Douglas Emmett Inc (DEI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett 2009 fourth 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 per person to one question and a follow up. This is in an effort to accommodate everyone on today's call. You may requeue 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 that this call is being webcast live on our website, and will be available for replay for the next 90 days, and by phone for the next seven days. Our press release and supplemental package have been filed on form 8k 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 the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of these risks, please refer to the Company's press release and the current SEC filings, which can be accessed in the investor relations section of the Douglas Emmett website. Please note that the market data sources that are referenced in management's prepared remarks are, CB Richard Ellis for the Honolulu and Los Angeles office markets, REIT for the Los Angeles office market, MPF Research for the Los Angeles multifamily market, and Property and Portfolio Research for the 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. Good morning, everyone. Let's see, 2009 was a challenging year. We expect 2010 to also be a challenging year. Fortunately, we are beginning 2010 with a very different perspective from the one we had last year at this time. The capital markets have strengthened, appropriately signaling the expectation of improving leasing fundamentals. We also are now more confident having seen how our portfolio responded to the recent period of economic turmoil.

At the end of second quarter 2007, the least percentage of our office portfolio peaked at 95.7%. Notably, 2.5 years later at December 31, 2009, the lease percentage of that same office portfolio was 91.7%. Still very healthy by historical standards in our markets. Additionally, our multifamily portfolio has remained 99% leased throughout this time.

As we discussed in last quarter's call, we saw a resurgence of our office leasing volume during the third quarter of 2009. We are pleased to report that our office leasing activity during the fourth quarter continued at a strong pace. In fact during the fourth quarter, we signed new and renewal leases totaling 715,000 square feet, which was significantly higher than in any quarter since we began tracking this data as a public company starting in 2006.

During the fourth quarter, the least percentage of our office portfolio declined by 10 basis points. Although this decline was at a lower rate than in previous quarters, it is a decline despite our strong leasing volume. As we forecasted in last quarter's call, occupancy has continued to drop due to lease defaults and other space reductions from tenants, especially larger tenants who are suffering from the lingering effects of the recession.

We anticipate that this headwind will continue to offset our leasing activity, even if it remains healthy. This will likely cause occupancy levels to decline for the next few quarters. However, we are encouraged by the strong tenant demand, particularly from smaller entrepreneurial tenants who serve as our core customers. Demand continues to cut across a wide variety of industry groups, so we remain optimistic that we will see a recovery in leasing fundamentals, as we work through residual tenant issues.

Now I would like to give you an update on our fund, and the acquisition market. One of our highest priorities during 2010 is to acquire additional properties. We are pleased to report that we have raised more than $450 million in the fund structure, and have continuing interest. We have therefore extended the fund raising period until the end of June.

As we have previously said, excuse me, if the acquisition opportunities exceed the funds capacity and our own available liquidity, we have the option to utilize joint venture capital. We have received substantial joint venture interest from our existing fund investors.

Finally, if we do have the good fortune to source very large acquisition opportunities, we also have access to the public equity markets. As a result, we are confident that we will have sufficient capital to take advantage of any opportunity.

That being said, the acquisition environment remains competitive, and valuations are steadily rising as the economic climate and capital markets continue to improve. Therefore, we are staying focused on our core submarkets in Los Angeles and Hawaii, as opposed to seeking out alternative markets. We should be able to take advantage of the synergies that come from our existing, highly concentrated operating and leasing platform to create long-term value for the Company. We are currently looking at a number of office and multifamily deals, and we believe that activity will increase later this year.

We that, I would like to turn the call over to Bill Kamer, who will provide details on our fourth quarter and year end operating results. Bill?

Thanks, Jordan. I'm going to go through a number of very specific details, and then I am going to get to our guidance for the year and give you some color in what we see coming up in 2010.

For the fourth quarter of 2009, the Company reported FFO of $46.3 million, or $0.30 per diluted share. For the year ended December 31, 2009, the Company reported FFO of $198.1 million, or $1.27 per diluted share. AFFO for the quarter ended December 31, 2009, was $30 million, or $0.19 per diluted share. For the year ended December 31, 2009, AFFO was $145.2 million, or $0.93 per diluted share.

Same property net operating income decreased 0.7% on a GAAP basis, and decreased 1.1% on a cash basis, when compared to the fourth quarter of 2008. Same property total revenues in the fourth quarter of 2009 decreased 0.5% on a GAAP basis, and decreased 0.7% on a cash basis, when compared to the fourth quarter of 2008.

As previously stated, the fund was deconsolidated in February of 2009. Therefore the Company's financial results include the fund properties on a consolidated basis from March 2008 when we acquired the six assets, through February of 2009, and exclude the fund properties from March 2009 through December 2009. The following revenue and expense results are adjusted to exclude the fund properties throughout all applicable periods so as to provide more meaningful comparison.

Total revenues for the entire portfolio owned by the Company totaled $139.4 million in the fourth quarter of 2009, compared to $140.1 million in the fourth quarter of 2008. Total revenues for the year ended December 31, 2009, totaled $561.5 million, compared to $562.3 million for the year ended December 31, 2008.

Total office revenues in the fourth quarter of 2009 totaled $122.4 million, compared to $122.6 million in the fourth quarter of 2008. For the year ended December 31, 2009, total office revenue totaled $493.2 million, compared to $491.6 million for 2008.

Total multifamily revenues in the fourth quarter totaled $17 million, compared to $17.5 million in the fourth quarter of 2008. Total multifamily revenues for the year ended December 31, 2009, totaled $68.3 million, compared to $70.7 million for 2008.

Office operating expenses totaled $38.6 million in the fourth quarter of 2009, down from $38.9 million reported in the fourth quarter of 2008. For the year ended December 31, 2009, office operating expenses were $151.6 million, compared to $150.4 million for 2008.

Multifamily operating expenses totaled $4.6 million for the quarter ended December 31, 2009, compared to $4.2 million for the quarter ended December 31, 2008. For the year ended December 31, 2009, multifamily operating expenses totaled $17.9 million, compared to $17.1 million for the year ended December 31, 2008.

Our total office and multifamily FAS 141 income for the fourth quarter was approximately $7 million, and was $32.5 million for the year ended December 31, 2009. We anticipate that the total FAS 141 income will range between $24 million and $25 million in 2010.

G&A in the fourth quarter of 2009 totaled $6 million, and was $23.9 million for the year. We expect the G&A in 2010 will range between $25 million and $26 million.

Interest expense in the fourth quarter of 2009 totaled $45.6 million, and totaled approximately $184.8 million for all of 2009. Looking forward to 2010, we are estimating that our total interest expense for the year will range between $164 million and $165 million. Consistent with all of our prior guidance, 2010 interest expense or the 2010 interest expense estimate excludes the impact from any new or refinanced debt, and we assume that the non-cash interest expense relating to the Company's pre-IPO interest rate swap contracts will approximate straight line amortization.

Additionally, we are assuming in our guidance that one month LIBOR, which is currently 23 basis points, will average 100 basis points during the period from August through December 2010, the period following the expiration of $1.11 billion of interest rate swap contracts. We caution that our 2010 interest expense guidance should not be viewed as a definitive statement concerning the timing of refinancing of our existing debt. The credit markets continue to improve, with pricing and other terms becoming more favorable over time.

In addition, our existing interest rate swaps are at fixed rates that are between 125 and 200 basis points higher than currently available. So as we burn off our existing swaps, our refinancing costs substantially decline over the coming months. Although both debt spreads and the cost of our swaps are decreasing as time passes, we are also cognizant of the longer term risk that underlying interest rates may rise as the economy recovers. As a result, we are having ongoing discussions with our lenders concerning refinancing proposals with the goal of striking an appropriate balance among these competing factors. Thus the timing of refinancing is somewhat uncertain at this point.

With respect to liquidity, our cash position improved considerably over the last year, and continues to improve. At December 31, 2009, the Company had approximately $73 million in cash and cash equivalents, an increase of approximately $64 million from the beginning of 2009.

With respect to CapEX, recurring office capital expenditures totaled $0.23 per square foot for 2009, and recurring multifamily capital expenditures totaled $390 per unit for the year. For 2010, we expect that recurring office capital expenditures will be approximately $0.25 per square foot, and recurring multifamily capital expenditures will range between $400 and $425 per unit.

Turning to operations. The office percent leased for our 10 submarkets declined 10 basis points sequentially to 87.6%. Market rents for our 10 submarkets declined 2.3% sequentially.

As Jordan mentioned, we continue to see significant leasing activity in the fourth quarter. Overall we entered into 157 new and renewal office lease transactions, totaling 715,000 square feet in the fourth quarter of 2009, compared to 575,000 square feet of office space leasing done in the third quarter.

During the fourth quarter, we signed 58 new leases, aggregating almost 192,000 square feet, compared to 62 new leases totaling 214,000 square feet in the third quarter. At the end of the fourth quarter, our office portfolio excluding the fund properties was 91.7% leased, and 90.6% occupied. Including the fund properties, our office portfolio was 90.3% leased and 89% occupied.

Our multifamily portfolio was 99% leased at December 31, 2009. Tenant improvements, leasing commissions and other capitalized leasing costs during the fourth quarter totaled $17.84 per square foot compared to $15.83 per foot for the third quarter of 2009.

Our mark to market and rent role metrics during the fourth quarter are as follows. On a mark to market basis, our in place cash rents were 3% higher than our asking starting rents. On a straight line basis, the average rent from expiring leases was 4.1% lower than the average rent from new and renewal leases signed for the same space. On a cash basis, the ending cash rent from expiring leases was 8.1% higher than the beginning cash rent from new leases signed for the same space.

Now turning to guidance. For the full year of 2010, we are providing an FFO guidance range of $1.19 to $1.25 per diluted share. This guidance excludes any impact from future acquisitions, dispositions, equity purchases, debt financings, recapitalizations or similar matters.

Further, this also assumes that non-cash interest expense for 2010 relating to the Company's pre-IPO interest rate swap contracts will approximate straight line amortization. And as I said before that one month LIBOR will average 1% during the period from August 1, 2010, to December 31, 2010, the period following the expiration of $1.11 billion in interest rate swap contracts.

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

Again, in consideration of other participants, please limit your query to one question and one follow up. You are more than welcome to queue up again for additional questions. (Operator Instructions). Thank you very much. And your first question comes from the line of Alex Goldfarb.

Good afternoon, out there.

Hi, Alex.

Hi, Alex.

Or I should say good afternoon here, good morning out there. Just quickly on the fund, I think last time you guys spoke about fundraising, you mentioned you were up to $300 million, now you are up to $450 million. Two questions in that. One is, is your stake still the same or have you reduced it to allow more people in, and then the people who came in, what size investments were those?

We haven't reduced our commitment to the fund. We have $150 million in the fund. The people coming in are -- they are some larger ones-- we have a mix. What happened was, some larger ones have come in, and I think they are leaders to some other ones. That's why we extended the thing out until June.

Okay. And then, you're still seeing more people, you have more people who are still doing due diligence, or it's just your view that your advisors are running around, and they think that they can still get some more people into it.

We actually have -- I think we have an okay list of people that we think we can-- the reason we put it to June is because we have a list of people that we think we can get closed before that. But I will also say our advisors are also running around trying to get even more people than that. But we have a list that's in there that's in process.

Okay. And then the next question, is just on the LIBOR, if I look out at the LIBOR curve, it seems more like it's around 70, 80 basis points for the back half. So I guess, one, it seems like you guys are putting in some cushion, and then, two, I know you are obviously not giving 2011 guidance, but if you think about the swaps burning off then, it still seems like you guys get a pretty good pop from swaps burning off. Is there anything that we should think about as we model out to 2011, that may temper our outlook out there as the swaps burn off?

Let me say this, first of all, you're correct that the -- that our assumption on 1% is consistent with trying to be conservative on that amount. But if you look at the futures market as you said, if we do remain floating through that entire period in the year, it's based on what the market is saying, we are more likely to do better than worse on that. On the other hand, as I also said, it is possible that we may do some refinancing during this year in any event, so we wanted to be conservative with that number.

Looking forward, let me just say this, you are right we are not giving, it's hard enough giving guidance on this point for all of 2010 without focusing on 2011. But I think the real take away, which you are right, continues into 2011 as well is, there is some powerful forces pulling in the direction of deferring refinancing. And really one, but one very important one pushing in the other direction, and the one pushing the other direction is, no one knows at what point or if interest rates may start to spike up in the future.

We want to be as conservative as possible on it, and so as we go forward into, through 2010 and look forward to 2011, we will definitely try to hedge that longer term risk as soon as it makes sense to do that.

Yes, I have something I'd like to add to that. We as a Company and -- we have only been public for a few years, but we've been running our capital structure, I've been doing it for 25 years, and there is times when we have been floating, but culturally we really tend to try and fix our exposure.

Okay, thanks a lot, guys.

Your next question comes from the line of Michael Bilerman.

Yes, Josh Attie is here with me as well. Maybe you can talk a little bit, there is obviously the fix versus floating debate, and I'm pretty sure that it sounds like at least in current guidance is that a third of the debt is going to be floating come August 1, and then if you do refinancing you will adjust the guidance at that point. But I guess there is also the duration side of it, which is, over 80% of your debt comes due in mid 2012. And I guess, while I can appreciate that the current low rate is something that's advantageous, that derisking the Company from that perspective, both from a maturity standpoint but also from a rate standpoint has got to be top of mind today rather than waiting later on in the year. And so I don't know, Jordan or Bill, if you can just talk a little bit more about the balance sheet side, in terms of duration and rate, that would be helpful.

I think it's a good way of framing the issue, Michael. Separating, we do separate out those two issues. So one is the issue, and it's the issue that we recognize as the big long-term issue. And that is, Jordan said, culturally we have for many years felt uncomfortable about floating significant amounts for too long a period of time. And so we are not -- it's not within our normal focus to chase the lowest possible short term rate at the expense of taking undue risk about rates popping up in the future. So we are going to assess that as we go through the year, and we're definitely going to try to mitigate that long-term risk as soon as we can.

Now putting that issue -- so that's definitely an issue that we recognize and are trying to wrestle with, the second one that you talked about, the maturity duration issue. I think we feel at this stage that we are rapidly moving back into the more normal capital markets that we have seen over several decades, that were interrupted by the very unusual period that we had at the end of 2008 and into 2009. As a result, we are very comfortable about the issue of refinancability and maturity. In fact, we typically have done over the years, five year financings, we typically did floating rate five year loans and swapped them out.

So in that cycle, we are, at this month, in February, really just starting to move into the second half of what would be our normal five year cycle with 2.5 years left on that period of time. And we are very comfortable with the refinancability of the loans, and normally, and again I think we are heading back into a more normal environment, just from that perspective, we would be normally looking in the last year to 18 months, in other words, 12 to 18 months prior to maturity as the normal window for refinancing five year debt.

However, that first issue, keep coming back to it, but that first issue is very high in our thinking, which is looking for the earliest opportunity to hedge long-term rate interest exposure at an appropriate cost.

If the other thing you are asking about is staggering our debt because it's so piled up in one year, is that what you are--?

Well, I mean I think that's, look, you don't want to run the risk, and I can appreciate you're thinking about it, but God forbid we go through what we did in '09, and that this hasn't been addressed, you could be facing 80% of your debt -- you are facing 80% of debt coming due what maybe an inopportune time. And so, like I say, if you rethought as a public company, and went through this at the IPO but it was so far out down the road that we said we'll deal with it at the time, of changing rather than doing all of your debt five years bullet, doing a staggered maturity schedule like your staggered lease maturity schedule.

And I think, yes, we are working on structures, I can guarantee it will be staggered but it won't be a five year bullet. We are working on structures that stretch it out. It's tricky, and it might have to be a two, it might be something you do in two stages. We are working on that. I somewhat agree with you. It's tricky with the way the loans work to achieve maybe in the first round of moving the loans out, we might not achieve all our goals but we might have a second opportunity to do it structurally.

Okay, and just as a follow up in terms of the fund, your, so you have an extra $150 million but your share of the debt on page 11 of the sup hasn't changed from that 49%, so have the new investors not bought in at the same pricing that the existing investors are in at, or is that capital not in yet?

The, structurally, what we went through to raise the fund, and I don't need to give you the history on this, but I have to say it to explain myself. First we started raising the money for the fund and we bought our first set of properties, about 1.4 million feet in 2009 -- and those properties at the time looked like they were bought at extraordinarily good price. And it helped us to actually close the first $300 million into the fund at a horrendous time, right? I think our first closing of the fund was right around when Lehman was imploding. But I think the investors coming in felt like, wow, this is just a really good deal.

Then we went into '09, and they, people thought there is no such thing as a good deal. Anything you've done, even ten minutes ago, had to have been a bad deal. And so people really weren't willing to consider something with legacy assets, so they went from being a positive in terms of raising money to standing in our way.

So we worked with our existing investors and worked out a structure where people could come in both, you had a choice, you could come in and only be in new deals that the fund bought or you could come in and be in both the old and the new. And so what you will see play out, I don't know, and frankly now what is happening is, now those deals are maybe looking better again and people are saying, hmm, those are pretty good deals, so we are going back the other way.

The most recent round of people that came into the fund said, no, I don't want to go to my Board and say to them, I'm buying into properties that were bought some time ago. But in very recent conversations, people are nervous about what could come for sale, and there is starting to be a little bit of price discovery about where prices are coming out, because we were sort of in a no man's land last year. And so now the deals maybe are looking good again, and may have an interest in coming in them, so we don't know how that's going to play out by the end of the fund.

That was a long explanation but did that answer your question?

How is it going be set up in terms of the prior, how much capacity is in the, is it fund 1 and fund 2A?

I mean, structure within the fund, but we will have to see. We will be able to give you a better feel for that once we see the way the remaining investors come into the fund.

Your next question comes from the line of George Auerbach with ISI Group.

Jordan, can you give us some color on the leasing activity in Sherman Oaks, Encino and Woodland Hills, going forward which industry should we expect will be the primary absorbers of space in these markets.

Bill might know the answer to that better than I do, so I'll let him answer it.

Well, George, we are seeing a pretty broad base group of tenants there in terms of new activity. I think we've discussed previously, that submarket tends to perform very similarly to the west side markets, and sometimes the Sherman Oaks, Encino market gets lumped together with Warner Center, Woodland Hills, and it really is quite a bit -- it's a market that's much more dominated by the smaller law firms, accounting firms, and has its fair share of entertainment firms as well.

And I think it's reflective of what I think we are seeing throughout all of our markets now, which is we are seeing very good activity among smaller tenants, including a fair amount of expansion activity, and a number of newer small tenants that are forming themselves.

And on the other hand, we don't have a lot of large tenants, for us what we call large tenants most other companies would call smaller tenants, but our relatively larger tenants are the ones that are finding the necessity to do some downsizing. And Sherman Oaks, Encino is reflecting exactly that.

Okay, the rents on new and renewals rolled down 8% this quarter. When you look at your in place rents at $31 a foot, how does that compare with market rents today.

Well, let me, because I saw that quoted -- and maybe it was your note. I don't actually yet feel like, at least the way I look at it, rents are really rolling down. Because you have to remember, for a lease for the same space, so for a lease signed for the same space, the lease rolling off actually had a value that is, I don't know what it is, three, four, five, still below the value of the lease we are putting on that space. So, I know the ending rent of the old lease is rolling down to the beginning rent of the new lease, but the new lease going on that space has a total value that's, I don't know, I know I read it in my thing, 4%.

It's 4%, and we're not, I should mention as we are looking forward as well, that -- the straight line comparison in terms of the leases rolling, we think that's going to continue to be a positive spread going forward.

Yes, so it's the lease coming off the property is inferior to the lease, the new lease going onto the property.

Right, but I guess how you present it going forward, should we expect the ending cash rent versus day one starting cash rent to also be in the sort of down five to ten range.

Day one cash rent, down from where we are, the ending on -- so if a lease-- when we say they are down -- it's down 8.1%, it means the ending rent on the lease that just expired is 8.1% higher than the beginning rent of the new lease. But at the same time, the total rent on the lease that just expired is less than the total rent we will collect on the new lease that we are signing.

I will follow back, thank you.

Your next question comes from the line of John Guinee with Stifel.

Hi, how are you? Bill, a quick question here. If you answered this let me know because I got in late. But it looks to me like FAS growth revenues are going to come down because of FAS 141 accounting, you are going to lose $10 million out of FFO. And then you are going to get -- you are going to gain $20 million in interest savings, so you have a $10 million or $0.06 a share net gain. Where is the leakage that offsets that such that your guidance is essentially $1.22 at the midpoint?

Well, let me say it this way. A good starting place to use is, because of the fact that we were consolidated early in the year, and obviously occupancy's declined during the year. I think a good way of starting to look at things is to look at the Q4 results, and then do some adjustments for run rate and compare it to the guidance 2010. So if you look at it from that standpoint, the FAS 141 income in Q4 was $7 million. So annualized net is 28. And the guidance that we were giving on FAS is a drop of between $24 million and $25 million, so $3 million to $4 million drop there.

Similarly, I think if you look at the interest expense in Q4, the $45.6 million interest expense in Q4, and annualize that, and compare it to the number that we have given out, I think it works out to be something like a $13 million improvement. So when you are looking at those numbers, that is sort of the comparison I think that you have on that basis. So, I think that's a fair way of starting with it.

But going forward, more generally I think when you look at the run rate at Q4 you get to $1.19 for FFO for, at an annualized basis. And given the guidance, the midpoint of guidance range we are talking about, the bulk of the difference, something like two thirds of the difference is, relates to decreases in the GAAP adjustments for FAS and straight line. And then the smaller as miscellaneous things, including the fact that average occupancy is projected to be somewhat lower in 2010 than it was for 2009 for the year.

Perfect. Thank you very much.

Your next question comes from the line of James Feldman with Banc of America.

Thank you, just a quick follow up on the guidance. So, back into an AFFO number based on your guidance, you provided the FAS 141, you said maintenance CapEX you think will be $0.25 a foot per office, $400 to $425 per unit for apartment. In terms of straight line and then leasing costs, where do you think those will come out based on what you provided.

Well, --.

Why don't you give him the straight line number, but the--.

Like $7 million to $8 million of straight line in the year. And what was the other one?

What was your other question?

TI's in leasing costs.

--leasing commission, we have said for a long time, including some quarters where we had significant drops on a quarterly basis, that that's all been noise and that we see if will you take the year as a whole, '09 you go forward to 2010, we are seeing it's just about the same as in '09. If you look at this past quarter, the renewal component was higher, that's because we had, it's always an issue of whether it falls on the new side or the renewal side if we do a lease with one of the relatively larger tenants, which is what drives TI's, it will skew the number. So that was up, on the other hand, new lease TI and lease commissions were down. But over any period of time, if you blend it, we are seeing nothing but that staying very flat.

So you are saying on a dollar per foot, kind of that $17 range.

Yes, you cut out for a second, but yes, I think we just have this right.

$17 per foot is a decent blended TI number.

Yes, I think that's a decent range.

Okay, and then in terms of your same store NOI, where do you think that comes out in 2010, and also your year end occupancy.

I don't want to give a projection on that going forward. I think we're -- we would expect to see some additional decline, some very modest additional decline as we go forward in 2010 on a same, because of the occupancy.

Yes, on occupancy.

And then based on your response to George, it sounds like you think GAAP leasing spreads will stay positive?

Yes.

Okay. And then just in terms of acquisition opportunities, can you give an update on what you are seeing out there, and then if you are interested in the Wiltshire [Blendy] asset, if that's still on the market.

Well, I'm not going to talk about a particular deal, but there is certainly, as I said in the scripted part, I feel like there are some assets coming. There are some assets coming to market that we have a strong interest in, more than one. So, I feel like we will be able to achieve some part of our goal, maybe if we are lucky we'll achieve it in a big way, of acquiring some additional assets this year.

What kind of pricing seems reasonable?

Well, the pricing never seems reasonable. But I think through the last 20, 25 years, I've never really bought something where I thought, wow, that was a really good deal. But pricing is way below where it would have been had we been buying in 2007. It's still pushy though. There is plenty of people out there with money looking at deals and looking at deals in west LA. So you're bidding.

Your next question come from the line of Brendan Maiorana with Wells Fargo.

Yes, good afternoon, this is Young Ku here for Brendan. Have a question in terms of your investment opportunities. Are there any parameters in your fund where you could invest or not invest in value add type non-stabilized properties.

Sure. We actually try to invest in non-stabilized properties. I mean, the basis you go into the property at is something you carry forever, and we like to be the ones responsible for having created value through rehab or through leasing up a property as opposed to just buying a fully leased, nice, new, bright and shiny building. And with that said, we have done both.

So would you say that your appetite for that type of asset would be higher today than say it was in the past.

It's always high.

Okay. And just in terms of your leasing economics, your rents rolled down about 8% but CapEX costs per square foot per year remains pretty consistent. As a percent of rent, it's around 10%, do you expect that to remain pretty stable in 2010 or do you expect that to perhaps get worse.

It's stable.

Stable, thank you.

Your next question comes from the line of Chris Cotton with Morgan Stanley.

Hi, most of the questions have been asked. I guess I would, you mentioned that you thought occupancies would tick down in the portfolio in, say the first half of this year, but that also market occupancies seem to be coming close to stabilizing. Can you talk about what you are seeing in your portfolio versus the market.

Versus market.

Well, I would say our portfolio is doing better than the market by as you can see from our numbers, I think we gave both the market numbers and our portfolio numbers. I think we are beating the market by, I don't know, 300, 400 basis points.

Yes, I think the thing, if you go historically, going back years before we came public to the current time, our portfolio occupancy has consistently been better than in our submarkets. It tends to narrow in really strong markets because the advantages that we have by having our own operating platform are not as significant when space is very tight, and it's a very, very strong landlord market. It tends to widen out at times where occupancies decline because of the advantages of doing your own leasing and your own property management are more important, and so that's what we've seen during this downturn as well.

That makes a lot of sense. I guess my question was around the sequential change rather than the spread between the markets. So if the markets are close to stabilizing, but also you think, baked into your guidance, it sounded like you had some occupancy lost in the short-term here. Is there something you are seeing specifically in your portfolio.

That really relates to a comment that we made earlier in the presentation. And that is, the operation is running very strong on new demand from tenants and actually on a fair amount of expansion activity from existing tenants, but there is another sector of existing tenants that, whose businesses were hurt when the downturn hit. And who as they, either as a result of defaults or as the result of downsizings, that have come along, represent a headwind, and that's what we have suggested is the item that we think as we are looking forward is going to constrain our ability to grow occupancy in the near term.

Thank you.

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

Thanks, good morning to you guys.

Morning, Rich.

First question is on the mark to market, you mentioned 3% difference between in place and market. That's equivalent to, unless I have my numbers wrong, to what you reported last quarter. So are you expecting, I know you mentioned GAAP leasing spreads to stay positive in 2010, are you likewise expecting that mark to market to sort of stay in that sort of down 3%, 4% range, or what are you seeing on a go forward basis there.

Let me say this, and then Jordan can comment more there, although I know what I'm saying Jordan agrees with this, maybe he feels more strongly about this than even I do. We just find that number, that metric to be a not very useful number, and which is why we sort of softly talk about it in the presentation, just because people want to hear it. So, it's hard to say, I would suspect that it's not going to move a huge amount which would be consistent with our view that rents going forward are going to be pretty stable, but not going up until occupancy starts to move up significantly. So yes, about probably in a range with where we are now, but again, put huge caution on it, it's just bad data, we don't like-- .

It's bad because market is so subjective to what space people happen to want to advertise and whether, if you have a full building you might be throwing out a high number, if you have a very vacant building, you might throw out a lower number, (inaudible) on maybe your worse garage space or something. And so you get, and then depending on which way the market is going, it's just not a stat that anyone has had to put a tack in the board on, they can just move it around at their whim.

Let me also say this, too, because maybe it helps with some of the other questions that were asked before. Even though there is limitations on that data, the data that we give out on our straight line and cash roll up, roll down numbers, on the other hand is a very good indication of, in realtime, what is going on in our markets because we do, as you know, we do over 150 transactions a quarter. So they are spread out throughout our submarkets. It's based on leases signed in the quarter not when leases start. So it's really reflecting in realtime what is going on in that market.

And so when you look at the numbers now and you see, as we talked about for a long time, that starting rents on new deals is where the pressure is coming from. We are not seeing enormous downward pressure on fixed increases, annual increases. We are not seeing enormous pressure on TI packages. Unlike from what we heard is going on in other markets, but we are seeing pressure on starting cash rents. So you see that number decline.

On the other hand, as Jordan pointed out, the all in package when you factor in the bumps, was seeing that hold up remarkably well on the downturn, and that's a very good window on what is going on in the market.

And then just a second quick question, on the fund, and maybe you've written this some place, but the 450, this is just a quick question, the 450 equity, is that inclusive of your 150 or is that in addition to your 150?

Inclusive.

Okay. Then, do you think, Jordan, that, or Bill, whoever, that the whole growth of the fund or potential growth of fund is like a somewhat of a self fulfilling prophesy in the sense that if you are able to do a deal that comes off as an attractive deal, that you are able to complete within the fund today, that that may in and of itself attract more investors into the fund. Do you see that as part of the conversation you are having with potential investors?

No. I mean, I will tell you, investors usually, when it gets down to it and you show they a deal, they are not typically ever in love with the hard numbers of a deal, and what you have to do to make the deal. I think what is going on -- I think what is happening, where you see the turn is, I think let's say from a little higher altitude of beyond looking at the specific numbers of a specific purchase, they have the feeling that the market is honest, at least the capital markets and values, building values are on more of a recovery path, and they want to get in and not have missed this opportunity.

And so they seem to be more willing now to make, to sign and make a commitment because a lot of these guys maybe for, if I would have talked to them earlier in the year they would have said, I'm going to buy debt, I think debt is usually discounted. Be they didn't successfully buy much debt because they were trying to buy first trust deeds on properties, and there wasn't a lot of that, most of it was CNBS. If they weren't comfortable with, and then they went out and said, well, I'm going to do some big deals because we have a lot of money. But you know what? There weren't a lot of big deals to be done and they weren't successful in that.

And now maybe they are saying, well, I'm going to go with local operators that I know have a history of sourcing deals through markets like this, and I'm going to give them money because I don't want to miss this. And that's how we are raising money into the fund.

Your next question comes from the line of David Aubuchon with Baird.

Thank you, can you provide a little bit more commentary on the multifamily portfolio. You mentioned that occupancy obviously around the 99% range still, but when do you think rents will start to turn positive?

Well, as you said, occupancy has hung around the 99% level. We have -- on that part of our portfolio -- the differences have been up in the tenths of a, level. We saw a very modest decline in occupancy in the quarter, which modest though it may be, is certainly an indicator that we are not likely to see rents increasing in the near future. There has been, we are rolling down on rents from expiring leases there, and that as well is likely to continue for a while. I think in that sense it's not in terms of forecasting, it's not too different than on the office side, which is I think we have probably at least a couple of quarters in front of us of a similar looking picture to what we have seen over the last quarter.

Although, on that portfolio the good news is as soon as things recover even a little bit, it's 99% leased. So you immediately have pressure on rents. And you can bring them back up again, and it's also the reason they are not moving down very fast.

Would you view that as a 2011 sort of move, Jordan?

I don't know when it will be. I hope it's in the next couple of years, in 2010 and 2011. But I actually don't know.

And adjusting for just the relative size of office versus multifamily in your portfolio, are you seeing any more or less opportunities in the multifamily acquisition world versus office?

Well, I think there is going to be more office than multifamily, and I would have been sure of that even a couple months ago, but now I'm starting to see more activity in multifamily, although I have to say, this is a lot of bidding, it's not cheap, but so there may be some good multifamily -- more multifamily opportunities coming up than I otherwise expected.

Okay. On the office side, are you seeing the same leasing pace in the first quarter here as you did in Q4, or maybe the last half of last year?

I think it's too soon to really tell. What happens, the quarter, the Q4, Q1 quarter is always an odd transition because of the holidays that are in the middle of that. So, you pretty much always see a softening as you move in, really more in January than you see in December because in December there is deals that are in the pipeline that are closing for year end, but then as people get back to work in January, it always takes them a little while to get going. So, hard to say at this point, but as to whether we are going to see the same pace as we get in further into February and March.

Your next question comes from the line of Anthony Paolone with JPMorgan.

Thank you, I have a question just understand on the fund side. If I recall, I think previously the idea was you put in $150 million, which you have already funded, and so right now you have about half of the assets that exist, and then I guess as you raise incremental capital, your interest would just decline but the DEI equity was already in it, am I looking at that right.

We didn't fund the whole $150 million, we funded a good portion of it. And depending on the way in which people invest in the fund, either that could decline or we could hold onto that position in those properties. It depends on, as I described earlier, it depends on whether they come into the whole fund including the preexisting properties, or they just invest in new properties that are acquired.

I guess I'm just trying to think through, if say, the incremental $150 million that you raised, if all that capital opted to not be part of the existing portfolio, how much money would DEI coinvest with say, the assets that that capital buys.

Well it would still have a reasonable investment in, it's going to still have, regardless it's going to still have a reasonable investment in the new assets, but we also have the ability to, we can also invest additionally too. So as we see how capital comes in, if we feel like we want to have more in new stuff we buy, we can put more money into that. We won't know how it plays out for a few more months.

Okay, so it doesn't sound like there is a, for an investor that comes in that doesn't want to be part of the existing portfolio, it doesn't sound like there is a definite percentage of those assets that would be DEI's equity versus the rest of the partners.

Right. Not right now there is not. There will be, when we close it will all fix.

Okay. Thanks.

Thanks, Tony.

Your next question comes from the line of Robert Salisbury with UBS.

Hi, guys, it's actually Ross Nussbaum here with Rob.

Hi, Ross.

Good afternoon. Somebody asked a question earlier about your guidance with respect to what your same store NOI and occupancy forecasts were embedded in the guidance, and you declined to answer, and I'm just curious what the big secret is. Why not share those numbers.

We've never projected same store going forward. I can tell you on the occupancy side, we are looking at probably in the guidance, we are probably looking at around 200 basis points of decline throughout the year. We were hoping that's unduly conservative and we're hoping to do better than that, but that's the number that's embedded in the guidance.

We can extrapolate on to what that means for same store NOI, I guess.

There is a lot of assumptions that go into getting the bottom NOI, we give you the assumptions that we are comfortable giving out. You can make your own assumptions for the other stuff.

Okay, we will do that. I think you are one of the few companies in the REIT industry that doesn't give that detail. Nevertheless, have the terms of the fund changed at all in terms of fees, preps, promotes, investment period, hold period, is there any color you can share with us on how the economics work?

None of the terms have really changed.

Thank you.

Your next question comes from the line of Michael Knott with Green Street Advisor.

Hi, guys. Just curious if you can comment maybe on the breakdown of the leasing activity this quarter between west LA and San Fernando Valley, was there more done in the Valley and that's why the roll down was worse, or can you just comment on that?

A lot of the volume came in the Valley, in particularly the Sherman Oaks, Encino market had a very good sized representation, so, yes, that would have been definitely a factor.

If you had to guess, if you were to break out that number just for west LA, would it have been all negative but closer to zero?

Well, yes, I think -- they were both, on the cash roll down side, they were both negative but the, if you use the 8% as the average, you're a 200 basis points better on the west side, and a couple base points worse on the Valley.

Okay, that's helpful. And then clearly Warner Center has been kind of the weak link for a while, I just thought maybe I would ask you guys if you wouldn't mind just revisiting for everyone why you feel like that's a good market for you for the long-term, given it's 83% occupied now, and just curious how you think about that market long-term and 15% of your office NOI or so.

Well, we still like the market a lot, long-term. The answer is almost too long for this call. But it's a market that's, all markets like that go through a process to mature. Where, in a mature market is, in my mind and at least in this Los Angeles area, is a market where you don't have a lot of very large tenants, large tenants have moved out to cheaper areas, the housing is in filled, you have homeowners associations that are just very firm about not allowing any new construction to happen, and your office stock is sort of set in place.

We think that that market is, it's not there but it's very close to there. And we like getting in at the price point on the buildings, we own some of the best buildings there, and it happens to be for quality of life, cost of housing, those things are close enough that we can see that it's happening. And so, you know what, before it's fully matured, just like another market we have here, Century City, we watched that market go through this cycle of finishing building its buildings, the larger tenants move out, the smaller tenants move in. And then there becomes pressure to be in that location because there's expensive housing nearby, and people are there for whatever all of their reasons are.

Well, we see the same thing out in that Warner Center market, there's good schools, the way the housing works there, and the traffic flow, we can see now that it's tightening up around where we bought these buildings, and where we would even buy more. And while it's finishing maturing, it's always going to be bumpy because you have to lose some of the larger tenants that are willing to look all over the state or all over the country to locate. And you have to convert them to smaller tenants that are in your building because they live five minutes away and they are a lot less price sensitive. But it's going through that conversion, it's well along the way in the conversion.

And then the other thing that's happened is, they are restricting more and more what could be built there. As a matter of fact, dramatically restricted it now with the way the homeowners associations have developed. So the quality of life, the office stock that's there, the housing that's there. And the way I think the housing is going to be filled, it makes us just feel good about that market long-term. Although right now it's the bumpiest.

Okay, thanks for that, Jordan, I appreciate it, that's all for me.

Thanks, Mike.

Your next question comes from the line of Alexander Goldfarb with Sandler O'Neil.

Yes, just a follow up just general market, Northrop, I guess they are moving out of Century City to be closer to their major customer out east. Two questions, any collateral from that, or I guess most of defense has sort of moved out of southern California. And then second, are there any other major tenants or industries in your area that you think are at risk of relocation?

On the first question on the defense industry, it actually coincidentally works out to be a really good segway from the point that Jordan made on the last question, and that is, Northrop Grumman moving out is what amounts to the last gasp of the aerospace and defense industry issues in LA. It was something we went through in the early 90s after the end of the cold war where a number of the aerospace defense companies moved out. Northrop Grumman, the oddity is that they were ever located in Century City, a high end west side location, they were there for many many years. And it's been an anomaly that, frankly it's surprising that it wasn't rationalized years ago.

So with them moving out, in terms of the direct impact on the market, their lease as we understand it goes out for several years, and shouldn't prove to be any significant impact in terms of the Century City market or west side market for us. In terms of, so that's the aerospace, so put a period at the end of the sentence on the aerospace industry, and office markets on the west side with this one.

In terms of other industries, no, not at all. I don't think we are seeing any particular -- we're certainly not seeing any particular move outs from LA or from southern California to other parts of the country. And also looking forward into 2010, as best as we have been able to determine looking forward for the year in our portfolio, I don't think we are seeing any big scale tenants that, where there are issues of moveouts or non-renewals. The only one I can think of that even comes close is, we have one 50,000 foot tenant in Q3 that we have in our guidance in our budgets as doing some significant (inaudible) so probably giving back about two thirds of that space. But that would be, looking as far as we can look to see if there is anyone like that, anyone else like that, we don't think there is.

Okay. That's very helpful, thank you.

Your next question comes from Dave Aubuchon with Baird.

Thank you, one more follow up here. Looks like you have plenty of room to increase the dividend based on just the payout ratio off of fad. Any thoughts there?

Well, we've had that room for a long time. And I think it's, there is some strong and good logic for holding a dividend where it is, and there's some strong and good logic for raising the dividend, and I don't know where we really will come out on that.

Okay. That will be a surprise this year, then, thank you.

Your next question comes from the line of Michael Bilerman with Citigroup.

Bill, I just wanted to follow back up on the guidance for a second, you talked about an $0.08 interest rate benefit from basically the swap expiring and going floating, you threw out an interest expense number of 164 to 165. And if you look at the fourth quarter, that's about, you have $45.6 million of interest expense for $182.6 annualized, so you basically have an $18 million benefit 2010 versus '09, which is $0.11. So what is the missing piece, because if it's $0.11, and you're at $1.19 run rate, even if you lose a couple of pennies on the straight line, or on the FAS amortization, your number should be a lot higher.

Right, but that is the missing piece, the missing piece is the lower swap amortization in 2010 because of the swaps that expire during the year.

So the 164 to 165, that is a cash interest expense number or a GAAP interest expense number?

It's, the number in the guidance is an all in GAAP number.

So why when, so if it's FFO, why wouldn't we compare the 164 to 165 to the 183 annualized coming out of the fourth quarter.

But what I'm saying is, the difference, it's true, but when I'm talking about, the swap expiration is happening regardless of anything else, it doesn't matter where interest rates are, it doesn't matter whether we refinance or don't refinance during the year, that delta is just (inaudible). The thing that I was looking at in terms of the $0.08 differential is with regard to the moving piece, the number that comes from the assumption that we float in the second half of the year and we don't refix and that that float is at 1%.

Right, and so effectively if you start at 119, you take away $0.02 to $0.03 from the FAS, and then you add your $0.08, you are at 124 to 125, and then you add in a couple more pennies for the swap burning off, you get to 127 to 128. Right? And then I guess the difference going down -- .

There is no -- I'm having trouble doing--.

Is there anything just in terms of the other assumptions, G&A for next year.

We gave that one in the call. So, do you want me to repeat the number for you? G&A we are estimating between $25 million and $26 million in 2010.

And then you are saying 200 basis points of occupancy that is relative to where you ended the year, like the office portfolio you are going 89 to 87 by the end of next year?

Yes.

And so I guess that's just pro rata throughout the year or is it declined earlier rather than later.

I would say at this point, it's pretty pro rata with where we came out. We always have an issue, which we really underscored last year, where with year end there is always this beginning of the year drop in occupancy because you have a disproportionate number of leases that expire at the end of the year, so they are in occupancy on 12/31 and out of occupancy on 1/1 of the next year. And so usually you wind up more front end loaded, but I think the way it's sorting itself out, I would say it's more evenly spread.

Okay, and then just on the joint venture, can you going forward put the joint venture income statement as well as the balance sheet, and maybe just some details on the capital structure of the fund in the supplemental rather than just putting the equity in income and the JV depreciation add back, I think it would be very helpful and will help clarify what is happening.

Well, no not right now we are not going to do that. We can look at doing that at a later time. But we wouldn't do that now.

I don't see what providing the income statement and the balance sheet as it's currently set is any -- any of your peers that have major joint ventures are putting that information out.

Because we are still in a process of doing the fundraising and going through finishing stabilizing what happens with the fund. And it effectively would mean we were giving those numbers out in our, in this disclosure ahead of the time that we give it out to our actual investors in the fund.

I will also say, just to add to that, the other thing, it just isn't really a fair comparison. In looking at the other REITs, we are -- our involvement is, it's so small, both in terms of the impact of the Company and then also the number of properties involved.

It really is getting into some very micro numbers, whereas when you look at the other statements that you are referring to, they actually tend to include multiple funds in the consolidated joint ventures that are aggregated together. So it becomes much more of an appropriate look on a higher level basis. And as Jordan says, we will take a look at it as we go forward, and as we move in that direction it may be appropriate at some point it just isn't right now.

It's 10%, if you look at your assets on the balance sheet versus the assets in the fund, it's 10%, you don't own all of it but I think it's a substantial enough piece where it is material. Again, my opinion, you can get opinions from others.

Okay.

There are no further questions at this time. Do you have any closing remarks?

Well, thank you everybody, we look forward to seeing many of you at the Citi conference. We will be speaking to you again in a quarter.

This does conclude today's conference call, you may now disconnect.