, I would like to briefly touch on the credit markets. As is widely known, the turmoil in the global credit market since last summer has resulted in generally higher financing costs and lower loan availability. Fortunately, due to our well established long-term relationships with various domestic and foreign lenders in the bank and insurance company syndicated loan market, we continue to have access to debt capital on relatively attractive terms.

During the first quarter, we obtained a nonrecourse $340 million term loan secured by four of our previously unencumbered office properties. The loan bears interest at a floating rate equal to LIBOR plus 150 basis points and we entered into interest rate swap contracts that effectively fix the interest rate at 4.77% until January 2, 2013. The loan matures on April 1, 2015. $225 million of this financing was funded in late March and the remaining $115 million was funded on May 1.

We also financed two acquisitions during the first quarter. For the Honolulu Club acquisition, we obtained an $18 million loan at the floating rate of LIBOR plus 125 with the term of two years plus a one-year extension. We financed the six property office portfolio that we acquired at the end of March with a $380 million bridge loan that matures on January 2nd of next year. We anticipate that we will obtain long-term financing over the next several months in order to repay the bridge financing.

As a result of the financing that we obtained during the first quarter and the completion of the final funding on May 1st, we now have approximately $300 million available under our secured revolving credit facility. In addition, we don't have any debt maturities through the end of 2009, excluding the previously mentioned bridge loan and the credit facility which matures on October 30, 2009 but has two one-year extension options.

As Jordan mentioned, we intend to contribute the six property office portfolio that we recently acquired to the fund upon its first closing. This will result in a reduction of our current leverage. In the interim, we remain financially positioned to take advantage of acquisition opportunities as they arise. We continued to buy back shares this year. During the first quarter, we repurchased 1.1 million share equivalents for approximately $23.8 million or $21.48 per share.

On the operational side, excluding the six property office portfolio that we acquired on March 26th, our overall offers portfolio was 95.3% leased at March 31st, 2008, up 10 basis points year-over-year but down 40 basis points sequentially. Rent-paying occupancy was 94.3% at March 31st, 2008, up 50 basis points year-over-year but down 70 basis points sequentially. Our new six property office portfolio was 88.9% leased and 86.5% occupied at the end of the first quarter. Our multifamily portfolio was 99.6% leased at the end of the first quarter of 2008, up from 98.7% leased at December 31st, 2007. We entered into approximately 99 new and renewal lease transactions, totaling approximately 474,000 square feet of office space. Our office TIs, leasing commissions, and other capitalized leasing costs during the first quarter totaled $12.54 per square foot as compared to $14.93 in the fourth quarter of 2007. As was the case in the fourth quarter of 2007, these numbers are impacted by a few large low TI deals. In general, we believe in our capitalized leasing costs have remained relatively flat since the third quarter of 2007.

In February of this year, when our joint venture acquired the small office building in Honolulu, it also acquired the assets of the private membership, athletic, and social club that is located in the building. As of May 1st, our joint venture transferred the assets of the club to an unaffiliated sports club management company and entered into a 20-year lease with them for the club premises in the building.

Our mark to market and rent roll up metrics increased year-over-year and declined from last quarter. However, they remain at levels that represent signs of healthy internal growth. On a mark to market basis, excluding the newly acquired six property office portfolio, the spread between our in place cash rents and our asking starting rents increased year over year to 31.2%, up from 25.7% at the end of the first quarter of 2007 and down from 35.4% at the end of the fourth quarter 2007. On a straight line basis, the average rent from expiring leases compared to the average rent from new leases signed for the same space in the first quarter of 2008 increased to approximately 38.2%, up from 31% year-over-year and down from 55% in the fourth quarter of 2007. On a cash basis, the ending cash rent from expiring leases compared to the beginning cash rent from new leases signed for the same space in 2008 increased to approximately 21%, up from 14.7% year over year and down from 33.9% in the fourth quarter of 2007.

As we wrap up with our prepared remarks, I would like to conclude by updating our 2008 FFO guidance. Our updated 2008 FFO guidance is $1.28 to $1.32 per diluted share. Our previous 2008 FFO guidance was $1.25 to $1.29 per diluted share. This guidance assumes we will have an initial closing of the fund by the third quarter of 2008 and continues to exclude any impact from future acquisitions, dispositions, additional equity purchases, debt financings or other recapitalizations. With that, I will now turn the call over to the operator so we can take your questions.

(OPERATOR INSTRUCTIONS). Our first question comes from the line of Michael Bilerman with Citi. Please go ahead.

Hey, guys.

Hi.

Irwin Guzman's on the phone with me as well.

Hi.

Just a quick question on the mark to market. You talked about it sequentially going down 400 basis points, but I know we are mixing and matching a bunch of different things. But Jordan you talked about rents in your market sequentially being up and at least the leases that you signed in the quarter had cash rent spreads of 21%. I am just trying to figure out if you lowered your asking rents? Or are market rents really not up for that spread to narrow?

Well, market rents, I have never been in love with that metric, but the bottom line is that first you have got the rents that are rolling off being from a later and later period when rents were stronger. So you are making a comparison that doesn't -- that is driven both by the beginning rent, the rent from the old lease and then where asking rents are. So that would naturally narrow as it moves forward. The question as to whether rents are generally moving up, I think they are. It's such little movements -- it is really hard to tell. You can anecdotally point to leases where you say look rents are going up and you can anecdotally point to leases where they're flat. And I don't think there's enough, a long enough trend to really make a statement that they are absolutely flat or they are absolutely still going up. They have certainly slowed down their pace.

Right. But thinking about a 400 basis point sequential decline in your mark to market, that's a pretty dramatic decline in one quarter when you have talked about rents being flattish. And even the leases you signed, it shouldn't cause that much of a decline.

This is Bill. One of the things that has been noted is that the metrics that we are using on deals signed during the first quarter -- it is heavily dependent on the mix of transactions. So the actual leases that we are rolling off of, the particular deals and the mix across various submarkets. So that number is going to tend to bounce around. I think we should expect it will continue to bounce around as we go forward.

You have talked about only reporting same-store NOI growth until you had a comparable quarter, which should be this quarter. Can you comment on what your same-store NOI cash basis was for the office and apartment portfolios?

What we have been waiting for is to have data that we were comfortable going forward represents a good comparison. In Q1 of last year, which was our first full quarter as a public company, based on estimates we were using on the expense side at that point that got adjusted in subsequent quarters. It wasn't a good quarter to start that comparison with. Our intention at this point is that we will be providing same-store data starting next quarter.

And your expectation for same-store growth for the year is?

We will talk about it next quarter.

Irwin had a question.

I am just wondering -- realizing you probably don't want to get into which specific assets you are interested in. On the deal volume that you expect to come to market that you're currently tracking -- what's the dollar volume of assets that you are tracking or expect to come back and what's the split between office and multifamily?

Well, let's see. There's a pretty strong pipeline. Certainly $1 billion plus. In the actual deals you do, that number could swing dramatically. There's some residential. There's some large office. If you hit it on the large office you can be mostly office. If you hit large residential and some office, I don't know how it will play out. In terms of the pipeline itself, there's a good amount -- there's a good amount of both I think is coming.

Can you just talk about if you are seeing any movement at all from west L.A. into downtown? I know this is something people talk about. You hadn't seen it until now. Is any of that sticker shock starting to take effect?

No, not really. I mean, as I said before, when you hear about a tenant moving from west L.A. to downtown, it is sort of the exception that proves the rule. I mean it makes it into the paper, whereas tenants move out of downtown to the West Side all of the time. So the West Side is pretty tight now. So maybe there's not as many tenants moving to the West Side, but you still don't hear about a lot of cases. I read something that said there was one tenant that was maybe thinking about moving downtown. But no, I am not seeing downtown as a significant draw off the West Side.

I think that just to answer more than you asked, I think that tenants are evaluating the West Valley and areas in the Valley more. Because there they continue, they might -- you might have a law firm or something that has, you can get pretty expensive housing out in the Valley. And you might have a law firm that has partners living in the Valley and partners living on the West Side. And they used to have the attitude that oh we all need to be together, team approach and now that it has gotten expensive -- and even more driven by commutes than cost. Some of the guys in the Valley might have just been screaming for so long, saying hey, we want a satellite office that we can work out of so we don't have to drive in every time. We have tenants in our portfolio that both have leases with us here on the West Side and in the Valley where some partners go to Valley, some partners are on the West Side.

Okay. Thank you.

Thank you. Our next question comes from the line of Ian Weissman from Merrill Lynch. Please go ahead.

The West Side has actually held up pretty well if you look at the latest broker statistics but maybe you could talk specifically about the north L.A. suburbs, specifically Woodland Hills, Warner Center, where you've had vacancy go from the high single digits to the low teens. Obviously the mortgage market has affected that and there's a lot of sublease space. What's your outlook for that market and what do you expect rents -- what do you expect rents to go over the next call it six to 12 months there?

Well, I think that it's one of the markets we are in that still have a remainder of some larger tenants and it was a market that was still in the process of reaching its full potential as things started to turn. So, it is probably -- I hate to use the word tough, but it is one of our tougher markets to lease up because we are leased up into the 90s there. It is still a very good market. Over the short term, though, I suspect that to the extent there's a falloff in the pace of rental growth. You will see it more there than you will probably see it in some of the other places. In terms of the market over the long haul, I still believe it is a very good long term market to be in because there's a great mix of housing and population and education and work force and amenities. If you live out there and you work out there, it is just a very comfortable commute to work as opposed to the tightness we feel on the West Side. So I still like that market a lot. It has also got, starting to really develop a good set of NIMBYs and fanatics -- whatever you want to call all of the people that don't want building in their area. So I am getting more and more comfortable that you won't see a lot of aggressive new product coming on.

Rents are up 30% in that market in the last call it four years, but a mid teen vacancy -- do you care to put a number on where you think rents could pull back over the next 12 months?

I don't know. I don't know. I mean they have been climbing quickly for the last year or so. So it is maybe you lose 5%. Maybe you even, let's see. Yes, maybe you lose 5 to 10%. But even there, it is not as though there's so much space that there's tons of options for every tenant. So, depending on what you are kind of dealing with, there's some sublease space that's coming on. But sublease space for large tenants that doesn't necessarily always work. They need a direct deal. They want a different sort of deal, et cetera. And we bought a building out there recently, one of the building in the ARM portfolio that had some real vacancy right next to the buildings we have. They're over 90%. And we feel good about being able to lease it up. It's a good amount of deal flow out there. So, it's not dead. Guys are still going there and growing there. But it is Countrywide is farther north than that. I don't know what will happen with them. They would have an impact on that market, although they're not in as much in that market as markets near it.

My last question relates to the deal flow you think you will see on the market. You have had a pretty high hurdle rate in your underwriting, but you are obviously getting more excited about the prospects. That only tells me that pricing has pulled back, let's say over the last 12 months. I know your underwriting hasn't changed. What would you say has happened to valuations over the last 12 months in your core markets?

Well, Bill, had something to add.

I was just going to say on the issue of the short-term increase in vacancy in the West Valley, which goes to the issue of supply and which is one of the reasons that we are really feeling bullish about things as we move forward. As you probably remember, that market, that submarket is one of the few where there was any new supply coming on stream at all. And there was in this past year 250,000 feet got added on the LNR projects. That hit the market. There's currently literally nothing under construction out in that market. That is in part -- that, coupled with as you suggest to the extent there were mortgage tenants in our markets, they were located there. The combination of the two factors is the factor that is leading to the short term increase in vacancy. But those issues are largely moving behind us at this point. So that's the reason we feel good about things going forward.

To answer your other question, we are feeling good about it because pricing has come back to more rational numbers. So to answer your question directly, I think that pricing is maybe off 10 or 15% from -- it's tough because you say 10 or 15% of what, because there weren't a lot trades of individual buildings where you can say, okay, that was the high point. I'm coming off of a set of values I figured things were at in my head even though not a lot of trading, but that I could extrapolate values from the few trades and back up bids that there were.

Okay.

Thank you very much.

All right.

Your next question comes from the line of David Harris with Lehman Brothers. Go ahead.

Good day, guys. Is it possible to talk about the terms that you are offering to investors on the fund in terms of the management fee structure to promote what little leverage you might be adopting within the fund?

I don't mind saying that. It is basically a fund where the asset management fee is 1.25% and the expected leverage levels will range between 50 and 65% for office with a maximum of 65% on office. And for residential, they will range between 50 to 70% with a maximum of 70% leverage on residential. The promote is effectively -- there's a little minor twist to it, but it is basically 20% over [an A] and it is expected that the REIT invest -- take a position also equivalent to a 20% equity position. So they will have 20% equity and they will have a promote that's 20% over [an A].

And the GE buildings you referenced or the $610 million if that should be characterizing it a different way. The recent acquisition of the buildings, would those go in at cost to you -- there wouldn't be a mark up?

Basically they would go in at our cost plus an 8% return, annual 8% return on the equity we have invested. We bought them into an LLC. We will just transfer, so we have a certain amount of equity in the LLC to make that transaction happen. That came from the REIT. When we transfer it over, we will transfer that LLC interest over, not having taken out any income from the earnings of the properties. And what we will receive back is just 8% on the money for so long as it was in there before the transfer.

One final point of detail on the structure, is what is the life of the fund going to be?

It is a four year acquisition period with a ten-year life and then to have extensions it takes a vote of the investors.

Okay. And did the acquisition trigger any Prop 13 issues or can you just?

Yes.

Obviously it did.

It triggers a Prop 13 reassessment, and as you guys know that have been with us since the beginning, it is not a quick process. But it is in process.

Again, any idea the magnitude you underwrote?

The magnitude of what?

The magnitude of your underwriting in terms of the Prop 13 impact.

We are not -- I mean what we underwrote won't be far off from where we will end up. You can -- when you buy a property, and you just buy a individual, a single asset, a lot of times you can do 1% of that purchase price and it is done quickly. As soon as you get into a portfolio with allocations and there's adjustments for a variety of things, you end up having -- numbers move a little here and there -- not dramatically. So our, how those numbers fall out, I do not believe will impact our anything you guys are looking at in any material way.

Okay. One final point on the fund if I may. Should we think of that as being purely your acquisition of stabilized assets which may require some repositioning CapEx but certainly will exclude development?

No. Everything we do with very limited exceptions that are peculiar to the REIT for different reasons would be done through this. So if we think there's a deal that's good development deal to the fund and whether it be office, residential or any other product it would be done through the fund.

Okay. Forgive me, one final question and I will leave the floor. Is it conceivable you can use OP units to acquire properties within the fund structure or is that something you wanted to keep on the balance sheet?

You couldn't use OP units of the REIT to acquire properties to the fund. But of course a fund -- a person that has a piece of property that wants to invest in the fund and assuming we want the property could contribute to the property into a fund. And then they would have it, a LP interest in the fund equivalent to the equity value that we had agreed to that they contributed.

And we are also maintaining the flexibility that if there was someone with a property that -- where it made sense, it was appropriate for them to come in with OP units into the REIT. That would be one of the circumstances where the REIT could still acquire. So we will maintain our flexibility.

Just so I understand, that would -- in that scenario, Bill, that you just outlined, that property would remain 100% on your balance sheet or you would still have the option to take it into the fund?

Well, let me just say, we would push to have it go in the fund. So it would only be in a situation where someone came and there was absolutely, they were not willing to do anything except for take OP units. If we could get them to go into the fund and take a position in the fund, that's what we would do. So I mean that's for sure our best interest and what we want do have happen. It would be in a rare circumstance to somebody came and said, I will do this deal with you, but it can be only be done with OP and I don't want to go into the funds. If we thought it was something we wanted to do, then it would end up being an asset of the REIT.

Okay. Thanks so much, guys.

Your next question comes from the line of Rich Anderson with BMO Capital Markets. Go ahead.

Thanks and good morning still, guys.

Hi, Rich.

I just wanted to clarify the mark to mark number, the 31.2, that's the entire office portfolio of Honolulu and L.A.?

Yes.

I just wanted to make sure. The higher guidance, is the increase in guidance a function exclusively of the fund?

It's primarily a product of the acquisitions we did in the first quarter.

Okay. The fund would, you would lose NOI; right, the REIT would, you'd gain [C's] but -- would the fund be initially additive to your FFO outlook?

Well, we are assuming we are doing the fund in the numbers we gave you. So you mean if we removed the --

You have six properties you bought. You are going to put them in the fund, lose 80% of the NOI, gain fees.

You mean over the long term?

Yes.

I think it depends on the success of the properties. I think we have -- so far the properties are contributing to the fund. I think we will be very successful. If you looked at it in a vacuum, you would say hey, wouldn't you want to own those on the REIT books and make a ton of money. But we're committed to this structure, the fund structure. The fees -- one way or another don't -- they're not the big swing item. The big swing item is just if the properties are successful then yes, you had rather own them 100% on the REIT, but you will still do well with them in the fund.

Are you still able to get the 4.5% rent bumps without any problems still in this market?

In the first quarter and currently we are still generally getting 5%.

I am sorry, 5%.

From the West Side properties. And then outside of the West Side we are getting 4 to 4.5%. Depending on the deal.

Okay. Where was the 5%? I missed that.

West Side.

Okay. You mentioned that $1 billion plus acquisition pipeline, Jordan. What do you think that number was this time last year?

There was probably -- obviously the Blackstone thing was floating around. I don't know how you'd want to count that. But if you didn't count that, I felt it was real lonely, sort of almost deserted. We were working on a lot and optimistic about almost nothing.

Okay. I figured. In terms of the portfolio acquisition six properties, how long were you looking at that? Did you look at it maybe a while ago and it went away from you and it came back? Is how that you how it sort of went in this case or?

No, no. What happened was, I think, I think they were surprised by the fact it came available. You remember that GE bought Arden, right. And initially they made a sale and then some time later they sold a huge number of their B properties, a very large portfolio and I think they had kind of gotten to the portfolio they liked and felt like was a good portfolio and long term in L.A. I think what happened was when GE -- we all heard the call when they saw that the earnings maybe were going be a little loss the first quarter. In fact, in their press release at the end of the first quarter when they posted earnings, they said a reason they were off was failure to consummate some sales before the end of the quarter. I think when they saw that coming, they sent an order down to Arden and said we need to generate some earnings, you need make a sale of blank, whatever it was, $1 billion to $1.5 billion. I don't know what it was. So Arden quickly had to put up sort of a portfolio of assets and try to generate those earnings and they had to close by the end of March. We were both surprised that came up.

But what happened was there was more than the six assets. There was 12 in L.A., 10 in San Diego, something like that. And we started working on it, having gotten a lot of guidance that if we wanted to be competitive we would have to purchase the, all -- they knew we weren't going to do the San Diego stuff, but they want us to do all 12 L.A. assets. We were really struggling with that. That process really got going at a good clip the beginning of February. And by the end of February, watching it, we really felt like we could still get a competitive price if our offer was just for what we wanted, like really long term wanted, not buying more and then figuring to sell some we have never been having big at, big on. I have never liked doing that. So, we put in our offer for just the six we really wanted and were lucky enough that they -- now of course at that time, there's only 30 days left, so they really had to choose someone they knew when they made a deal would close. You're documenting a deal and closing at the same time. And we were lucky they chose us and then we did do what we said and we closed a little less than a week early.

Interesting. Last question. I think it was, I don't know if you used this word, Jordan, but at the beginning of your prepared remarks, you said tougher leasing environment, we're forced to look externally. I think you used the word force but maybe not. If that was the word, why would you use that word, why do you feel forced to look externally?

I don't think word was forced. I said while internal growth prospects remain strong, changing market conditions are permitting us to move more aggressively into the acquisition arena. What I was saying was --

I misheard you, I am sorry.

Okay.

You don't have to explain anymore. I will apologize. Thank you very much.

All right. Thank you, our next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead.

Hey, guys. Jordan, apologize if I missed this earlier, but does the fund have any geographic constraints?

It is not worded very strongly right now, but the intention is pretty clear that the fund is constrained to Hawaii and the Coast, the West Coast. I mean it doesn't say you can't buy anything in Denver, but all of the purpose language of the fund is for acquisitions in the coastal market and Hawaii.

But it's coast broadly defined, not just your current markets.

That is up and down the coast.

Okay. What is your observation if any about pricing movements over the last 12 months and markets outside of your existing portfolio and is that any more attractive today than it was say six or 12 months ago?

Well, I think San Francisco has a good long term prospects and I don't think pricing -- maybe it has come off [subliminally] to the way it is here. But for us to move into that market right now we want to see it come off even more. We're at a higher comfort level here. San Diego, I haven't seen -- our assets in San Diego weren't necessarily ones we would've wanted anyway. And then I haven't seen a lot come available there that you can really key into and say here is what is happening with pricing there. Orange County is not a market we were ever focused in, although there has been a lot of discussion of it because of (inaudible) situation. But it is not a market that we have ever had much of an interest in. Sacramento, I think pricing is off a little more, but hasn't been a big focus for us. That give you enough info on other markets?

That's helpful. I guess related to that, do you feel like the fund structure makes it incrementally more likely that you could expand outside of your markets?

No it doesn't make it more or less likely. It's, the fund structure just doesn't change what we would buy. Frankly, our whole lives we have always bought new funds. So maybe the argument to be made reverse which is being the public company with that changing what we would buy, but that wasn't either obviously because we didn't do anything last year because it didn't meet the criteria we were used to living with in the fund structure. So, I don't think it changes any of our thinking in terms of what would or wouldn't be good to purchase.

Okay. That's helpful. How much competition was there from other bidders on the Arden assets you bought?

Well, that's a good question because I think there was very little competition for a larger portfolio and there was a lot more. I mean they had multiple bids on all of the single assets, and I am pretty confident that the sum of the single asset bids were significantly higher than what we got the six assets for. But, and that's -- what's interesting about that is that condition was reversed in '07. I actually believe that portfolios were trading for more than the individual assets would have traded for. So we have gone back to more typical condition where if you are willing to buy a portfolio of assets, you will get them incrementally for a cheaper price. And that's what happened here. I mean they needed someone with the money that can close quickly, give them a big sale. It is a lot of work to negotiate a purchase and sale agreement and get a deal closed. So they wanted to have a real impact. I think it, my guess is that was worth between 5 and 10% beyond just the other pressures on the deal that got us a good deal. Just the fact that they said to themselves maybe even 10 -- really a real 10% to themselves, hey this is a, we can generate $600 million of the $1 billion we have to come up with right here, bam, we know they will do it. So it is off by such and such, $20 million to $30 million -- from what we can do on a individual asset deal, but it is done. Whereas you do individual assets, one guy maybe does it and another guy tries to carve you up, another guy just blows out and you don't make your number. So that's a long way of saying I think the competition at our level wasn't very stiff. But on a individual asset level, I think you had multiple bids on every asset.

That's really helpful. Thanks and my last question and I will yield the floor. What, I am assuming your unlevered IRR expectation for your purchase is above the 8% hurdle rate at which the promote comes in the money. Should we think of your fund as being seeded with the big portfolio that is sort of in the money with the promote from day 1?

Well, my feeling about this portfolio is that I said this. In the past, when we have done funds, it is -- my best day is, the money is raised we are done and it is also my worst day because I am working on an ulcer, worried about placing the money effectively, and getting the goods returns out of it. So I'm happy it is raised and scared about getting the money placed and nervous. I get frantic working on finding good deals. This is one of the first times when I feel like I have like got some good returns in the bank that we're contributing this portfolio. I already know it is a good chunk of the fund. It has good built in, everyone -- good returns for everybody. So, I've got a little breathing room having done my first big deal on this fund and knowing that it is going be a real winner in terms of going forward. Because usually we raise the money and we haven't bought anything yet. So you are sitting there knowing your first acquisition is going be really scrutinized even though the investors don't have much say about what you buy, they're all looking at it. So it is real nervewracking, but here I have a great winner that's going in. So I am feeling as comfortable as I can ever feel in this business.

Thank you.

Thank you. Our next question comes from the line of Dave AuBuchon with Robert W. Baird. Please go ahead.

Thanks. Jordan, with regard to your acquisition opportunities, would you say you think there's more inefficiencies in the office market right now or the residential side?

I think that the -- residential historically trades just tighter than office. So I think that the residential is more -- a little more dislocated than office. There's a little more desperation on the residential right now than on the office. And that doesn't necessarily mean that you are going to get better returns in residential than if office because residential always trades so tight anyway. But it has loosened up more from where it typically is than the amount that office has loosened up. Maybe that's rightfully so though. I don't know. Both have come off and there's product coming available on both fronts.

And do you feel since you have outlined a pretty good case that the initial contributed assets are going in a pretty good return already -- do you think it is likely your next deal within the funds are going be traded toward the residential side or should we not assume that?

We are, I would say we have very good residential and office deals that we are right working on. I mean we have got a good pipeline. I mean really, I am feeling pretty good about it. I mean we are, you guys heard me last quarter -- I mean last year. We are working on stuff. We are just not getting there. It is almost feeling like practicing instead of doing. Now we are back to doing.

And your comments were regarding large opportunities? That applies to the residential side as well?

Both residential and office.

Bill, a question for you. Can you just update on the -- where the share buyback authorization stands and how much you have left?

First of all I want to welcome Dave AuBuchon back into the quarterly calls. We missed you last quarter. And on the issue of buybacks, we said before we don't announce any authorizations we have. To the extent we do buybacks, obviously they're with approvals, but we are putting out any number ahead time to create expectations we might buy when we are not. We will announce deals we actually do.

All right, thanks for your time.

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

Thank you.

Hi, John.

A couple of quick ones, did you ever break down the price per building of the six assets you acquired for $610 million.

Are you kidding, do you know how many runs we did on the individual buildings, the combined buildings, separating value, allocating value? We did it.

No, no, did you disclose it in a SEC document?

No.

Would it be appropriate to ask you to do that now?

No, we have disclosed the amount we are going to disclose on the portfolio.

Second as a clarification, we assuming you are getting paid 125 bips on the equity, not the whole gross fund amount?

Yes.

And then, when you decide to go with a fund versus raising common, is this, are you raising in the fund because it is in your D&A and you are comfortable with that? Or did you do a trade off and say look at $26 or more, $26 a share or greater, I am more interested in raising common? And is there a cost of capital analysis you did comparing to cost of capital raising of funds versus the cost of capital to common?

That's a very good question. I would say that we did the analysis that you are talking about, we looked at where our stock was -- and we felt like it wasn't even a close call let's just say we would be willing to be diluted. But I also think it is fair to say we are prejudiced by our D&A.

Thank you.

Thank you. Next question comes from the line of Mitch Germain with Banc of America Securities. Please go ahead.

Hey, good afternoon, everyone. A couple of quick questions. I apologize if I missed this. The entire $610 million is going to be contributed at once?

It is in an LLC. We are just going to transfer the LLC interest over to the fund.

You mentioned that. I wanted to be sure. I know you have planned redevelopments on a couple of the assets. Just to clarify your comments, that will be done within the fund?

Yes, it is going now. It is all happening within the fund, within the LLC.

How does it work -- does the fund have right of first refusal on any future investments?

No, no, the -- we are effectively general partner, or we're in charge of the fund. If we think something is good to buy, we are buying it for the fund. It is not -- there isn't some other fund that decides if they want something or don't want something. We are it.

So basically the fund vehicle will be your sole acquisition vehicle on a forward basis.

Exactly. The entire external growth strategy of the REIT is being executed through the fund.

Thanks, Jordan.

Thank you. Our next question is a follow up from the line of Michael Bilerman with Citi.

Yes, just to clarify, the $500 million to $1 billion -- that's total enterprise value of the fund or is that total equity?

Equity.

Great. Thank you.

Thank you. Our next question is a follow up from the line of David Harris with Lehman Brothers. Please go ahead.

We're flogging this fund question to death, aren't we. Is there a chance that -- does the or should I say does the -- the recognition of the promote, is that going be possible at any time other than the winding up of the fund? Could you harvest this after three, four, or five years or something?

Well, actually what happens and even spending a little time on this issue -- funny you should ask about how the funds accounting impact the REIT and what is and isn't reflected in the REIT's numbers and an FFO going through to AFFO. Typically, funds -- especially when you buy properties in a fund like this and you have your (inaudible) -- you are working on a very tax efficient structure. We happen to be very focused on being tax efficient as a REIT because we just like being tax efficient. So we are actually as REIT managers more focused on tax efficiency than on driving up a particular metric like FFO or AFFO. So we always take the tax savings route. The funds make -- where you see the impact of the promote in a fund is as the property's cash flow grow in value, you will go out and re-fi and generate distributions from those re-fis that are tax free and I suspect also will flow through and not be brought, taken in really as income. But in your private kind of owned fund, you think it is a great day because you are getting cash. The REIT will be happy getting cash too. I'm not sure what I think you might see. Other than the asset management fees, I think you might see a real lag in the recognition of the success of the real estate owned by the fund until we actually do go and sell the properties, even though we will be getting pretty good economics for the fund.

It becomes a little challenging for us to include that by way of valuation. You can get at it from a NEV perspective rather than FFO. The other question I have too is you pointed out that starting a fund with $610 million is specified properties, and it is a contrast to what you have done before where you have had [blind pools] which is pretty standard model of course.

Yes.

Did that affect your hurdle, I would, the hurdle have been more benign had you not been willing to put up the $610 million? It is a great comfort to the investor to see the $610 million more than a signup to a blind pool, isn't it?

Yes, I guess so. No, it didn't, we actually are using, it is very, very small variations. The terms are the same as the terms of the last funds when we were a private company. So it didn't affect anything. I think actually, I am glad we did that deal and it is a real good deal because it is encouraging. It is helping speed investors along, let's say in terms of getting subscriptions and commitments. Because even though we have an incredible track record which you guys have all seen in our S11, in the nine funds we did at a private company. I think we are being looked at a little bit as a different sort of animal right now because we are -- it is a public company that is the general partner as opposed to Dan, Ken, Chris and I. So they're saying, well, you are answering to the public. You have an obligation to the public company. You have an obligation to the fund. Very similar questions you guys are asking. And so, I think we have to prove ourselves up again, with the public REIT being a good GP, a good producer share for the fund. So this deal helps us rebuild in our new uniform credibility as good fund managers. That's a structure that we want to continue and get back firmly in place the way we had it in place in the past as a private company.

The other little bit of a head wind we are running up against right now is that we aren't typically, we don't typically promise say the returns we have delivered. We have delivered returns that were well north of a 20 IRR, and we typically promise more conservative returns. And we are not, we don't go out and say oh we are doing -- we are jumping around the markets where people are really on their heels. And so when we are out raising money, I do hear from people like, kind of hot thing today is they want to be doing distressed debt or equity or distressed is just a word everybody is focused on. And yes, I would love to buy those sort of highly distressed situations, but it is not exactly what we do. And we are describing the fund as doing really what we do. It is what we did with the last nine funds. So that's a little bit of the head wind because most people are allocating money -- particularly money from foreigners, they're allocating U.S. dollars. I think they're allocating them for let's call it distressed situation. We don't describe ourselves as being acquirers of distressed situations. We have a strategy you are familiar with in the markets we are in.

What are the returns that you are indicating to investors that you are talking to today? Is it 15?

We are telling investors the same thing we said on the last nine funds, which is that we will deliver to them, to the investor between an 11 and 14 IRR. Now we dramatically outperformed that on every fund but that's what -- that's what we say.

That's what net of fees and net of taxes?

Net of everything.

Well.

I mean not net of income taxes.

No.

Yes, their distributions which they receive, their checks, the cash flow from their making an investment and the cash they get back, to the investors after everything will be between an 11 and a 14.

Okay. Great. Thanks so much.

All right.

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

Hi, Michael.

I missed the first couple of minutes of the call this may have been spoken about earlier. It sounds like you are pretty far along with this fund and it seems like a pretty wide gap to have between $500 million and $1 billion of committed equity. What's the likelihood that it's just the lower upper end of that range and what's the timing for when it will be settled?

Well, we haven't had a first closing. So, we are giving ourselves some room. In terms of you guys, I don't want to fail. The reality is -- I actually just described on the last question that was asked. In one sense, we are getting a good response, but we are running up against the head winds of most of the -- there's a lot of big foreign investors that can write very large checks, but they do seem to be focused on [solely] this distressed situations, distressed debt, distressed equity. I think -- I have been doing a lot of traveling, and I think when we meet with them we are able to catch their attention. When they see the returns we have delivered in our last fund, that catches their attention when they see what we have done here in the markets we are in. But until we lock those subscriptions down and see where they're at, I won't really know -- we are comfortable giving that range of $500 million to $1 billion. And maybe the $1 billion. And it may be $500 million.

Okay. And then just to be clear, the promote structure is based on everything over [8] on an unlevered basis, right?

No, it is not levered or unlevered. It is the IRR to the investor. So once the investor has [reserved] their money back with an 8% return, then the promote kicks in.

Right. 8% on their equity.

Yes.

Okay. Thanks.

Thank you. Ladies and gentlemen, this concludes the Q&A section of the call. I will turn the call back over to Mr. Jordan Kaplan for his concluding comments. Mr. Kaplan?

Okay. I guess that the summary from all of the discussion we've had is that I feel like Douglas Emmett is very well positioned to weather any potential economic storm with our team and our position and multitalented portfolio. And I also feel like we are in a great place right now to take advantage of what's going on in this market. So, I hope you all enjoyed the call and I appreciate you joining us today. We will see you next quarter. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation. At this time, you may disconnect.