Douglas Emmett Inc (DEI) 2009 Q3 法說會逐字稿

Welcome to the Douglas Emmett's 2009 third 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. Douglas Emmett has requested to limit the question-and-answer session per person to one question and a followup. This is in an effort to accommodate everyone on today's call. You may re-queue with any additional questions you may have. At this time, I would like to turn the call over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer; and Mr. Bill Kamer, Chief Financial Officer. Please note this call is being webcast live on our website and will be available for replay for the next 90 days and by telephone for the next seven days. Our press release and supplemental package have been filed on Form 8-K with the SEC and are both 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 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 at DouglasEmmett.com. Please note that the market data sources referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office markets, REIT for the Los Angeles office, MPF Research for Los Angeles multifamily market, and Property and Portfolio Research for the Honolulu multifamily market. With that, I would like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan.

Thanks, Mary. I'm just getting over a cold, and so while I'm here and I'm happy to answer questions, at least easy questions, I'm going to have Bill read my prepared remarks. So Bill, take it away.

Thanks, Jordan. I would like to begin with an overview of the current leasing environment in our submarkets followed by a brief discussion of Fund X and potential acquisition opportunities. I'll then go over our third quarter financial and operating results.

During the third quarter, leasing in our markets entered a transitional phase. As fear of economic collapse faded, some optimism returned and positive indicators surfaced. We feel that these encouraging signs will translate into a reasonable recovery in our leasing fundamentals in the not to distant future, but we recognize there are still obstacles to overcome before this will occur. New office leasing activity increased significantly in the third quarter. I will provide additional color on those leases a little later.

We are encouraged that the resurgence in tenant demand cut across our industry groups, such as health, legal, insurance, entertainment, and financial services. We are also pleased that our third quarter leasing showed a return to expansions by existing tenants. In addition, our leasing activity in the fourth quarter has been keeping pace with the third quarter, but there is no certainty that it will continue as we head into the holiday season. As a result of our improved third quarter leasing activity, the lease percentage of our office portfolio declined at a lower rate.

Excluding the six buildings that we acquired for Fund X, the lease percentage of our office portfolio declined by 30 basis points to 91.8%. We acquired the Fund X properties with significant vacancy and with the intent to do major renovation and repositioning, which became more challenging due to the economic downturn of the past year. However, we recently completed the rehabs in the largest of these buildings and we are now gaining leasing momentum. In fact, the lease percentage in the six properties actually increased by 30 basis points in the third quarter.

Although office leasing volume has returned to a healthy level throughout our portfolio, occupancy continues to decline due to lease default and other space reductions from tenants who are suffering from the lingering affects of the recession. Over the past three months, we have identified fewer tenants who are in distress than we did earlier in the year. While this is a strong positive leading indicator, working through the existing pipeline of challenged tenants will most likely cause occupancy to continue declining over the next several quarters. However, if the national economy continues improving and our higher leasing volume trend continues, we believe that we will see a strong recovery in our leasing fundamentals. At the end of the third quarter, our same-property lease percentage remained at almost 92%, a level that is significantly higher than in prior downturns. That being said, there is no consensus on the future direction of the national economy, and business confidence is somewhat fragile. So we may have some uneven leasing results over the next year until the national economy fully recovers.

Now I'd like to provide a brief update on Fund X. We continue in our efforts to raise equity capital for our institutional fund and have experienced a renewed interest from potential fund investors. We have extended the subscription period for the fund. Jordan has been spending a lot of time on the road meeting with prospective investors and their sentiment has improved significantly over the last nine months. We are at a very advanced point with several major investors, but since we have not completed the transactions, I will refrain from providing additional commentary at this time. As I've said in the past, the fund is the exclusive acquisition vehicle for the REIT. However, if acquisition opportunities exceed the fund's capacity, we then have the option of utilizing joint venture capital. We have received substantial interest from potential joint venture investors.

As for the acquisition environment, we believe that valuations bottomed in our markets several months ago. Even though there weren't any transactions, we've been able to derive valuations from watching the bid ask on several aborted marketing efforts earlier in the year. With the improvement in the economic climate and with significantly better pricing in both the unsecured and secure debt markets, sellers have been become more emboldened to pull back from fire sale pricing, resulting in marginally rising values. That being said, we continue to be optimistic that over the next 12 to 18 months, we'll be able to acquire a substantial number of assets within our core markets at fair to attractive pricing.

I will now provide details on our our third quarter 2009 operating results. For the third quarter, the company reported FFO of $47.8 million or $0.31 per diluted share. AFFO for the quarter ended September 30, 2009 was $35.7 million or $0.23 per diluted share. Same property net operating income decreased 1.3% on a cash basis and decreased 2.4% on a GAAP basis when compared to the third quarter of 2008. Same property total revenues decreased 0.8% on a cash basis and decreased 1.6% on a GAAP basis when compared to the third quarter of 2008.

As previously stated, Fund X was the deconsolidated in February of this year. Therefore the company's financial results include the Fund X properties on a consolidated basis from March of 2008, when we acquired the six assets, through February 2009, and exclude the Fund X properties from March 2009 through September 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 1.6% to $140.4 million in the third quarter of 2009 compared to the third quarter of 2008. For the nine months ended September 30, 2009, total revenues of $422.1 million were flat compared to the nine months ended September 30, 2008. Total office revenues in the third quarter of 2009 decreased 1.4% to $123.5 million compared to the third quarter of 2008, primarily as a result of lower parking, straight line, and FAS 141 revenue, but increased 0.6% sequentially. Total multifamily revenues in the third quarter of 2009 decreased 3.4% to $17 million as a result of rent rolldowns compared to the third quarter of 2008. Sequentially, multifamily revenues decreased 0.5%. Office operating expenses decreased 0.4% to $38.7 million in the third quarter 2009 compared to the third quarter 2008. Multifamily operating expenses increased to $4.6 million for the quarter ended September 30, 2009, compared to $4.4 million in the comparative quarter of 2008. Our total office and multifamily FAS 141 income for the third quarter of 2009 was approximately $7.5 million. We have anticipated that FAS 141 income will range between $31.5 million and $32.5 million for all of 2009.

G&A in the third quarter 2009 totaled $5.6 million. We've estimated that our total G&A expenses for 2009 will range between $24 million and $25 million. Interest expense in the third quarter of 2009 increased to $45.3 million from $44.6 million in the second quarter. The majority of this increase, approximately $500,000, is explained by there being 1 extra day in the third quarter compared to the second quarter.

On October 30, we extended our secured revolving credit facility to October 30, 2010. This credit facility renewal was for $350 million compared to $370 million prior to the extension. Otherwise, no changes were made to the pricing, terms, or conditions covering our revolving credit facility. We still have a second option to extend the facility to October 30, 2011. We maintained a zero balance on the credit facility throughout the third quarter.

During the third quarter, we repurchased 250,000 share equivalents in a private transaction at a total cost averaging of $11.52 per share. Year-to-date we have repurchased a little over 1 million share equivalents totaling approximately $8.2 million at an average cost of $7.68 per share. At September 30, 2009, we had $63.8 million in cash and cash equivalents on hand. For the nine months ended September 30, the company's cash position increased by $55.2 million.

Turning to operations. The office percent lease for the 10 submarkets where Douglas Emmett office properties are located declined 90 basis points sequentially to 87.4%. Market rents for the 10 submarkets where office properties are located declined 4.6% sequentially. We have seen a significant uptick in leasing volume over the last two quarters. During the third quarter, we entered into 62 new leases totaling 214,000 square feet. This compares to 56 new leases totaling 132,000 square feet in the second quarter. Our third quarter of new leasing was the highest it has been since the fourth quarter of 2007 and represents a sharp rebound from the low of 37 new leases totaling 97,000 square feet which occurred in the fourth quarter of 2008. We also renewed 85 leases totaling 361,000 square feet during the quarter.

At the end of the third quarter, our office portfolio excluding the Fund X properties was 91.8% leased and 90.7% occupied. Including the Fund X properties, our office portfolio was 90.4% leased and 89.2% occupied. Our multifamily portfolio was 99.4% leased at September 30, 2009. Office tenant improvements, leasing commissions, and other capitalized leasing costs during the third quarter totaled $15.83 per square foot compared to $15.41 per square foot in the second quarter of 2009.

Our mark-to-market and rent roll metrics during the third quarter are as follows. On a mark-to-market basis, our in place cash rents were 3% higher than our asking start rent in the third quarter of 2009. On a straight-line basis, the average rent from expiring leases was 7.5% lower than average [rent rolls] from new leases signed for the same space in the third quarter of 2009. On a cash basis, the ending cash rent from expiring leases was 1.7% higher than the beginning cash rent from new leases signed for the same space in the third quarter of 2009.

Now turning to guidance. We estimate that our 2009 fourth quarter FFO results will range between $0.29 and $0.31 per diluted share. Therefore, FFO for the full year of 2009 is anticipated to range from $1.26 to $1.28 per diluted share, which is narrowed from our previous full year guidance range of $1.25 to $1.29. 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 preop IPO interest rate swap contracts will substantially conform with straight line amortization. We anticipate providing 2010 FFO guidance on our next quarterly call, which should occur sometime in February of 2010 in conjunction with our fourth quarter 2009 earning results.

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

Thank you, sir. (Operator Instructions). Our first question comes from the line of John Guinee from Stifel.

Hi. Jordan, to the extent you're able with your cold, could you talk about the markets you tangentially look at within the greater LA area. For example, LAX, El Segundo and the secondary markets?

Well, I think their -- I mean, what I see happening there is there having a greater battle in keeping their space occupied having their buildings occupied than we are here. And we're having a great battle. So they're going through a very tough time. It's those markets where you see -- there hasn't been much in the way of trades of the markets that we're focused in, but you are seeing in those markets that there are some trades happening. And people are taking long shot bets and [stuff is traded] in Orange County and then in the other areas south of here. But they're suffering from the economy.

Okay. And then a follow-up question. On your apartment portfolio for the last four or five quarters, you've consistently run at 99% plus or minus. If you were more aggressive on rental rate growth, how much would you lose in the way of occupancy points?

We've talked about this from time to time, the issue of the sensitivity between rental rates and occupancy. What we really find is that trying to push up rents and have occupants come in just never really works for us. The equation, a lot of it is the nature of our particular market. So we have an operational policy across the board of renting at a level that keeps us fully occupied.

Great. Thank you.

And your next question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Yes, hi. Good morning. I just want to focus a little bit on the fund and the investor sentiment. Can you just tell us how people's expectation have changed toward the beginning of the year there was hope for RTC-like investment opportunities. Clearly that seems to be a bit different now. Values seem to be hardening. What are the investors, now that they seem more receptive to invest in the fund, what are their return expectations now as opposed to your previous conversations with them?

I can't tell you that return expectations have changed. What has happened is they went from -- and this is really global, I mean the attitude of it's early, it's early to be investing and it's too early to be investing. And that's what I was hearing the first quarter of this year, second quarter of this year. And that shifted literally almost from one trip of mine to the next, to wow, do you think we're missing it? Is it behind us? And you see that now in all of their attitudes. No one is dumping money, but they're all focused -- the ones with equity are focused on getting it out and able to be placed in this market. They're comfortable with it being placed now. And as I said -- or as Bill said for me on the call, we actually think the value bottom for buildings in our markets at least was probably first quarter.

Okay. But as far as sense of returns?

The returns we're telling them we're going to deliver were relatively modest leverage or 50% leverage is 12% to 14% over ten years.

Okay. And then just the follow-up questions is, are you seeing lenders yet force distressed owners of assets to foreclose and clear those assets, or are you seeing people extending and pretending?

I think both are happening. I think the same way that sellers are becoming a little emboldened by the fact that the market and the capital markets are showing a little strength, I think lenders, I think you may see them starting to become a little bit more emboldened, saying okay we'll just take back these properties and sell them on certain ones, maybe where they didn't feel like the operator was that strong to begin with. I'm also seeing a lot of deals where lenders are saying we'll continue on if it covers.

In our markets there is not a lot of properties that are distressed in the way that you would expect the lender is going to force the sale. The properties are going to maybe sell, but for other reasons like entity level liquidity, general entity level liquidity, or maybe all of the -- there's a bunch of buyers that came into our market that weren't maybe set -- were short-term owners. And the short-term owners, they stayed open. They want to get back out. And they're just looking for an opportunity to get out and they've already been trapped in longer than they had otherwise expected, and the operating metrics of their properties are deteriorating badly because they didn't spend the money to set up an operating platform. And so not having one, they're taking a bigger beating than let's say some others are in our market, which would be -- to be expected. So they want to get out. Those are the sellers that I expect to create the opportunities that we describe, which aren't going to be fire sale. They'll just be reasonable probably.

And your next question comes from Chris Kim from Morgan Stanley.

Hi. Good morning. Following up, I wonder if you could comment -- I think I heard you say you're looking at your core submarkets for investment opportunities and I'm wondering if you would contemplate going out to a broader set of submarkets within your market and could opportunities be attractive enough for that location drift?

They could. They could. I mean we're always looking in San Francisco and we look down in San Diego when stuff becomes available. But I feel like there is enough in our markets that is going to come available that the opportunity is there, and I do not have any reason to believe the pricing will be any better relative to the assets in say San Francisco or San Diego. And since my belief is just going to be enough product coming in our markets, we're pretty much staying here and just watching what is going on in the other markets.

And I guess the second part of that is you intend to have only the better submarkets within each of the cities that -- I guess LA, or would it be a cross LA that you would look at?

We're in the absolute best submarkets. It's not a cross section of LA at all. It's the best markets in LA.

That's -- I guess that's what I was asking. So you would stay -- in those best?

We're staying in the top tier. We've looked at deals in the past that I thought someone would make a lot of money buying that building. But culturally our company operates on a very high service level, and we would have overimproved and overspent on the service side for that building for that market. So it wouldn't have been a good buy for us. We try and stay with what we're good at, which is the very high end, high service model.

And your next question comes from Michael Bilerman with Citi.

Hi. Thanks. It's Josh [Addy] here with Michael. Can you give us a little more color on the acquisition pipeline? You mentioned the opportunities could be substantial. Are there assets that you're bidding on today or prepared to bid on? Maybe you can give us a sense of the overall size of the pipeline?

There are assets we're prepared to bid on today. And I believe that there is a very strong pipeline coming and my hope is that there will be a lot of transfers in these markets. I don't know about giving size, but I think certainly when we tell you that we're raising a fund that is $500 million or maybe could be more and we use 50% leverage, we're hoping to buy a lot. Certainly has been a lot of work to raise the money.

This is Michael speaking. A, I hope you feel better. But I do have a follow-up. I think in your opening comments which Bill read, you talked about if you exceed the funds' goals, then you would go toward a joint venture model. And I'm just curious, as you're talking to fund investors that I'm sure would also probably go to a joint venture model. Is there just different pools of capital and do they have different return expectations that you would diverge from what historically has been purely a fund model? And then going down the road of doing individual joint ventures?

That's a great question, Michael. A very perceptive question. I'll tell you exactly what I meant by that, which is that we -- a lot of the stronger pots of capital that are out there are interested in JVs. But they also recognize the strength of our market and the strength of our operating platform. And we as a company pretty firmly believe that the best way or one of the best ways to invest is through the fund concept, which this is our 10th fund that we're raising. Now deals could be too big for the fund and there are a number of deals coming that are too big for the fund. I believe a number -- I could count two at least and maybe three -- of the investors that came into our fund specifically did so to have access to those joint venture opportunities. It's not saying that once the money in the funds are placed that then we'll go to joint ventures, we're saying that the fund is limited in the size of the deals it could do and we comfortably have some good investors in the fund, because fund investors have the first priority to do any joint venture. We have good investors in the fund that have made it clear that they're interested in also funding large joint ventures.

And your next question comes from Jamie Feldman from Banc of America.

Thank you. I was hoping we could focus a little bit on fundamentals. You commented you expect further occupancy loss. Can you quantify what percentage of the portfolio you think is still at risk and the duration of how long you think it will take to work out?

Yes, hi, Jamie. Let me say it this way. It really comes down to, as I was trying to say before, it really comes down to two factors. I think the important takeaway from this is the following, which is when we spoke last quarter, we were seeing signs of a pick-up in new leasing activity and tenant demand and the businesses were getting back to business. We said on the call three months ago that it was at a point that we couldn't yet say that it was a trend. It was just too soon. Now three months later, with an even significantly stronger quarter with recent activity, we can say there has been a trend. Now whether that trend continues into next year, we'll need to wait and see.

So that's -- the issue of declining occupancy, it really comes down to two components. It's that simple. The trend of leasing volume now is good and healthy. If it stays at that pace, the same pace, not even increasing, the same pace, that's a real healthy sign for an end to occupancy declines and the turnaround, we think a pretty strong occupancy turnaround not too far down the line.

The other end of the equation which you were focused on that is tricky, because we've been seeing in the last few months we've seen very few tenants come on our radar screen running into trouble of various kinds that we saw earlier in the year. That's a great sign. That pipeline is working itself through. But it's also true that as we roll through next year, as we're in this transition, tenants that are not even on our radar screen now, that are not at all indicating any issues, as we hit their walls that come up in the next year, they -- some of those tenants have suffered in the recession as well and they may either be going out of business at the time of renewal or downsizing at the time of renewal. We're trying to get a good handle on that, in a very micro way now as we're looking forward to next year. And I think that's going to in large part shape our guidance for next year that we'll be offering.

I think that's about -- I'm laying out for you every element as we see it now with the idea that we'll probably be able to give you a better idea of quantifying things for 2010 when we're in a position to provide guidance.

Okay. And then in terms of the activity you're seeing, would you say it's a catch-up for a very slow period? Are businesses really expanding or are they just getting back to signing leases and doing renewals because they were just panicked and didn't know what to do for a while?

Well, let's start with the expansion side. We definitely -- we saw, we had something like over 20 of our 150 transactions in the third quarter had an expansion component to them, which we were somewhat surprised by and thought was a very healthy indicator of businesses that are expanding. We've seen a continuation of expansions so far in the fourth quarter. So at the same time that we continue to express concern about the headwinds of some businesses that got damaged by the recession and are fallen by the wayside or contracting, we are definitely seeing signs now of a wide range of tenants that are in an expansion mode, at least in our portfolio. And it cuts across -- as we said in our prepared remarks, it cuts across the different industry groups. It's not in any one particular area.

So the -- as I think we tried to say, our view on that side of the equation, which is a main driver of where we're going, at the moment is very healthy. We were a little concerned about that pent-up demand issue last quarter. We were thinking maybe there was a catch-up from the fact that no business got done in the fourth quarter of last year, and we did a little bit in the first quarter. So we're thinking second quarter maybe there was pent-up demand. But the results in the third quarter and so far in the fourth quarter suggests its something more than that. But again, I think the clearest indication we can give is that the -- we, like everyone else, are looking at the national economic forecast going into next year and there is a lot of disagreement whether we continue to improve or whether there will be a dip, and that will tell the tale on whether this leasing volume continues.

And your next question comes from the line of Brendan Maiorana from Wells Fargo.

Thanks. Good afternoon. Bill, a balance sheet question for you. You modified term loan and you've got the $1.1 billion tranche that swapped to 4.9% that expires in August of 2010. How are you thinking about that for next year and would that just go to LIBOR plus 85 or are you thinking about swapping that to fixed? And if you swap it to fixed, what is the rate you think you could get?

Well, let's -- starting with the fact that if nothing else happens, as you said, we do -- that $1.1 billion would go to floating LIBOR plus 85 at the beginning of August. We are not, and we've been urging everyone as well, to not count that money as being in hand. It's spread between the fixed rate that we have there now, which is around 5% all-in -- with the spread at LIBOR plus 85, it's a significant drop. It's $40 million or so a year of positive cash flow. But we're not anticipating that at the moment. And we will -- we're looking at a variety of options in connection with those loans to try to deal with both the issue of trying to address 2012 maturities and also trying to anticipate higher interest rates down the road. So there is a lot of uncertainty on that. The swap rates today, if you were to do -- if we were to fix today on a future basis and go forward, roll forward another five years from August 2012, you're talking about a strike price of around 3.5%. So the all-in with the 85% spread on that would be like 4.3%, something like that.

But it won't be 85 -- a new five year bond is not going to have an 85 basis point spread.

I was trying to address the issue if we reswapped in the existing time period. If your interest is where we think brand new loans are now, swapped out, you're looking at a range of like 5.5% to 6.5%, which would be the range of what's available based on current swap rate spreads.

Okay. That's helpful, thank you.

And your next question comes from the line of Rich Anderson with BMO Capital Markets.

Thanks. Bill, did you give that typical data point, the asking versus in place rent spread for your entire portfolio?

Yes, we did. It's -- the in place is 3% lower than the asking.

So it hasn't moved?

No, it's moved. It's moved from -- it was positive last quarter, and now it's in a negative situation.

So in place is 3% higher?

In place is 3% higher.

Combination of rent decline and the in place rent decreases, and the in place rents will continue to increase, which you can see on the forthcoming roll rates for a while because those rent bumps continue to click up.

Okay. And this one is unfortunately for Jordan. And I appreciate if you could sing the response. The fund, say you get to $1 billion of buying power -- how, if any, has the process been different as a public company versus the nine that you had completed as a private entity? Has it been more difficult with the public environment, or has there been any change at all given the conditions that you've maybe gone through in the past as a private entity?

Well, private or public, the best time to raise money and buy buildings is always the hardest time to raise money, so of course we're going through that. But I would say the only other slight difference is that as a public company, we have some of our old investors that do not invest in funds of public companies. So that hurt us a little bit, when the public company is a general partner, even though it's our sole acquisition vehicle. They're just used to there being too many conflicts in that situation, so they have a rule about it. But maybe it's helped us a little bit in terms of overseas investors. It's very easy to due diligence us in what we've done with all of the information and transparency of a public company. So I guess a little bit helpful on foreign investors. Not that great in terms of the domestic ones.

And your next question comes from Michael Knott with Green Street Advisors.

Hey, guys. Bill or Jordan, whoever wants to answer, I was curious if you could get us a little bit of color on the trajectory of rents in some of your different submarkets and maybe you can give us some color on some of the different submarkets as well?

Let me try to handle that one. Rents will continue to trend down as long as -- well, let me say it this way, until occupancies have both stopped declining and are in fact in an up-swing that is recognized by the market. So we'll continue to see that drift. I gave the market stats for the 10 submarkets earlier, which is market went down sequentially 4.6%. I don't think what we've seen within our portfolio, since we are a large part of that market, is dramatically different.

I will say this, which is that I think the adjustment in market rents across -- are clearly from the new volume that we're doing, where there is no question that rent levels currently are at a rent level that is causing there to be a lot of activity. So based on that, while the trend would still have to be viewed as downward, so long as -- until occupancy starts to pick up, we seem to be at a point now where the rent levels and what the market is looking for seem to be matching up pretty well in terms of new business.

Okay. That's helpful, thanks. And then the dollar amount is completely immaterial, but I'm just curious your thought process on the stock buyback in the quarter?

Well --

I just wonder how you thought about it.

Well, I guess what we've said for a while is that with the cash we have available, and we see when we look at the other peers and how they report, it looks like we're not doing any worse than they are in terms of the ridiculously low interest rates that we all get on the cash we have on hand. You look at that, our cash buildup positions, the various uses for cash. As you know, on the external growth side, the equity we're really looking primarily at the fund and joint venture equity for that. We do not have any particularly strong short-term use for cash in terms of external development or external acquisitions, and obviously we also do not have a development pipeline or other CapEx commitments. So we have cash, and how we use that cash as we've said is a balance to adding it to things like external growth, and then also selectively buying back stock from time to time when we have an opportunity. We had an opportunity to buy a chunk of shares privately. We thought it was an attractive price and we took advantage of it. But we're looking to do that on a selective basis and balance. We're certainly not shifting into a major stock repurchase mode. Everything is consistent with what we've been talking about for some period of time.

Thank you.

And your next question comes from George Auerbach with ISI Group.

And Bill, just to get back to the positive leasing trends you're seeing, are these signs of a recovery concentrated in your west LA markets or are you also seeing them in the Valley?

Well we've been seeing it really in both areas, both in the Valley, so a lot in Beverly Hills. Honolulu had a good quarter as well. So it's been broad-based.

Okay. Thank you.

And you have a follow-up question from Michael Bilerman from Citi.

I think Jordan or Bill, you said when you looked at the acquisition market and you thought the deals would come and you used the term fair and attractive pricing. And I'm just wondering how to put them into context of maybe a price per pound, an initial yield, a yield five years out, what does that mean? Fair and attractive?

Well, I gave you what we told investors we thought what we would get for them, which is a 10 year discounted IRR paid to them of 12% to 14% using 50% leverage.

The other thing, Michael, which -- what we mean by that is what to us is really very important is we've had a -- an acquisition strategy for many, many years of trying to focus on quality buildings that for one reason or another happen to have vacancy that is above and hopefully well above the market averages, and we think that those kind of opportunities exist. The problem has been in -- back in 2007, when the market was overheated, even buildings that had some vacancy, the vacancy was being marketed as being more valuable than occupied space. Just the assumption that sellers were forcing you to make about market rents and how quickly you would lease-up and so on. For us, it's very critical in external growth to be able to buy buildings that have vacancy. That's where a lot of our growth has come from and we think will come from again. So being able to buy quality buildings with vacancy at a fair price is extremely positive to us and we think those are the conditions that exist right now.

And just, I want to understand just so your perspective or mentality when you're looking at this deal pipeline today -- when you had the [Arden] acquisition earlier this year, you went out and saw the opportunity and closed -- I'm sorry, last year, prior to having the fund done. So when you're looking at these deals coming in and obviously you do not have that much more capacity, depending on how much more equity you raise for the fund, would you go out and do a big deal and take it all on balance sheet with the hopes of syndicating it out as a joint venture or as a fund? Would you use your own stock for that? I'm trying to understand how aggressive you're going to be prior to having capital in place.

If a big deal came, I think -- if we liked pricing, we'd find a way to do it, I don't -- I couldn't -- cannot tell you much beyond that, although I'm comfortable we have plenty of ways to put the capital together for a large deal that would not necessarily stress our balance sheet or do much in the way of dilution.

And I think from a timing standpoint, we have not had any issue. And contrary to what we said, we do not intend to miss any acquisition opportunities in our core markets. And we're very comfortable that the timing of those opportunities and the timing of our capital rates are going to match up just fine.

And your next question comes from the line of Brendan Maiorana from Wells Fargo.

Thanks. I'm just interested in your thoughts on Honolulu. We heard that Bishop Square may be coming on the market, which would be a big asset and really increase your footprint over there. Are you guys thinking about expanding there as well or are you totally focused on the LA market?

We're thinking about expanding there as well.

Okay. Thanks. Can you elaborate in terms of any pricing differential that you may see, is that 12% to 14%, the same for LA as it is for Honolulu? Or are you thinking about different return expectations?

Well, I don't know that we adjust our return expectations, but we're very conservative in our assumptions. Bishop Square is an asset we're looking at, so I don't want to talk about it beyond that.

And your next question comes from the line of Michael Knott with Green Street Advisors.

Yes, guys, I'm curious if you can give us a little more color on maybe the timeline you would expect to extend the fundraising time, and also if the new investors are haggling over whether to accept the Arden acquisition at your original cost basis or not? Thanks.

I think we've still got a couple of months to go. Maybe even out to the end of first quarter, but I'm not sure. And we could tell you the rest about what is going on with the fund after it closes.

Okay. Can you just remind us of the formal closing date, or is that subject to extension at your discretion?

The formal closing date was --

It's end of October, right? Was it the end of October or the end of November.

October. It was the end of October. But I believe now it's extended to -- the original formal closing date was in October, and now it's going to go out to the end of December or the end of March. Probably the end of March.

Okay. And just one last question. You do not feel comfortable providing any parameters or ballpark figure of what the final tally may be, even if it's a guess on what the range is or something?

I would rather just wait. We have been telling you guys, we thought we would get the $500 million and we're still -- I'm certainly still willing to say that.

And you have a follow-up question from the line of John Guinee from Stifel.

John, how are you doing?

I'm sorry, refresh my memory, Bill. Your undrawn credit facility, you've got either seven or nine assets which are carved out and totally unencumbered as the borrowing base for that facility. Can you refresh me as to the unincumbered NOI for that?

Well, it is nine assets and we -- I don't have the numbers for you on the NOI on those properties.

Okay. And then did you have any lease term fees in Q3?

Our typical low amount, it was something like $80,000 for the quarter. With rare exception, our lease termination fees never to seem to be any significant number.

Okay. Thank you.

And you have a follow-up question from the line of Jamie Feldman with Banc of America.

Thank you. I know we've been talking a lot about acquisition activity, I'm just trying to figure out the big picture here. What is it going to take for a deal to start happening?

Willing sellers and willing buyers.

Sellers being emboldened enough that they're willing to sell.

Is it a year end event or what are they waiting for?

I don't know. I think they're gotten a little bounce off the floor already, and so I think that probably strengthened some people's resolve to get their properties sold that they've planned to sell already. They're probably waiting to see that after the bounce. When the capital markets were at their worst, it didn't take much to figure out it was a bad time to sell. Now there seems to be capital out there. If you put a building on the market today, there is going to be plenty of bidders. But the question for you now is, am I in that market sell, or not subject to capital markets but just the value of the building, And so I think as sellers start to realize that's where the market is today. I think the people that have planned to exit a number of properties will start doing that.

And there are no further questions at this time.

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

And this concludes today's conference call. You may now disconnect.