Douglas Emmett Inc (DEI) 2009 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by, welcome to Douglas Emmett's 2009 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 management's 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 that 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 also 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 current SEC filings, which can be accessed in the Investor Relations section of the Douglas Emmett website.

Please note that the market data sources that are referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office market; REITs for the Los Angeles office market; MPF Research for the Los Angeles multi-family market; and Property and Portfolio Research for Honolulu multi-family markets.

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.

In our last quarterly call, I shared with you our perspective on the Company's position and future prospects during this economic downturn. The last three months have transpired generally in line with our stated expectations, and we are maintaining our existing 2009 FFO guidance. So today I plan to give a brief update on a few items, and then Bill will present a detailed account of our financial and operating results for the first quarter of 2009.

As we anticipated, our office portfolio occupancy continued to decline at a slow but consistent pace during the first quarter. As we stated last quarter, we began 2009 with office occupancy at 91.7%. We ended the first quarter at 91.1%, a decline of 20 basis points per month. In the first quarter of 2009, we lost 56,000 square feet of occupancy due to tenant defaults, compared to 63,000 square feet in the fourth quarter of 2008. We believe that this trend of elevated tenant defaults will continue for the remainer of this year. Tenant defaults are very difficult to predict, and the magnitude of future defaults will likely be a primary driver of our overall occupancy rate during the remainder of 2009.

During the first quarter of 2009 we continued our work to strengthen the Company's balance sheet and liquidity position. We fully repaid the outstanding balance on our secured revolving credit facility, which was $49.3 million on December 31, 2008, and we increased our cash position by $21.2 million during the first quarter. Douglas Emmett also reduced its quarterly dividend, which was paid in April, to $0.10 per share from the $18.75 per share we paid the prior quarter. This dividend reduction should provide Douglas Emmett with an additional $50 million of liquidity on a annualized basis.

During March and April, we repurchased 819,500 shares of our common stock in the open market, at an average cost of $6.51 per share. In terms of a fund update, we deconsolidated the fund operations from the Company's financials at the end of February. Therefore, the Company's first quarter financials reflect the operations of the fund properties on a consolidated basis for January and February and on an unconsolidated basis for March. As a result, certain aspects of the Company's operating performance, when comparing the first quarter of 2009 to the fourth quarter of 2008, are somewhat understated. Bill will provide additional detail on this issue in his formal remarks.

Our goal is to raise a fund with at least $500 million of equity by July of this year. We continue to have very positive discussions with a number of potential investors, and remain hopeful we will accomplish our goal. However, as can be expected during these challenging times, investors are taking longer to make decisions, and July is almost upon us, so it is possible that we may not meet our desired timetable.

Before I turn the call over to Bill, I would like to mention once again that the Douglas Emmett management team is as committed as ever to same hard work ethic that we have relied on in the past to achieve our goals. We have daily discussions on ways we can strengthen the Company, achieve additional operating cost efficiencies, and improve our leasing results. As a result, we are continuing to implement programs that I believe will minimize the adverse effects of the current recession.

Now I would like to turn the call over to Bill Kamer, who will provide specific details on our first quarter 2009 operating results. Bill?

Thanks, Jordan.

For the first quarter, the Company reported FFO of $54.3 million or $0.35 per diluted share, an increase of 1.6% over the first quarter of 2008. Last quarter we indicated that we would recognize additional income during 2009, in connection with the transition into the fund of the six properties that the fund now owns. During the first quarter of 2009, we had interest and other income totaling approximately $2.9 million of FFO or $0.02 per diluted share, which is primarily attributable to this transition. AFFO for the quarter ended March 31, 2009 was 41 -- $42.1 million, an increase of 11.7% compared to the first quarter of 2008.

Turning to our same property results, same property net operating income increased 5.2% on a cash basis, and increased 0.4% on a GAAP basis, when compared to the first quarter of 2008. Same property total revenues increased 4.5% on a cash basis, an increased 1.4% on a GAAP basis, when compared to the first quarter of 2008.

Breaking out the office and multi-family portfolios, same property office revenues in the first quarter of 2009 increased 5.2% on a cash basis, and increased 2.4% on a GAAP basis, compared to the first quarter 2008. Same property multi-family revenues for the first quarter of 2009 increased 0.2% on a cash basis, and decreased 5.1% on a GAAP basis, compared to the first quarter of 2008. As we have discussed in past quarters, the GAAP decrease is due to a decline that began in the second quarter of 2008 of approximately $1 million in FAS 141 income per quarter that was generated as a result of our IPF.

Moving away from same property statistics, total revenues for our entire portfolio increased 8.3% to $151.4 million in the first quarter of 2009, compared to the first quarter of 2008. Total office revenues increased 10.3% to $134.1 million, compared to the first quarter of 2008. On a sequential basis, total office revenues in the first quarter of 2009 appear to have declined from the $138.1 million reported for the fourth quarter of 2008. However, as Jordan mentioned, we deconsolidated the fund operations from the Company's financials at the end of February; therefore, the Company's first quarter financials reflect the operations of the fund properties on a consolidated basis for January and February, and on an unconsolidated basis for March. If we include the office revenues from the fund properties for March, our total revenues -- total office revenues for the first quarter are $138.8 million, which is a 50 basis point increase from the fourth quarter of 2008.

Office parking and other operating income rose 6.4% in the first quarter of 2009, compared to the first quarter of 2008. Our total office and multi-family FAS 141 income for the first quarter of 2009 was approximately $10.1 million. We currently anticipate that FAS 141 income will range between $31 million and $32 million in 2009.

On the expense side, office operating expenses increased to $40.3 million in the first quarter of 2009, compared to $35.9 million in the first quarter of 2008. If we include the deconsolidated office operating expenses from the fund properties for March, our total office expenses for the first quarter are $41.9 million, which is 5.2% lower than our total office expenses of $44.2 million in the fourth quarter of 2008. Multi-family operating expenses increased to $4.5 million for the quarter ended March 31, 2009, compared to $4.3 million in the comparative quarter of 2008. G&A in the first quarter of 2009 totaled $6.4 million. We continue to expect that total G&A for 2009 will range between $24 million and $25 million.

Turning to operations, the office percent leased for the 10 sub markets where Douglas Emmett office properties are located declined 140 basis points sequentially to 89.3%. Market rents for the 10 sub-markets where our office properties are located declined 3% sequentially. During the first quarter we entered into 93 new and renewal office lease transactions totaling 331,000 square feet, compared to 323,000 square feet of office space leasing done in the fourth quarter of last year. Our office portfolio was 91.1% occupied at March 31, 2009. As Jordan mentioned, from January 1 through the end of Q1 we have declined 60 basis points. Our multi-family portfolio was 99.2% leased at March 31, 2009, which was up 10 basis points sequentially. Our office tenant improvements, leasing commissions and other capitalized leasing costs during the first quarter totaled $18.16 per square foot, compared to $18.28 per square foot for the fourth quarter of 2008.

Our mark to market and rent roll up metrics during the first quarter are as follows. On a mark to market basis, our in-place cash rents were 6.6% lower than our asking starting rents in the first quarter of 2009, which was down from 14.6% at the end of the fourth quarter of 2008. On a straight line basis, the average rent from expiring leases was 18.5% lower than the average rent from new leases signed for the same space in the first quarter of 2009, which was down from 32.9% in the fourth quarter of 2008. On a cash basis, the ending cash rent from expiring leases was 5.5% lower than the beginning cash rent from new leases signed for the same space in the first quarter of 2009, down from 16.8% in the fourth quarter of 2008.

Now turning to guidance, we are maintaining our FFO guidance range for the full year of 2009 of $1.24 to $1.30 per diluted share. This guidance excludes any impact from future acquisitions, dispositions, equity purchases, debt financings, recapitalizations or similar matters. This guidance also assumes that our 2009 non-cash interest expense related to the amortization of our pre-IPO interest rate swap contracts will be approximately $18.5 million.

With that, I will now turn the call over to the Operator so we may take your questions.

(Operator Instructions)

Our first question is from the line of Tony Paolone with JPMorgan. Please go ahead.

Can you comment on where you think cash rent spreads trend over the balance of this year?

Yes, Tony. We are estimating that our cash rent spreads might decline a little bit from first quarter through the end of the year based on what we are projecting, but that's obviously going to depend on the mix of deals that are actually done. But at the moment, it looks like it's probably at or maybe trending down slightly from where we are on a cash basis.

Do you think if occupancy continues to slip at the rate it's been going at, that that number can become meaningfully negative on a cash basis?

You know, I think, I think our general -- let me just come back to this. I think in terms of the rent side, the published data that from we look at from CBRE, we -- in our 10 sub-markets, market rents have declined from the peak month, which was Q3 of '07, through first quarter of '07 by about 9%. And we think that published data probably understates the decline a little bit from what we are seeing, and we think that number is likely continuing to trend down to some degree for the balance of the year. I think that's about as far -- as clear as our crystal ball is at this point. Obviously, we have a sense of occupancy dropping at what we have described as kind of a slow steady rate, given -- which we tend to track the relatively consistent lull that we have. I think as long as we continue in that fashion on occupancy, that's probably the trend we will continue see on rent as well.

Okay. In your packet, in Warner Center, I think in the second quarter you show about 190,000 square feet expiring, can you just comment on the status of that space?

Yes. It's primarily in one lease, which is Blue Shield, which is I think 135,000 square feet, and we are in advanced discussions on that with them at this point.

Okay. Then was there any lease termination income in the first quarter of note?

There was a modest amount of lease termination income. We had about $600,000 of lease termination income in Q1 of this year, compared to $150,000 in Q4 of -- $150,000 of lease termination income in Q4.

Okay. Thank you.

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

Thank you very much. Nice job, guys. It appears to me, correct me if I don't have this right, but you got -- your competition in west LA is primarily institutional ownership, and if that's the case, or even if it isn't, what's your competition doing in terms of the TI tradeoff versus rental rate? As I recall, Blackstone jacked up rates a year ago, and maybe backed off of that?

Yes, I'm not so sure they are doing as much of that anymore. There was a period of time when we had a sense they were trading -- they were trading a higher face rate for higher TIs, which were applicable to rent, which they could use against rent. I think that might have calmed down a little bit.

Okay. Who's your primary competition in the Valley? Is it also institutions or is it primarily private owners?

The Valley isn't as organized as the west side is, so I would say it's -- of the billings that are competitive, they're institutions but they only own one building. I don't know that there is many private owners. L&R and RC in Warner Center area have been creating competition, and that's institutional, but it's mixed.

All right. Thank you.

Thank you. Our next question comes prom the line of Richard Anderson with BMO Capital Markets. Please go ahead.

I'm sorry, I missed this number. You said the asking versus in-place cash office rent spread to 6.6%?

The spread on our leases on a cash basis is 5.5% in the quarter.

Okay. So that compares to the number that got, you know, ridiculously high in like the '06, '07 timeframe. That's one we always refer to like 30% or more, 40%?

A couple of the numbers got very, very high. The straight line comparison, I think, was really the one that got the highest, and it's still significantly higher.

What was the straight line number?

18.5%.

Just -- sorry about that. I think you might have explained, and I kind of lost you a little bit, too. What's the difference between cash and GAAP rents for multi-family, if it's an annual lease?

Oh yes, in terms of on the same property, it's an issue which thankfully this is the last quarter we are going to have to have this conversation, on a comparative period, which was we had FAS 141 income that we -- that was generated by our IPO that was -- went over a period of 18 months, so it disappeared in April of last year, which was about $1 million s per quarter, and that's been gone since the second quarter of last year, so this will be the last comparative period that we have to deal with that.

Oh, I see. So it was in the first quarter of '08?

That's right.

Oh, okay. And so that was -- so all the FAS 141 income is all office now?

Almost all. There's a very small amount of FAS 141 income from our significantly below market units that are under rent control, which goes out for a long time, it goes out for like 10 years or something.

Okay. What are your comments -- you seem to have your ducks in order in terms of your liquidity position for the next few years, but what are your comments about the $2.3 billion term loan in 2012?

Well, I mean, that is the result of the fact that when we went public we took all of our debt and launched it out as far as we could, which at that point was 7 years. So that debt is broken up in to 7 or 8 -- 7 different loans. So it's not as though we had $2.3 billion that has to be dealt with.

Yes, the $2.3 billion in loans on the commercial side, it's 7 different loans that have different properties in them that we can deal with on a piecemeal basis as the window of opportunity presents itself over the next three years to move those maturities out and refi or extend them. In addition, there's $388 million that also matures in 2012 on the residential side, that's in two separate Fannie Mae loans that we have. So the 2012 maturities are in nine different loans, all of which we can address --

We don't have any deal made in prepayment penalties. So we are keeping an eye out for an opportunity to relaunch them farther out.

Okay. Jordan, is there a way for you -- or maybe you can, I assume you can do something through the fund at this point, you can acquire it at this point, is that right? Or do you still have to wait to get up to your $500 million of equity target?

No, we can acquire now.

You can acquire now. So what is your appetite right now in this marketplace?

Our appetite is good. We are spending time, you know, looking at things but, you know, there is not really very much that's been served. There is a few little things out there, where the bid ask is still pretty far apart. But, you know, it's more seeing what's coming than -- and doing our work on the stuff that's coming now, early, than it is having a number of things ready to go. There is projects we have been now following for two years that I think when they do trade, they are under the type of pressure they will trade at market. A market trade today was a good deal. There is not -- we are not seeing any trades.

Do you see, if you look couple of years out, some distressed sellers that maybe they're not trading now but certainly look like opportunities at some point in the near term or intermediate term?

I think over the next 18 months, most of that is -- most of those trades will in some fashion happen. Are you saying, do I see people who I think two years from now are going to be more distressed than they are today?

No, but that they don't necessarily have to pull the trigger now, but will eventually have to, it's a foregone conclusion type of thing?

Yes, I guess. There is basically three types of sellers in our market. In this kind of market, one is the kind that maybe you are talking about, which is someone who has an overleveraged loan, and they're just eventually going to lose that property one way or another because they are just so out of the money, but maybe they're covering debt service so they can wait a little longer. That is pretty rare. There's a few of those, but those are imploding now or in the next six months.

The second group is properties that are owned by institutions that maybe not necessarily here in our market but in general are having significant liquidity problems, so they are just looking for somewhere to create liquidity, so they looked in the LA market and they say that building still seems to be doing well, I can sell it and get a lot of cash out of it. The building may not even have a loan on it. There is more of them, and I think they are under liquidity pressure, and I think that those trades are coming out now or the next six months or so.

And the third group, which is even a larger group and more opportunity, is a group that is also not necessarily under any kind of a short-term debt pressure, but it's a group that sort of came into the real estate industry for a while to buy and flip, people what call financial engineers, they're not really operators, they don't have operating platforms. So they openly are saying, we didn't even mean to own these properties for more than a year or so, and we want to get out. So their -- you know, they had originally gone in thinking about some very high IRRs. They know they're not going to achieve that now, and so they will trade out. That's many properties in our market, which are owned by groups, for example, by [Archstone], which is now effectively run by a bankruptcy trustee and some banks, you know, that stuff's going to trade, right? And everybody knows Blackstone is eventually going to sell some of their stuff. And I mean there is a couple of companies like that, that we know will trade and they're not in for the long haul.

Okay. How would you, in your history of doing this, I mean, do you see an opportunity unlike you've ever seen before eventually from an acquisition standpoint or do you -- or is it not quite that sanguine, I guess, is the word I would use?

I think this is -- this round over this next two or three years of trades will be, in my business career, my last round of this kind of incredible opportunity. I had it one time in the early 90s, and as Dan says, we made as much hay while the sun was shining at that point as we could, and I think it's going to happen now again, because it's gone back to an operators market, and I think pricing is going to become -- rational would be a generous term. So I'm excited that this happened, and a time when I still got the energy to be very active.

Last, Bill, is that interest and other income, is that something we should expect to recur, that $2.9 million?

No. It was a period -- we discussed last quarter, there was a period of transition of income relating to the contribution of the fund, and it primarily hit over Q4 quarter of last year and Q1 of this year. There may be a relatively small amount of it in future quarters, but minor.

Okay. Thank you.

Thank you. Our next question comes from the line of Brendan Maiorana with Wachovia. Please go ahead.

Thanks, good morning. Just a follow-up on the acquisitions, can you just refresh my memory in terms of what the capacity is currently on the fund for new acquisitions?

Well, the last time we announced the amount we raised it was $300 million, and we actually were shooting for $500 million to $1 billion, but I mean it's just very hard to raise money. I still think we might make it to around $500 million, because we are working with some guys I think will get close by July, and after that final closing we will announce to you where the fund ended up.

That says roughly there's $200 million available? Potentially, if you get the $500 million by July --

Of what moneys left to buy? Well, when we finish, maybe I'm not getting -- you're asking today, or if you use the $300 million, there would be $50 million-odd left, and if you use the $500 million, there would be $250 million.

So if you don't get additional fund commitment, say you got the $50 million available, that could probably be absorbed quickly with a deal or two, would you be willing to do, and do you have the ability to do, deals on your own balance sheet, given that you've got line capacity of $350 million-plus, would you be willing to do deals with that line in hopes of terming out that debt, or would you hope to be more conservative if you were pursuing it on your own, and lock up some long-term financing before taking down any acquisition?

I like the way you answered the question. Would I hope to be -- I hope I'd do the smartest thing and I'm conservative and careful. But just to back up a little bit. The process that we've just been through of trying to raise this money has been an outstanding process for the Company. We've -- we set a goal for ourselves of that $500 million number, and I hope we hope we get there, and I think there is a good chance we will, but beyond that we've made some very good relationships, equity relationships, that I think whether it be on a follow-on fund, in a JV structure or a couple of other structures, I think we've developed for ourselves a -- strong equity access through this process. I'd like to do it the way we've always done it through the fund, but we have developed a great set of relationships that I think we will be using -- even with the fund, we will be using for deals that we may be doing over the next six to 18 months.

In terms of whether it be -- just to characterize it properly, foolish and imprudent to use a short-term credit line to purchase properties which are long-term investments and I don't have long-term debts that match up with it, I hope I won't to that, we don't do that, I don't believe that we will. I think that we will be instead very careful to use good long-term both equity and debt to make the acquisitions that we make, so I do not think they will be particularly stressful to our balance sheet.

Fair enough, okay, thank you. Then turning back to the lease maturities, looking at 530,000 that you got rolling, which includes the Warner Center, which you spoke about, there is 110,000 of that in terms of square feet that is locked up. That seems like a lower ratio than you have historically had; can you just give us a little bit of sense of how the expirations are trending and what the likelihood of retention may be in addition to Warner Center?

I think what we are seeing is a trend that we saw a few quarters of shorter short-term lease maturities, and -- of lease extensions rather, and whether that trend continues or not, I mean could be reasonably that it won't, it'll start to turn around at this point, but we will see what happens with that as we go forward.

But in terms of retentions, I think -- I don't think we are seeing any reason to believe that retentions at this point will be dramatically lower than they've been in the past. It's sort of volatile quarter to quarter, and I think -- going forward I think our assumption is as we've said, which is in the current economic climate that we will continue to see slow and steady erosion in occupancy, primarily driven by the issue of default levels and how strong or weak new lease activity is. I think we think those are the bigger variables rather than retention.

Okay. Thank you.

Thank you, our next question comes from the line of Dave Aubuchon with Robert W. Baird. Please go ahead.

Thank you. Were the tenant defaults concentrated in any particular sub-market or industry?

Definitely not in any industry. If you have to characterize anything by industry, and this is only because we have a relatively small amount of retail in the portfolio, but clearly a disproportionate amount of retail given its relatively small size, which you could expect given the impact on retail sales in this economy. But by sub-market, again not particularly concentrated, maybe a little heavier in Beverly Hills and Sherman Oaks and Encino this past quarter, but I wouldn't say that's a trend, I would say that's a way things fell in this quarter.

Okay, and then how much lease termination fee is kind of in your guidance? Obviously if you booked $600,000 in Q1 and $150,000 in Q4, are you expecting somewhere in between that for the balance of the year?

We don't use -- we include zero lease termination income in our base assumptions for the year.

Any change in what sort of annual rent increases you are able to negotiate in leases over the last couple of quarters?

Yes, there's been a modest trending down. I think again, we've said before and I think it continues to be true, one of the things has been favorable in this downturn, which is that rent increases have held up pretty well on a historical basis. We are doing most of the deals on the west side at 4% increases at this point, maybe some over that, some under that. And in the Valley, in the 3 to 4% range. But when you look historically, it seems to be settling -- you know, if we are heading towards the bottoming time period, it seems to be settling in a range that is higher than where we were before the last peak in the market.

Right. Okay. Then just to be sure, you have a couple of quarters remaining this year that have higher roll, specifically in Sherman Oaks and I guess Brentwood in the fourth quarter. Any bigger leases that are driving that roll? Kind of similar to the Blue Cross lease that you have in Q2?

Not really, nothing of that kind of -- as you know, we don't have very many of those kind of leases in our portfolio at all.

Right. Then last question, any commentary regarding the same store cash NOI performance of multi-family assets this quarter? It was negative, do you anticipate that to improve throughout the year or --

The cash same store NOI was slightly higher in this --

On multi-family?

On multi-family. Going forward, our view of the market on the multi-family side is that our -- is that we're -- it's flattish, you know, for this point going forward. Occupancy is staying about to where they are, rents flat to maybe slightly down offset by a pick up, and as leases roll and some of the old rent control leases come off. So when you put it all together, it's a pretty flat situation for the year.

Okay.Thank you.

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

Bill, on the office same store cash revenue being up 5%, can you just help us understand was that partially a function of the lease term income or burnoff of free rent, or the bumps on leases you previously signed?

It's mainly a function of the rent roll up. We're -- the narrowing in our mark to market is -- that you seen and that we've reported, that's the major driver as we burn that off by rents rolling up. On a cash basis, we are also picking up the rent bumps that were in place, and so that picks up some of the same store NOI, somewhat offset by lower average occupancy over the time period. That's really the mix. It's not -- I don't think anything else is in that as a significant driver of those numbers.

Okay, so are you saying despite the occupancy change year-over-year, that the rent rolloffs that you gained over the last several quarters have caused that to go up?

Yes, they're overwhelming the loss of --

Right, okay. Then was it a 5% positive leasing spread this quarter? Could you give us a little color on how that broke out between west LA and the Valley?

I will need to get back to you on that.

Okay. Then what about -- maybe you mentioned this in your comments, but I didn't catch it if you did. What do you think the current mark to market is for the entire portfolio on a cash basis?

Well, I don't which of the metrics you are talking about in terms of mark to market. Are you talking about our lease spreads on new leases signed? We think going forward through the year that looking at our expiring lease schedule and the market rents in place, that we are probably more or less at the spread that we have seen in this quarter, it might narrow a little bit. But we don't the think we see any dramatic moves one way or another through the balance of the year.

Okay, and I guess tying into my question, that would be -- do you think that sample that matures in the next fourth quarters, say, or the rest of the year, is representative of the overall portfolio? In terms --

He is asking mark to market of, like, all our leases.

Exactly.

Yes, what was that spread, we gave that number.

That's a 6.6%. In terms of that number, the overall mark to market in the portfolio, we are going to see a narrowing in that because we are -- the in-place rents continue to move up as rent bumps hit and as we're rolling over the other leases, on top of the fact that certainly market rents are not going up in the near term, and as we indicated before probably some -- continuing to somewhat trend down. So I think we will likely see that 6.6% spread between our in-place in the portfolio and [asking rent], we are likely to see that narrow over the next several quarters.

Can you just comment on trends you are seeing in TIs and leasing commissions and [free] rent in your market?

Looking at the overall capitalized cost for us, we are seeing that -- and you can see in our numbers in the quarter is pretty flat, so probably at the margin somewhat declining TIs, as you've got tenants that are looking to do renewals and are much more -- are focused on the fact that they don't want to go out-of-pocket themselves for TI's, which tends to help a little bit. And with leasing commissions probably flat to slightly up, so kind of offsetting. So you put the two together, probably about flat. Then in terms of rent concessions on new leases signed, still very very modest impact, not something that we are seeing very much of.

Then in terms of downtown LA, one of your competitors, as you know, has a building for sale; is that still a market that's strongly crossed off your list?

Wait, okay you're talking about a downtown competitor selling a building downtown or selling a building on the west side?

Well both, but I was specifically asking downtown, I'd like your opinion on both.

We haven't -- for the simple reason that our strategy that we follow of looking for supply constraints, smaller tenant, high amenity base, we just haven't been buyers downtown, and I don't see that changing.

Okay, and then my last question. Jordan, what is your thoughts, or Bill, what are your thoughts on the long-term ramifications of budgetary problems in California, in terms of how it would relate to the attraction of living, working, doing business in your markets?

I think for those of us living here in California, our taxes are getting ready to go up. In terms of our -- of the markets that we are in, I don't feel like the budgetary problems are going to be necessarily all that impactful.

Let me say this. I believed at one time that those kind of impacts were going to have a significant effect, but that time was in the early 90s, when we had earthquakes, floods, riots, financial problems in the state budget, and people and jobs moving out of the state, and they were headlines at that point. I actually was worried then, and that proved to be extremely wrong. And at this point, as we've commented before, it -- I think our view is there is structural political issues going on that really don't have a huge impact long-term on people's desirability of living or working here, at least that's the perception we've seen.

Bill, Sacramento got bailed out in the 90s, per your example, by rising stock markets; does that mean we should all go out and buy stocks?

Given how the state budget is so dependent on capital gains, the 35%, 40% recent increase in the stock market has got to be good.

(Operator Instructions) Our next question is from the line of David Harris with Arroyo Capital. Please go ahead.

Any thoughts on the impact of the Endeavor-William Morris merger?

We only stay abreast of local activities, David.

Well, you know, I try to be -- raise my eyes just above looking at retail 100% of the time.

We -- obviously we are carefully following what is going on there. There isn't -- we have, Endeavor -- for everybody listening, Endeavor's headquarters is in one of our buildings in Beverly Hills, and William Morris is another agency that's in Beverly Hills, and it sounds as though they are going to be merging. We haven't gotten any indication that that merger is going to cause us to actually lose the tenant out of our building. As a matter of fact, where William Morris was going is a smaller building than the building that Endeavor occupies a portion of, which we own. So we probably at worst have an even chance of our situation improving as a result of that, but I don't think at the moment we are very concerned. Just by the way, the Endeavor lease goes out until 2019.

But more generally, does it send any message about the health and state of the entertainment/advertising business?

Well, it's the agents for the actors and whatnot, I mean those -- I don't know. Those are two I think if you were to say, what are some -- I think people say both of those are healthy agencies. I'm not exactly sure --

It seems, David, like it's part of the ongoing process in the entertainment industry. There was a article written about the merger which I think said it pretty well, which was that the entertainment agency always seems like it's a very young industry, and that's because it keeps reinventing itself with the young, aggressive new players in that industry. So that process just continues along, and agencies and other entertainment companies merge, and as a result that others spin off. One of the interesting impacts of these kinds of things, we see it on the law firm and accounting side as well, as they go through changes, people spin off, there are still productive people in the industry and they generate new business that start up, and for us it's good because it generates new leasing opportunities for us.

I can understand the fragmentation, and that's obviously what we're seeing playing out to fairly dramatic effect here in financial services in New York. But even 3,000 miles away, I kind of read that news a couple of weeks ago and thought, is this a defensive move, is this just one of the first signs of the reduction in advertising spend that's really impacting the -- stressing entertainment business, which is obviously going to have some impact on tenant demand across a whole range of your tenants on the west side?

I think the move has a lot more to do with kind of Endeavor -- William Morris having something endeavor wanted, and Endeavor having something William Morris wanted. I think that's what's causing that merger.

Okay. In the light of the current environment, are you upping your credit underwriting? How much more difficult is it today versus what it would have been 12 months ago to underwrite new tenants?

Well, probably everybody's credit is looking a little worse, but I think that credit standards that we use have been similar throughout all the periods, going back for an extremely long time. The same guys for 10, 15-plus years have been underwriting the credit of our tenants, which basically [Ken and Michael Means]. So we haven't put in place any new policies or changes on that front.

Have you rejected anybody's TI request as a result of having concerns about their ability --

You can always have a tenant that comes in, and you say I'm willing to lease to lease to this guy and take a little bit of a chance but I'm not going to give him huge TIs, because I might have to take a long-term chance, and you look at someone's credit, and you might make the deal by saying to them we want you to support the -- it's not just your personal guarantee we want, we want you to put up some extra money. The form of credit support that any particular tenant can provide for their lease varies dramatically. Obviously, if they want TI's, then it takes even more credit or more credit support.

Okay. Thanks, guys.

Thank you. We do have a follow-up question from the line of Michael Knott with Green Street Advisors. Please go ahead.

Just wondering if you can give us just a short overview of maybe what you're seeing in Hawaii, and are there any emerging opportunities over there?

Yes, I think there probably are. Hawaii is, honestly, taking a beating, from what's going on with the tourism industry, but at the same time it's a very contained environment, so people that live there and work there need to work, so you are having a little decline in office occupancy but not extraordinary. You are having flatness of rents, people are just sort of frozen, and waiting to see how this plays out. In terms of opportunities, though, I think when you have a company that owns one building in Hawaii, if they can get some liquidity out of it, I think a lot of times that's happening, and we are looking to kind of over the long-term build the strength of our portfolio in that downtown market, so I think some opportunities could come up there.

Thanks.

Thank you. That does conclude our question-and-answer session for today. I would now like to turn the call back to Mr. Jordan Kaplan for any closing remarks. Mr Kaplan?

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

Thank you, sir. Ladies and gentlemen, if you would like to listen to a replay of today's conference, please dial 1(800) 405-2236 or (303) 590-3000, using the access code of 11130116 followed by the pound key.

This does conclude the Douglas Emmett 2009 first quarter earnings conference call. Thank you very much for your participation. You may now disconnect.