Douglas Emmett Inc (DEI) 2009 Q2 法說會逐字稿

Welcome to Douglas Emmett's 2009 second 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 the 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 has been filed on From 8-K with the SEC and those are also 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 beliefs of or 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 programs that are referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office market, [Reese] for the Los Angeles office market, and PF Research for the Los Angeles multifamily market, and Property and Portfolio Research for Honolulu multifamily market. With that, I would now like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thanks, Mary. Hello, everyone, and thank you for joining us today. I would like to begin with the discussion of leasing in our office markets and I will also review our position on the Company's leverage. After my comments, Bill will summarize our financial and operating results for the second quarter of 2009.

In the second quarter, our office markets continue to be impacted by the downward pressure of the national economy. The lease percentage of our office portfolio declined by 80 basis points in the second quarter to 90.7% while occupancy dipped by 120 basis points to 89.9%. We believe that our office leasing markets will continue downward until the national economy recovers. While we, like most of you, follow the various forecasts that predict when recovery may occur, we do not have any additional insight on the potential duration of the national economic downturn and therefore, the duration of the slide in our office markets.

As to the rate of decline, we have said on prior occasions that tenant defaults will likely be a primary driver of our overall occupancy rate. Tenant defaults are very difficult to predict, but are likely to remain at elevated levels for the next several quarters. A significant amount of our increased vacancy has occurred in our softest submarket, Warner Center Woodland Hills, where we had a disproportionately high level of lease expiration over the past three-quarters -- over the past particularly rough quarters. Fortunately, we are now through bulk of the lease expirations in that market. Not surprisingly, much of the increased vacancies have also been concentrated in the buildings that we recently acquired and we were in the middle of repositioning when the sharp economic downturn hit last year.

Excluding the six office buildings that we acquired in March of 2008, our office portfolio is 92.1% leased and 91.2% occupied as of June 30th. The major renovation project in the largest of the six buildings will be completed later this month and we have made progress in our other repositioning efforts. So we expect to now benefit from a bit more positive leasing momentum in these buildings.

While our leasing markets are still fragile and while we want to remain cautious in our comments, we recently have seen several encouraging signs that may mitigate the effects of the downturn. We significantly increased our leasing volume during the second quarter which Bill will expand upon in his comments. So far in the third quarter, we are seeing some indications that this higher level of new leasing activity may be continuing. We also believe tenants are favoring landlords with high-quality assets as well as landlords with long-term track records and financial stability.

As the national economy stabilizes and shows signs of recovery, we believe for several reasons that we will see a rapid turnaround in our office leasing fundamentals. At the last peak, our office portfolio was close to 96% leased, higher than at any time in our company's history. Very little new office supply was delivered in our ten submarkets during the last several years and almost no new space will be coming on-line in the foreseeable future. The underlying tenant demand drivers remain in place in Los Angeles, unlike in other parts of the country where major local industries have been fundamentally altered.

Thus, unlike in prior cycles, we will be refilling previously occupied space rather than dealing with a more protracted process where new demand generators must form before new space can be filled. Moreover, in contrast to other office markets, our submarkets do not contain significant large blocks of currently leased, but nonetheless vacant space. Therefore, our leasing progress should not be impeded by the overhang of competing sublets and by future lease expirations covering large already vacant space. So we remain optimistic on the future strength of our leasing markets, once we get through the current period of national economic instability.

The issue of leverage has been the focus of significant discussion over the last few quarters. My goal today is to clarify our views on this subject. For more than two decades, originally as a private company and more recently as a public company, Douglas Emmett has consistently followed a conservative approach to debt. We have focused exclusively on accessing first mortgage debt at the best available pricing in the bank and life company markets.

Normally, the credit markets have provided this tier of debt at between 60% and 65% LTV at the time of loan origination, based upon underlying real estate valuations rather than stock market values. By following this discipline, we have averaged under 50% leverage throughout our company's history on an overall portfolio basis. We have avoided higher leverage first mortgages, mezzanine debt and corporate level debt of any kind such as bonds, convertible notes or unsecured credit lines. In the past, we were offered all these types of debt, but chose not to take them. We have always maintained our discipline because we strongly believe that a low leverage property level debt strategy is the best approach to ensure that a real-estate company can maintain control over its own destiny even during a severe downturn.

Now we are in the midst of just such a downturn and our debt strategy is performing as anticipated. By starting off with low leverage, having debt maturities that do not occur until the middle of 2012 and by avoiding financial covenants that are common in corporate-level debt, we are not forced to remargin at the wrong time when it is most expensive to do so. We are continuing to raise equity capital for our fund to take advantage of external growth opportunities. We are confident, based upon discussions with our lenders, that we have access to a very reasonably priced mortgage debt capital in sufficient quantities to implement our acquisition strategy.

Even though real-estate values have declined so correspondingly our overall portfolio leverage has decreased to over 60%, it is not limiting our ability to find new acquisitions. As I said earlier, we believe in the virtues of low leverage and we plan to bring the Company's leverage back to its historic norms. There are several paths that can lead to lower leverage level, and a combination of approaches is likely to be the best strategy. Fortunately, we do not have near-term capital requirements of any kind so we have the opportunity to chart the best course for success over a reasonable period of time.

As we move forward, public equity issuance is one alternative that is important to consider. However, we are in agreement with one commentator who recently wrote that dilution is forever so a company should limit equity issuance to those times and in those amounts that are clearly required for capital needs. We think that this is the most prudent plan for us to follow. Now I would like to turn the call over to Bill Kamer who will provide details on our second quarter 2009 operating results. Bill?

Thanks, Jordan. For the second quarter, the Company reported FFO of $49.7 million or $0.32 per diluted share. AFFO for the quarter ended June 30, 2009 was $37.3 million or $0.24 per diluted share.

Same property net operating income increased 1.3% on a cash basis and decreased 0.4% on a GAAP basis when compared to the second quarter of 2008. Same property total revenues increased 0.6% on a cash basis and decreased 0.5% on a GAAP basis when compared to the second quarter of 2008. Splitting out the office and multifamily portfolios, same property office revenues in the second quarter of 2009 increased 1% on a cash basis and decreased 0.2% on a GAAP basis compared to the second quarter of 2008. Same property multifamily revenues in the second quarter of 2009 decreased 2.1% on a cash basis and decreased 2.3% on a GAAP basis compared to the second quarter of 2008.

As most of you know, at the end of February of this year, we deconsolidated the Company's institutional fund Douglas Emmett Fund X. Therefore, the Company's financial results include the Fund X properties on a consolidated basis from March 2008 when we acquired the six assets through February 2009 and exclude the Fund X properties from March 2009 through June 2009. The following revenue and expense results are adjusted to exclude the Fund properties throughout all applicable periods so as to provide more meaningful comparisons.

Total revenues for the entire portfolio owned by the Company decreased 0.5% to $139.8 million in the second quarter of 2009, compared to the second quarter of 2008 and increased 0.8% to $281.6 million for the first six months of 2009 compared to the first six months of 2008. Total office revenues for the quarter ending June 30, 2009 declined 0.2% to $122.7 million, compared to the second quarter of 2008 and declined 1.5% on a sequential basis from the first quarter of 2009.

Office operating expenses decreased 1% to $36.7 million in the second quarter of 2009, compared to the second quarter of 2008 and decreased 1.2% on a sequential basis from the first quarter of 2009. Multifamily operating expenses increased to $4.3 million for the quarter ended June 30, 2009, compared to $4.2 million in the comparative quarter of 2008. Our total office and multifamily FAS 141 income for the second quarter of 2009 was approximately $7.8 million. We currently anticipate that FAS 141 income will range between $31.5 million and $32.5 million for all of 2009.

G&A in the second quarter of 2009 totaled $6 million. We continue to estimate that our total G&A expenses for 2009 will range between $24 million and $25 million. Interest expense in the second quarter of 2009 decreased to $44.6 million from $49.2 million in the first quarter of 2009. The decrease is primarily explained by the deconsolidation of debt associated with the Fund properties and by a reduction in our net interest payments on our Fannie Mae loans which are hedged based upon LIBOR.

Turning to operations, the office percent leased for the ten submarkets where the Douglas Emmett office properties are located declined 100 basis points sequentially to 88.3%. Market ramps for the ten submarkets where our office properties are located declined 4.1% sequentially. As Jordan mentioned, our leasing activity increased significantly during the second quarter. We entered into 56 new leases, totaling 132,000 square feet and 94 renewal leases, totaling 417,000 square feet. This compares to 47 new leases, totaling 117,000 square feet and 46 renewal leases, totaling 214,000 square feet in the first quarter of this year.

Our office portfolio was 90.7% leased at June 30, 2009 and was 89.9% occupied. Our multifamily portfolio was 99.1% leased at June 30, 2009 which had had declined 10 basis points sequentially. Office tenant improvements, leasing commissions and other capitalized leasing costs during the second quarter totaled $15.41 per square foot, compared to $18.16 per square foot for the first quarter of 2009.

Our mark to market and rent roll-up metrics during the second quarter are as follows. On a mark to market basis, our in-place cash rents were 3.3% lower than our asking starting rents in the second quarter 2009 which was down from 6.6% at the end of the first quarter of 2009. On a straight-line basis, the average rent from expiring leases was 14.5% lower than the average rent from new leases signed for the same space in the second quarter of 2009 which was down from 18.5% in the first quarter of 2009. On a cash basis, the ending cash rent from expiring leases was 1.6% lower than the beginning cash rent from new leases signed for the same space in the second quarter 2009 which was down from 5.5% in the first quarter of 2009.

Now turning to guidance, we are narrowing our FFO guidance range for the full year of 2009 to $1.25 to $1.29, compared to our prior range of $1.24 to $1.30 per diluted share. Please keep in mind that this guidance excludes any impact from future acquisitions, dispositions, equity purchases, debt financings, recapitalizations or similar matters. This guidance also assumes that our 2009 noncash interest expense, relating to the amortization of our pre-IPO interest rate swap contracts will substantially conform with straight-line amortization. With that, I will now turn the call over to the operator so we may take your questions.

Thank you, sir. (Operator Instructions). One moment, please, for our first question. And our first question comes from the line of Anthony Paolone with JP Morgan. Please go ahead.

Thank you. Jordan, in the past you have talked about just a reluctance to go raise capital because you don't have any real debt to pay down because it doesn't mature near term. Has there been any change in that view, given your comments about the potential of issuing equity?

I'd say -- you said in the past my comments have been that I don't see -- could you say that again -- what you said again?

Yes. Since you don't have any real near-term debt maturities. Unlike others, you just haven't had a lot of use of proceeds unless you find a deal. And just wondering if you've had any change in that view, given your comments about potential equity issuance.

No. I haven't. It's probably one of the most important points here which is we're not going to issue equity unless we feel we have something particularly good to do with it. As you just said, we don't have debt to pay down. Short of having some great deal or something else come up, we're not -- it's not something that's currently on our front burner.

Okay. And can you give us an update on the status of fund-raising for the Fund?

Tough, but going better. We went through -- we had the Fund raised and right in the midst of when the whole world was coming unraveled in October, we got the first tranche of the Fund raised. Then we went into a period when everybody was in financial shock or something, I don't know.

And we rode that out. Then in March, April, people started coming back out and talking again. We started making some strong progress again as we had been prior to the collapse. That's why we extended the period of time because we're getting good traction with some large investors and still feeling somewhat confident, as confident as you can ever feel in an economy like this that we're going to make our goals.

Okay. And then, last question. You've in the past put the deal opportunities into, I think, three buckets. Can you maybe update us on those and what you're seeing out there?

The three buckets -- you've said it exactly right. It's three buckets of opportunities. Even more than I would have expected, there has been absolutely no transactions. I see -- the people walking up to the line, whether it be individual sellers that are just overleveraged which as I said, there are not many of, or large financial institutions that just have a liquidity issue, or owners that are in our market and maybe wouldn't otherwise choose to be long-term owners, just more in and out guys and now are trapped.

They all are clearly, seriously evaluating selling. At times, you'll even see them risk a property for a little while, but then there won't be a meeting between a buyer and seller, then they will drop back out again. But it's those activities that give us the confidence that eventually there will be a significant number of trades.

Okay. Thanks.

Thank you.

Thank you. And our next question is from the line of Michael Bilerman with Citi. Please go ahead.

Good morning up there. (inaudible) Jordan, I appreciate your comments on leverage. I understand that three years is a much further timeframe away, relative to the last year that we had. But over the next three years, almost 50% of your leases will roll and ultimately you will be coming up to 80% of your debt roll. When you sit here today, let's call it 65ish percent leverage on a debt to GAV and ten times debt to EBITDA, I think inferring from your comments, you think that's too high in today's environment and you'd like to move that lower. I'm curious how you think about how much lower you think it needs to go, whether it be debt yield, debt to EBITDA or debt to GAV, and how you are going to be able to get there, knowing that your fundamentals remain under a little bit of pressure and that you have substantial lease roll over the next little while to get to that point.

Actually, I think considering where we started and where the economy is today, I think we're doing pretty well to be around 60% or 65%. I agree, it's higher than where we want to be. But if you're saying -- I'm not saying that today -- today, to be between 60% and 65%, not have any debt roll for three years, to be relatively well occupied, and have strong cash flow, we're in a very good situation.

Now, yes, we want to be down under 50% again. And there are obviously a number of ways to get there. Issuing equity is just one of them. You can do a number of other things. We're building up cash. We've got -- you could sell a building. There's just a lot of choices.

And our point is just that we are not -- right now, we don't feel like we're under enough pressure to have to make one of those decisions. The decisions become clearer as time goes on. We think the options are becoming better as time moves on. We're waiting until we're under a little more pressure and we're comfortable that that waiting is a good move, considering we have so much time.

This is Bill, Michael. One other thing that I think is important to clarify that was implicit in your comment is in terms of our real estate debt maturities that are coming out between now and 2012, as you know we're in regular communication with our lenders and reviewing current underwriting standards. We're very confident that where things sit today, that our real-estate debt as it matures, is refinancable without the need for paydowns on that debt at the levels where we are. Is that necessarily optimal? Certainly not optimal at current pricing -- on debt. But as we go forward, I think we're going to have a number of choices that range from where we are now to choices that should be improving over the next couple of years.

I can understand that on the multifamily spaces where you probably can still get pretty good terms. But on the commercial loans, you'd be able to replicate the $2.3 billion in total proceeds relative to today's underwriting?

We're talking about, frankly, the commercial loans and you're right to question whether today I could go out and get $2.3 billion of debt, bang, at one time. But the point Bill is making is when you -- it's not like we're not having discussions with the lenders. We're not blind to what's going on. And when we sit down with them and talk about the existing loans and they get a quarterly package on their loans, and say to them, hey, we would like to extend this out. What things would you guys like? Like fees? Would you like a paydown? We have the ability to do a paydown. We're obviously sitting on cash and have additional liquidity.

The comment we get back is, now they're well performing. They're well covered and we're comfortable with the LTV. Frankly, they're going to people -- guys that they're doing work with -- they're trying to get down to the LTV that they view us as being in today on a property level. What Bill is saying is, yes, I don't know if there's $2.3 billion in one smack of debt out there right now. But for the individual buildings and the loans that we have on the buildings and the pools that we have, we haven't gotten any indications from any of our lenders like oh, yes, we would never review -- renew this loan at this level.

Maybe just switching to fundamentals. You obviously have a pretty -- smaller leases -- 40% (inaudible) Can you just talk a little bit about how you're finding those negotiations going (inaudible) and marry that with your I think initial comments that would see -- that your occupancy is more affected by default. I would have thought that with a higher lease roll that it was just people who decide to either downsize or they just don't renew, rather than waiting for default.

The reason I was saying that, our retention retention levels in the past quarter were north of 70% which we've always indicated in good times and bad is where we think the -- where we tend to be. Actually, if anything in the second quarter that was more favorable than norms. Now that number moves around a lot, quarter to quarter. And the -- number is more of a long time average than a good measure. Take a quarter so I'm not getting too excited about the fact that our retention was in excess of that in the quarter. And I think I mentioned before, there -- on retention, things go across purposes in down times.

On the one hand, you've got people closing up shop or contracting in the tough economy. On the other hand, people have an economic incentive to stay where they're located and not incur costs for relocation. They tend to somewhat be an offset to one another. The real drivers are leasing volume, new activity which as we said, is -- picked up quite a bit in the second quarter. And indications preliminarily in the third quarter so far is that we seem to be at least at those levels or lower.

As Jordan indicated, we're certainly very cautious about our comments on that. The one that's a little harder to predict is when the shake-out of tenants who were at the margin -- brought out of business -- when that process ends. We were at about 75,000 feet of lost occupancy from the fall from the quarter -- which was up from the 50,000 range in the prior quarter. And that shake-out probably -- as Jordan indicated is going to continue for at least another quarter or two. That creates the downward trajectory that we have and as that process bottoms and turns around, we are likely to see this end and occupancy start to pick up.

Also, one thing I would -- worth mentioning which we said in the script, but I think it's worth making a point of is the place where we're taking the biggest beating is in the six buildings that we're repositioning. You look at our existing portfolio that -- where we had gone out -- we're always (inaudible) and our underwriting on tenants, and obviously not going to rehab. We're at 92.1% leased and 91.2% occupied. That's very strong numbers, considering these economic time we've been in -- economic [doldrums] -- those buildings have stood up extremely well.

Right. Maybe on the Fund, Bill, what percentage of the Fund did you own effectively during the quarter versus where you stand in the third quarter. It may be helpful to have going forward an unconsolidated JV statement full share, then beside it your share of each of the line item to so that we can marry out what exactly is occurring. Jordan to your point, if these assets are being repositioned, getting that asset level detail would be helpful.

(inaudible) On the issue of information, we tried in our supplemental and in our presentation to lay out quite information on the fund. We certainly can follow up and point out after the call where those items are located within the materials that are published. As we go forward, I think you are going to see a lot more visibility. But I think there's quite a bit there. In terms of the Fund progress that Jordan commented on -- until we finish the fund-raising, I don't want to start saying, we have this percent at this point or this percent at that point. I want to finish the fund-raising and then we'll give you a recap of where that fund is and what's happening with it, but I don't want to do that right now.

There was something included in the quarter's results. I just want know what percentage of assets you own -- in the quarter --

It was at 48.82%.

Thank you.

Thank you. Our next question is from the line of John Guinee with Stifel Nicolaus.

Thank you. Couple minor questions, Jordan or Bill. I think property taxes were a big issue when you came public. That fell by the way side. It almost has to have resurfaced with the California budget issues. Do you have any visibility of what's going to happen to property taxes in your portfolio in the next few years?

So far in terms of the California budget issues, I think as you maybe have seen the resolution in the last few weeks was accomplished in this last go round entirely with spending cuts and not with new tax initiatives. That was largely the result of some public negativity and recent referendum on increasing taxes in other areas. It seems like for the foreseeable future, the increased taxes are off the table as part of the California budget situation. We're not likely to see that. In the other direction, obviously as you go forward and values move around, there's potential for taxes reductions over time, but nothing (multiple speakers).

First of all, you're surprised that people didn't vote to raise their taxes -- because at the -- probably the way property taxes work -- for instance in Hawaii and when Hawaii is tight on money, guess what, our property taxes go up. It doesn't work that way in California. They cannot use property taxes to balance the budget. They don't have the legal right to because it was something that was voted on and essentially amended our constitution. They capped at the purchase price -- growing 2% a year and the only thing they can do is go down because you can appeal and say, I think the value of my property has gone down and therefore I want a reduction. You can get a reduction, but then it can go back up to that original cap, but they can't solve their budget problems by raising it beyond that level.

Right. Okay. Next question, your CapEx has gone down nicely. If you look at your recent vacancy, is it pretty much paint and carpet? Or is this going to be a situation where you're gutting and starting again? When we're looking at CapEx in the --

Let me say -- we've come in for a number of quarters now and the tenant improvement number has moved up a little, down a little that our view is we haven't seen a real trend in either direction. It's more flat. We don't view the decline this quarter as a trend of -- product going down. We think it's been pretty constant. But -- and I think we see that going forward. I don't think we think there's going to be any dramatic move upward or downward.

Okay. And then last question is since the time you closed the 1.4 million square foot acquisition to start your fund, the world has clearly changed a bit. It would appear to me that would you would almost have to mark those assets to market in order to get anybody interested in the fund. Are you willing to mark the assets to market to keep the capital rates going?

We bought -- if you look at what's going on out there and you look at the price you paid for those assets, it's still -- on a comparative basis, look like an extraordinarily good price. But of course at the same time, someone is going to say, I don't care what price you pay and I don't care what's happening now, there's no way you paid this lower price as you would maybe pay today since you bought them a year ago. That is definitely a problem that we're facing but we feel we have found ways to work around it and are successfully raising money. It isn't -- saying -- mark them to market and people come in. But the truth is when you mark them to market -- and then -- you don't have very much marking down to do using any kind of reasonable comps or analysis. Therefore, that process doesn't make someone coming in the fund any happier because you don't end up with really much of a lower number. We worked on other ways to skin that cat and we think we're getting there. We've also got a lot of good news in the next quarter -- achieve their goals in terms of the equity fund in the fund.

Last question. Term fees this quarter and how are you dealing with that in expenses?

Termination fees? Is that what you're saying?

Yes, sir.

It was -- we've always had, except for one outlier quarter last quarter, pretty low lease termination fees. We had around $45,000 in termination fees that are nominal now in the quarter. In terms of -- I think your other question is on bad debt. We've been very conservative in prior quarters and in this quarter in taking ample reserves, both in terms of -- on straight-line income as well as bad debt to -- which we thought was prudent in the downturn. I think we're comfortable with what we've been doing.

Thank you.

Thanks.

Thank you. And our next question is from the line of Alexander Goldfarb with Sandler O'Neill.

Good morning. Just going to the lender front on the $2.3 billion commercial loans. What's the split between US lenders and overseas lenders? I think it's primarily European lenders, but what's the split?

The US lenders are mostly white companies and -- primarily still active ones, frankly. And the -- and then the others are mostly German banks and it's about --

In dollars, and I don't have the exact number in my head, but in dollars, it's probably something over 50% of the dollars are US based lenders and -- close to 50. It's probably a little over 50%. Then the rest are farm lenders.

But a number of lenders (multiple speakers).

It is primarily -- yes, that's correct.

A third US, and then two-thirds -- but on a dollar basis -- okay that makes sense. And then just going to the multifamily portfolio for a second, has there been a change turnover of your portfolio or has it been pretty constant there?

The turnover has been very constant in the past quarter. As you can see, quarter to quarter in terms of our lease percentage, we were down 10 basis points this quarter. Last quarter, we were up 10 basis points. That's been very static as well. We continue to see our residential side in the -- fairly flat in terms of its performance.

Okay. And then on the -- a two-part question. On the fund -- Fund X, you can use that for both acquisitions of office as well as multifamily? Or is that just office and then as an apartment segway on that. I think in the past, you had mentioned Woodland Hills and Marina Del Rey as potential markets of interest. Just want to know if there's anything of interest there or if the pricing is not right yet.

First, anything in general -- anything you would otherwise expect our company to purchase is able to be purchased out of the fund so that's definitely office and residential. In terms of specifically Marina Del Rey and Woodland Hills, there are deals -- Marina Del Rey more along the residential side. Woodland Hills is some office stuff and residential. Yes, there are things that are coming up there. I think there's more opportunity coming up in the westside market -- the Santa Monica, Westwood, Century City, Beverly Hills, Brentwood, Olympic Corridor -- that group of markets than in the two that you mentioned.

Thank you.

Of office.

Thank you. And our next question is from the line of Michael Knott with Green Street Advisers. Please go ahead.

Hi, Michael.

There was about a 3% GAAP between your in-place and current asking rents. Are you experiencing any --

(multiple speakers) We missed the beginning of your question so if you could repeat it.

it was silent. Just start over.

I think you said there's about a 3% GAAP between your in-place rents and your asking rents. I was going to ask if there's any gap between asking and taking rents and if that relationship has changed versus when the market was stronger.

We've mentioned a number of times in the past, we don't like using asking rent -- they're just very unreliable. And the only reason that we even get into this particular one is because, number one ,that the marketing rents that are quoted by all the various groups that do that are based on asking rents, not actual deals. And we have to or we've been asked to so we provide it. But no, we don't think there's a lot of relationship between what's in, quote, asking rates and the underlying deals. And we don't think that that (multiple speakers).

Not even directionally.

Not even directional relationship.

You could be asking -- going to the cheapest space tin building to try and draw tenants in or you could have a full building and throw up a real high asking rate because you getting full and you're trying to compare to drive people in other buildings to show that it's a bargain. It's just a marketing number. It's not very useful for judging direction.

We don't -- that the rent low on a -- numbers on a cash basis and straight line are particularly good data in our portfolio because of the number of transactions. It's a large data set. And that's based on actual rent of expiring leases and actual rent on -- of new deals for exactly the same space so that we think, is pretty good information.

And applying the bad debt reserve that you spoke about with John, in the terms of percent of revenue?

The beginning of your questions are being clipped off. I don't know why. You said something about bad debt reserve.

Can you just quantify that please? Or help us -- just give us a sense as to what the magnitude is? Maybe in percent of revenue?

I don't have that. I don't think we're seeing -- on bad debt, I don't think we're seeing a significant increase on that, or didn't this quarter.

I know we've been -- (multiple speakers).

We'll have to get back to you on that. We've mentioned in prior quarters -- last quarter and the quarter before, increases that we had had, apparently in straight-line reserve as being -- that were significant numbers that we had quoted. I don't believe that compared to the prior quarters that it was significant this quarter.

I know we've spent time carefully making sure that we're appropriately reserving against our straight line. You don't to have worry that we're missing that.

Last question. I appreciate the disclosure on the quarterly lease expirations as you always provide. There's a few of them that stuck out to me and I was going to see if you could comment on how you see those going. One was a fairly large amount of Santa Monica space, 40,000 feet in the fourth quarter at $60. Then a big Honolulu expiration at $44 this quarter. Can you give us any -- ?

Portfolio wide, in terms of our -- I think the biggest trend as Jordan had indicated in his presentation is we've come through really three or four quarters -- we're -- that we mainly have a small tenant focus, but our relatively small number of large tenants -- a number of them expired over the last two, three quarters. A lot of that was concentrated in Warner Center, Woodland Hills. And we're pretty much through that expiration cycle. I think this is true throughout the entire portfolio that over the next year -- I don't think we have any -- or certainly hardly any leases that are more than -- that are multifloor tenant, but anything more than one.

Yes. We're now just all slugging it out with little guys.

I think that's where the trend is. I think we're -- the time period where we're dealing with our larger tenants is -- that saga is largely over.

Thank you. And our next question is from the line of Brendan Maiorana with Wells Fargo Securities.

Thanks. Good morning.

Hey, Brendan.

Just in terms of the amount of leasing volume that you did in the quarter was high, I think it's the highest number that you guys have done on a quarterly basis being public. But your occupancy on a core level still went down a little bit faster than it did in Q1. Just help me reconcile the leasing volume versus the occupancy decline.

Sure. In terms of -- there's two components if you look out separately -- one is new leases strip and the other is renewals. Both were up, but the renewal activity was up dramatically in the quarter. If you're -- I gave a retention statistic of a little over 70%. You have 28% of a larger number non renewing in this particular quarter because we had a higher level of renewals. That -- a larger level of renewal activity when you're not retaining 100%, means you're increasing with that one particular component. You're increasing vacant space.

The new lease activity which was up to 132,000 square feet in the quarter, that's higher than we've had in several quarters and was a marked improvement from -- particularly the fourth quarter of last year when the economic contraction really had taken hold. But that number is not anywhere near the peaks of new lease activity that we're -- at the height of the market after we came public. That number could certainly as things improve going forward improve quite a bit. That's one part. The next largest part is on the default side and I've indicated that -- that number was elevated from last quarter to this quarter as well.

Thanks for those comments. Taking those comments, the retention and new leasing and default -- with some of your earlier comments that there's some bright side to the market in terms of leasing activity continuing to hold up in Q3. I know you guys don't give specific occupancy guidance, how do you think your occupancy or lease rate will trend as we look out over the next six to 12 months.

I think that the pace that we've been on for the first half of this year --that glide path of declining occupancy, is the range of where things go if these -- obviously if these components stay about the same. That's why we said the one big variable in that is defaults. That could move down. That could move up and get away from that number.

On the new lease side, what we're cautiously saying is we think that we're probably around the same level of activity on pace for this quarter as last quarter. That's a good improvement over the prior two quarters, but it's still not back to the peak level. It's not enough to really push up occupancy quite yet. I think that gives you a sense.

Then as Jordan indicated in his comments, the real issue about when the slowdown turns around is when there's a clear indication that the national economy is improving. And then we'll start to see these various components change. But until then, as we've said we think we're going to continue to see downward movement in occupancy.

How would that compare? You guys talked about some opportunities a little bit more in the west side market. What are some of the underwriting metrics that you guys are using in terms of occupancy declines, rent declines, CapEx as you're underwriting, new potential opportunities that you're evaluating?

They're all different. The role is different in the buildings. But we are underwriting a greater degree of defaults,. A lot of the buildings we're looking at are starting out with a significant amount of vacancy. We are putting in some real -- as we did in the last portfolio we bought, some significant rehab costs to bring the buildings up to par. When we look at the rent profile, we're assuming that when we buy a building, we're going to have to go through the same process we've been going through which is to be prepared to lose some tenants, rehab the building and undercut rents in order to be able to refill a building that's starting out with greater than market vacancy.

We're not alone in that. It's the reason buyers and sellers aren't getting together. The sellers are saying, well, I have this and why don't you pro forma the rent or the building will be released at some higher rent. Buyers are saying, I don't think I'm going to get that rent. And so it's keeping the price apart.

That's helpful. Then in terms of -- understanding that every deal is a little bit different, but on average when do you guys -- would expect underwriting a deal today that could you move it up to a roughly stabilized NOI level?

If the economy just keeps -- it depends on -- you have to put in for yourself an assumption about what the economy is doing because you are not going to stabilize a building until you've rehabbed it and leased it back up into the 90s. And you're not going to get it leased back up into the 90s if we're going to just continue to lose occupancy across all the markets which I believe generally is a result of more of defaults than anything. I think if you stripped out the effect of defaults on what's going on, we would be performing astoundingly, but our -- and our leasing group is doing a great job in dealing with what you know is coming up.

The problem we're having is, we just keep getting this shocks, not that we don't expect them. You don't know where it's going to come from. Then all of a sudden something is defaulting and you have a bunch of vacancies that you have to deal with in a building in that spot you weren't planning on. Then we start recovering and deal with it, then you get another shock.

It's really a question of when do you think the economy is going to shallow out and start improving. As we said, whether it be our portfolio or anything that we buy, our belief is that when the economy starts to improve, we will not have too tough a time refilling the space. As soon as you fill the space up to a certain level, you will start being able to significantly push rents. We're still, in fact, at pretty strong occupancy levels. We're pretty optimistic about being able to push rents relatively quickly if the economy -- if things would stop declining.

Okay. Thank you.

Thank you. And our next question is from the line of Rich Anderson with BMO Capital Markets.

Thanks, and thanks for hanging with us. Did you mention -- and if you said this, I apologize, what the average LTV was on the $2.3 billion debt starting to come due in 2012?

I said in general, across our entire portfolio, our feeling is that we're somewhere between 60% and 65%, or at least that was the view of the lender that we were speaking to.

Jordan, when you were going through the early part of this conference call, you started off sounding pretty negative and yet you also are throwing in some positive commentary. I think you're want to control expectations, but at the same time, see the light at the end of the tunnel.

I wouldn't say we're trying to control expectations. We're just giving you all the facts. And guess what, all the facts aren't pointed in one direction. Some are good, some are bad.

Fair enough. When I look at the mark to market, it declined from 6-plus percent to about 3% and change -- whatever the number was. But that didn't decline maybe as much as I personally thought it was going to go down. Do you feel the same way, that maybe at least the second derivative is slowing down?

You mean the rate of decline? I don't know that we can really even make that statement. I think that I'm happy that we're at this point in the cycle and we're still showing positive cash growth in our NOI. That's being driven by a great and Herculean leasing, as well as really controlling our expenses. I feel better about that number than maybe I was -- than where I was worried we would be at this point. But I really can't predict what's happening with leasing and rates.

I envisioned a negative number.

Yes. I was worried about negative numbers around now so I'm really happy that our cash is still growing.

Okay. And last question, you mentioned numerous ways to build equity to reduce leverage. You mentioned dispositions if you weren't going to immediately be looking at raising common equity. But after dispositions, which I have a hard time seeing you do as well, what are other forms of equity raises that you might consider? Are you talking about preferred equity which I don't think there's a market for right now?

No, I was saying we have cash. We can pay down our debt with cash and we're building up cash.

And let me just also say, Rich, a point you mentioned about surprises of things maybe being not as bad and so on. There's obviously over several years, which is the time frame that we're looking at, the amount of cash buildup -- the swing on that is significant, too. We know we're building up cash and --

You can see it on our balance sheet.

And we're decreasing costs as well,which is assisting that process. That's a great way -- and the magnitude of that over time is somewhat uncertain. That's one clear way.

Public equity issuance is another. Dispositions down the road, that's theoretically a possibility. But then there's also variations on how you use the cash. We talk about how we're not -- we don't have any great use of the cash in terms of paying down debt. And our debt is awfully cheap and goes out for a number of years.

But another possibility is in terms of acquisitions that are low leverage acquisitions that also bring down the overall portfolio acquisition at the same time also could be a good way of deploying the cash in terms of getting a good, strong accretive deal. As Jordan said --

We have buildings that affect it because nothing is drawn on the credit line or don't have any debt on them.

Not to mention when that becomes the last one which is -- but one that may also be significant which is over a period of years. The values off of these lows where they are now, we may see some recovery in those values as well over next several years and that would also help. I think the point we're trying to get across is there's a variety of ways in which leverage can come down. In a norm market, we're definitely low leverage people and we think that's the best way to proceed. But we also know that by prematurely moving in the direction and taking a unilateral approach, you can really wind up making some mistakes and spending a lot of money that --

Are expensive and damaging to the Company to make abrupt moves with such little amount of information of a few quarters in a horrendous economy, especially when we're not under any pressure.

What amount of free cash flow do you retain per year, roughly?

That number can vary quite a bit. I think the best thing to look at is the movement from so far this year.

Quarter to quarter.

We have -- in this quarter -- first quarter was better than as indicated because we also paid down our credit line to zero which we had maintained at zero and we also bought back some stock. But if you look at -- in this quarter, we moved up close to about $15 million in the quarter.

Okay. And then lastly, would you -- or could you consider another cut to the common dividend temporarily?

Of course we could consider it, but it's not something that we are considering at the moment.

You may not be able to --

We won't do anything, but we're not sitting around talking about this the way we did before when we did cut it.

Right. Fair enough. Thank you.

Thank you. And our next question is from the line of George [Ariva with IS Iva]. Please go ahead.

Hi. Good afternoon.

George.

What are the California based multifamily rates today? Noted there was an increase in layoffs across the motion picture industry in Los Angeles due to some projects moving to other locales that are offering better incentives. Just wondering if you could comment on the recent demand trends you have seen from the entertainment industry and also provide some overall comments on the health of your entertainment tenants.

So far, that sector seems to be doing fine. I don't know. When someone says there's some layoffs, usually they're talking about someone decides to go make a movie in Canada or something to save some money. I don't know that people even give up their apartments just because they're going to work in Canada for a few months. But in terms of the entertainment industry and the office leasing market, it seems to be going fine.

Okay.

They're part of the economy. They're not dancing in the streets, but they're probably declining less than other industries if anything.

And one thing -- just to repeat a comment that we have made a number of times in the past. There's a lot of long-term trends that are going on that are really unbroken as a long-term trend, regardless of the economy. And one of the major ones that we've been a big beneficiary of and we continue to be a beneficiary of and we think it's going to be very powerful going forward is that the entertainment industry has been moving for the last few decades from large studios based primarily in Hollywood and Burbank, to many, many diversified companies -- entrepreneurial companies -- smaller that have moved out closer to where they live which tends to be in the better areas of the valley and on the west side which weave been a huge beneficiary of. That's a trend that -- we see no indication that that's slowing down.

Look at our apartment portfolio. We're going from 99.2% to 99.1%. I'm not sure there's any argument there for the entertainment industry people leaving -- giving up their apartments.

Okay. Could you quantify the average level of free rent that you're offering on say, a five-year lease?

We don't see a huge amount of that. It's not the typical deal in our portfolio. Obviously in a softer market, all kinds of terms soften up a little bit, but I don't know that we've got a good number overall.

There aren't a bunch of concessions that are hidden and therefore, you're it not seeing them in the numbers and you're not seeing them in the real rates that we're getting. Because we're longer term owners, we tend to do pretty much straight up deals. That means rents could go down. Usually if you're using free rents or other tricks like that, it's because you're trying to organize a building for sale and you want a higher finish rate. And that hasn't been our style historically.

Okay. Thank you.

Your next question is from the line of Ross [Nussbaum] with UBS. Please go ahead.

Hey, guys. Good afternoon.

Hey, Ross.

We should extend this call because the more you talk, the more the REIT market goes up.

I'm sure that we're doing that.

Then I'm willing to skip lunch.

I've got two hopefully quick questions for you. I don't know if you answered this yet, but where do you think market rents are going to be 12 months from now? How much percentage-wise lower are we going from here?

I thought you were asking higher or lower. Let me say this. Let's talk about where we've come from which is a little easier to talk about to start off. The published data -- one of the reasons we do not -- as I said earlier, we don't like these asking rent stats that predominate -- the publicly quoted stats is -- it's not very good data. We saw in the published data over the last quarter that market rents, according to that data, dropped about 4% sequentially. And then I think it's something like 9% or 10% year-over-year.

I think our view on where we've come, and we've said this before, is it's probably more like a 15% or so drop so about 50% higher in terms of the drop that's been published. Using that as a benchmark going forward, we don't have any particularly strong view on the rent side. The occupancy side, we've discussed. We could easily see rents somewhat plateauing with not a significant further decline, but we'd have to say that that's uncertain at this point. We're certainly not -- we're not assuming rents are going to be rebounding any time soon. We're not assuming that rents are going to be dropping dramatically any time soon. I think that's probably the most you can say about it.

Just switching to the fund for a second. I know you can't talk a lot about, but can you help me understand. What happened in a situation -- let's say you got a couple acquisitions done ultimately when the fund is finished. And you have a situation where a broker or tenant comes to you and says I want to lease some space in XYZ submarket. How do you deal with the situation of steering them to a building that you own 100% of versus one that's in the fund? What does a potential fund investor -- I assume it's a question of potential fund investor asks in terms of how you manage that situation.

We don't really segregate the operations of fund buildings from the operations of the REIT buildings. What happens is, for instance, you might have some leasing brokers that are responsible for leasing the buildings in Santa Monica which you could have have a fund building in Santa Monica and you could have a REIT building in Santa Monica. And they are judged and rewarded by their success in leasing that submarket. There really isn't any steering. They don't even know because it's all signed.

Douglas Emmett -- another management entity signs the leases. They may know, but they don't necessarily know whether the REIT directly owns or it's owned through a fund. What they know is they have these nine buildings in Santa Monica and here's where their holes are and they need to lease them up. There really isn't any steering.

Just, by the way, there isn't much option for steering tenant -- no space is the same. And certainly buildings are not the same if you are going building to building. Tenants usually have a view about where they want to go. We can be successful in saying that a tenant, hey, come into our portfolio, we're great managers and we're going to give you great service. But you're still going to play the 95% role in choosing which space they want to go into. In terms of the leasing brokers who are on the front line, they're only focused on leasing their submarket.

What Jordan is saying, too, it's not anything new. When we were privately operated, nine different funds so that you had nine different ownership groups within the portfolio. For years, the organizers felt operationally on a portfolio basis and that's the way the leasing and property management people look at things. They look at things on an overall portfolio basis.

That's helpful. Thank you.

Thank you. And our next question is from the line of James Feldman with Banc of America-Merrill Lynch. Please go ahead.

Thank you very much. You guys talked a lot about defaults. Can you give us a little bit more color on what you did see this quarter that you're talking about and then what you think still may come, just in terms of tenant type, size, sectors?

As I said earlier, in terms of magnitude, it was around 75,000 square feet that fell out of occupancy due to default in the second quarter. And as I said before, that was up from about 50,000 in the prior quarter in terms of magnitude. In terms of type of tenant, it's pretty scattered around.

It would be -- if anything, we don't have lots of retail tenants in our portfolio, but we obviously do have ground floor retail. As you can imagine, in terms of the overall economic trends, it is disproportionately in restaurant spaces, other retail spaces even though those are small spaces. In other industries that you would think that would be impacted by a national employment problem and economy, like employment --

Temp agencies, yes.

But beyond that, it's not really in any one particular business. It's people that were operating close -- without a lot of reserves when the economy turned on them and wound up going under.

Okay. And then as you look forward and you are worried about more to come, you think it's the same types of companies? Or you think that wave has passed and maybe there's something else that could arise?

I felt like saying before when the comment was made, seeing light at the end of the tunnel that -- the old comment, not sure whether the light is from an oncoming train. But in terms of the trend in defaults, I think we see -- in terms of what's in the pipeline that this elevated level is likely to continue another quarter or so. Whether we're through it in terms of what's coming into the pipeline shaking out, one would be hopeful that's case --

You've got to think that defaults -- the weaker guys are being flushed out.

Yes, and the national economic news is obviously better as well so that's --

But we're still maintaining our guidance at the same level on defaults.

Until we actually see it, we're going to assume that --

We're not going to predict it.

We're not going to predict it. Until it's actual -- we're not going to tell you that we're going to predict it.

As you think about your watch list from a year ago and the ones that you didn't think make it, are they still surviving on life lines of capital or are they pretty much gone?

Many of them are and others aren't. I think the comment you made before is really the one that's going to be the big question over next several quarters which is at this point, has the tree been shaken hard enough that everything that was loose fell out and are we going to see a slowdown. One can certainly think that that may be the case, but we'll see over the next couple quarters.

And then a similar question just on the pickup in activity. What was different about this quarter? What sectors? What types of tenants?

Nothing too general. It's still pretty diversified. We tend to see -- as a trend -- the biggest thing is, the absence of the fear that was going on at the end of last year, the beginning of this year, where people just didn't want to do anything and people are coming out from their holes and doing business again.

The other thing is -- which goes to a point Jordan made in his comments and why we're so positive about the shape of the recovery when the recovery occurs. And that is -- we're talking about basically -- unlike what happened two decades ago, in the early 90s, where businesses were leaving this area and people were leaving the area -- there was an old joke in the early '90s that every U-Haul was a renter and headed out of town --

There were no more U-Hauls in California.

We faced that in the early 90s and that was a much more difficult environment. This go-round, we really don't have any sense of significant people leaving the market. What your are tending to see happen is a reformation. You go from a larger law firm, say a large downtown law firm. They've had layoffs in the winter.

Now those people -- they are people that are well educated. They're ambitious. They need to make a living. And they reform themselves in small firms and they look for space. And we're perfectly suited for that long-term trend of small, more entrepreneurial companies that are getting started. They're definitely -- with some of that activity that we saw in the last quarter that fueled a higher level of activity. We expect again -- when we gain traction on an economic recovery nationwide, we're going to see a lot more of that.

Okay. And then where would you put IRRs right now -- required rates of returns for potential fund partners? What returns are they looking for?

Depends on what kind of fund that you're pitching and term, and what product you're getting. What leverage level you're talking about. I could tell you for our fund, but boy, I'm seeing -- people are trying -- a whole variety of people are trying to raise funds and I'm seeing a whole bunch of different promises and structures out there. Do you want to know about our fund?

I would love to know about your fund.

Okay. We are using leverage that's around 50%. We're a longer term hold because it's a three or four acquisition period and a 10-year maturation period. We're shooting -- we're saying 12 to 14 but we're really shooting for the high end of that range without taking into account the positive effects of refis, assuming there's some recovery and increased cash flow. It's 14 just on a 50% leverage our on purchase price as opposed to increasing leverage with refis and flushing money back to the investors.

In terms of a delay in actually raising the capital, do you think it's with -- the returns you're potentially providing or it's more that they're not ready to act?

I think they're getting to be ready to act right now, but the delay was because they weren't ready to act. I don't think it's because of what we were offering on a performance or our markets or our strategy. I think it's just people are saying, hey, we just think the market is still going to be headed down and we -- if we gave you our money, we'd tell you not to buy anything and we're telling ourselves not to do anything so we're going to wait. And I think now we're starting to see a little more action because people are saying, okay, I can see opportunities are coming up and I don't want to miss them, and I know structurally that we have to have the money in the fund. We have to -- it takes time to get it in there. Now people are working on making a commitment. And we're getting commitments approved and getting their edits to the document. We're moving along again.

Where would you guys put your mark to market for your 2010 role? It sounds like you're not so worried about big vacancies. It's just a matter of where rents are going to be. If you were in a market at today's prices.

Mark to markets right now is still on top of our current rates. It's probably going to be around -- might be a little below, it might be a little above. It's going to bounce around.

You're think -- your 2010 expirations right now are pretty much in line with market?

Some are well below and some are in line. I don't know at the moment whether there are many that are above, but if rents keep going down there may be.

Finally, Bill, just more of an accounting question. Is there any risk that if market rents continue to decline that you will have to take -- either restate or impair your FAS 141 from the IPO?

FAS 141 is -- that gets locked in historically on the date of purchase which in the case of the IPO that was purchase accounting. That just rolls out as a fixed number, regardless of any fluctuations in market rent.

You will continue to recognize that number going forward until the leases roll?

We're required to continue to amortize the FAS 141 income over the life of each lease.

on a GAAP basis, if rents go below what that number was, then it would be a negative GAAP spread?

On the roll? Yes. That would be true.

Where are you now versus where the pricing was then?

I do not have --

We don't have numbers on the GAAP releasing spreads.

Thank you very much. I appreciate it.

Thank you. And our final question is from the line of Michael Knott with Green Street Advisers. Please go ahead.

Hey, guys, can you hear me this time?

Yes. We weren't being rude, but every time it was your turn to talk, we wouldn't hear the first 15, 10 seconds of it or something. And then we didn't know what you had been saying.

That's fine. I totally blame the phone. My question is on Beverly Hills and Westwood. Your vacancy -- your percentage lease reduction there was a little greater than for your other west LA submarkets. And then the absolute level of percent lease is a little lower than some of the other west LA submarkets. Can you just comment on -- I know in Beverly Hills that some of the Fund X assets -- can you just comment on fundamentals in those two submarkets?

Sure. With regard to Westwood, it's -- that is just a statistical -- some statistical noise. It's by far our smallest submarket, like 300,000 feet It's very small moves tend to move that needle, but they don't have much of an impact on the overall -- on our overall performance. And that's what went on there. There were a few pretty minor defaults in that submarket, but it moved the statistics on that for that submarket in our numbers.

In Beverly Hills, it is entirely the issue that Jordan discussed earlier, which is the repositioning properties that we have -- that we bought last year. That's where the decline is entirely concentrated. Our existing Beverly Hills portfolio -- the part we had done the underwriting on -- that we had already gotten to our standards prior to the downturn has held up. It's actually probably our -- probably our highest occupied.

And one of our strongest. But we had a building that literally had a construction wall around almost the whole building for the last six months or a year. And it's just coming down in a couple weeks. It's going to make a big difference. The building has come out just beautifully. It's a 400,000-plus foot building.

We've had a lot of vacancy there. It's hard to attract tenants to come in when -- we'll have our opening party and get a bunch of brokers through. I think we'll get some positive movement there. It's one of the areas that will be the most impacted that I was discussing earlier in our prepared remarks. Are you there?

Yes. This phone is screwing up again. Can you hear me now?

Yes.

From my notes -- [Encino] with your six west LA submarkets, could you just rank them in terms of strongest and weakest right now?

Again, I didn't hear all of your question. But Woodland Hills, Warner Center is certainly the softest of our ten submarkets as we've indicated. Now we've got -- the good news is the wall going forward over the next four quarters is relatively like -- unlike the last three quarters when it was a huge percentage of our total roll. Now we've got the challenge in front of us to build that back up with better expiration schedule. That's its own particular challenge.

Beyond that, we don't think of the other submarkets that there's a really huge difference submarket to submarket in terms of performance. It's -- we tried to get across the point that we thought that the variations were more in properties we were repositioning in particular submarkets.

I think the only reason Beverly Hills shows up is those two big office buildings that we've been redoing. Then Woodland Hills, we have the largest tenants come up. Everything else I'd rank equal.

Okay. Thank you.

Ladies and gentlemen, this does conclude our question-and-answer session for today's call. I would like to turn the call back to Mr. Kaplan for any closing remarks.

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

Thank you. Ladies and gentlemen, this concludes the Douglas Emmett 2009 second quarter earnings conference call. We thank you for your participation. You may now disconnect.