Douglas Emmett Inc (DEI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, welcome to Douglas Emmett's 2010 first quarter earnings conference call. Today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow Management's prepared marks. At that time, questions will be provided for questions.

At this time, I would like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer, and Mr. Bill Kamer, Chief Financial Officer. Please note that this call is being webcast live on our website and will be available for replay for the next 90 days and by phone for the next seven days. Our press release and supplemental package has been filed on Form 8-K with the SEC and both are available on our website at www.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 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, Reis for the Los Angeles market, and the M/PF Research for the Los Angeles multi-family market and the Property & Portfolio Research for the Honolulu family market. Before I turn the call over to Jordan, we would like to remind those of you that will be participating in the question and answer portion of the call to limit your questions to two per person.

Thank you and go ahead, Jordan.

Thanks, Mary. Good morning, everybody.

I'm very happy with how things are shaping up and expect that this will be a good year for Douglas Emmett. Our operating platform, lender relationships, market knowledge and presence, and capacity to take advantage of new opportunities have never been better. In fact, I think the Company is in the best shape it has been in during my 25 year career. Over the past three months, we have seen a substantial improvement in both the equity and debt markets. Lenders have clearly returned to the market and spreads have compressed considerably. We anticipate that there will be further improvement over the coming months. As we discussed last quarter, we are currently targeting the fourth quarter of this year to complete the refinancing of our 2012 loan maturities. We are on track with our fund strategy. Last quarter we stated that we have raised more than $450 million in equity commitments and that we believe we will meet our goal of $500 million by the end of June. I will refrain from an in depth update until the subscription period is over, but I can say that it looks promising that we will meet and likely exceed our goal.

On the acquisition front, the environment remains very competitive. However, we are seeing opportunities within our core markets to buy office properties at market prices that we believe represent tremendous long term value. It is not appropriate for me to comment on pending deals, but I can say that we are optimistic about the prospect of completing purchases over the next few quarters. The capital from our fund strategy, our own available cash, our $350 million credit facility that has zero drawn, and our access to joint venture capital should provide us with sufficient sources of capital to bring these opportunities to fruition. Unlike many other REITs, we did not need to issue stock at depressed pricing levels in 2009, so we have future capacity in the public markets to match a capital raise with an attractive use for the proceeds.

Turning now to leasing fundamentals, overall trends have remained on par with our expectations. Our leasing volume continued at a strong pace. We leased approximately 511,000 square feet of office space and 155 transactions. That tenant demand from smaller entrepreneurial tenants, our core customers, has continued to grow. During the first quarter, we signed 73 leases with new tenants, totaling 176,000 square feet. The number of new leases signed during last quarter was higher than in any quarter since we became a public Company in 2006. As anticipated, occupancy continues to be affected by lease defaults and space reductions primarily from our larger tenants who reduced their workforce during the recession and are now downsizing their offices.

Although we are fortunate that we focus on smaller size tenants, the negative impact from our larger tenants has offset our strong leasing volume. This trend is seen most noticeably in our Warner Center/Woodland Hills sub-market where our lease percentage during the first quarter declined by 1.7% to 82% and where we also have the greatest concentration of large tenants. Overall the lease percentage of our REIT-owned office portfolio declined 40 basis points in the first quarter to 91.3%, in line with our expectations. Our view on 2010 occupancy is unchanged from last quarter. We anticipate the headwind from downsizing larger tenants will likely cause occupancy levels to continue a modest, but uneven decline over the next several quarters. However, we are encouraged that the strengthening of tenant demand across a wide variety of industry groups appears to be continuing. We are, therefore, increasingly optimistic that a strong recovery and leasing fundamentals will be at hand fairly soon.

With that I would like to turn the call over to Bill Kamer, who will provide details on first quarter offering results. Bill?

Thanks, Jordan.

In the first quarter, the Company reported FFO of $48.1 million or $0.31 per diluted share. AFFO for the quarter ended March 31, 2010, was $40 million or $0.26 per diluted share. Same property net operating income in the first quarter of 2010 decreased 3.1% on a GAAP basis and decreased 2.2% on a cash basis, when compared to the first quarter of 2009. Same property total revenues in the first quarter of 2010 decreased 2.9% on a GAAP basis and decreased 2.3% on a cash basis, when compared to the first quarter of 2009. As previously stated, the fund was de-consolidated in February, 2009. Therefore, the Company's financial results include fund properties on a consolidated basis for the months of January and February, 2009, and exclude fund properties thereafter.

The following revenue and expense results are adjusted to exclude fund properties throughout all applicable periods so as to provide more meaningful comparisons. Total revenues for the entire portfolio owned by the Company totaled $137.8 million in the first quarter 2010 compared to $141.8 million in the first quarter of 2009. Total office revenues in the first quarter of 2010 totaled $120.8 million compared to $124.6 million in the first quarter of 2009. Included in last quarter's office revenue was $313,000 of lease termination income, which was somewhat higher than normal.

Total multi-family revenues in the first quarter totaled $17 million, compared to $17.3 million in the first quarter 2009. Office operating expenses totaled $36.1 million in the first quarter of 2010, down from $37.1 million reported in the first quarter of 2009. Multi-family operating expenses totaled $4.6 million for the quarter ended March 31, 2010, compared to $4.5 million for the quarter ended March 31, 2009. Our total office and multi-family FAS 141 income for the first quarter 2010 was approximately $7.3 million. Included in the quarterly FAS 141 income was one time income of approximately $700,000, attributable to defaults and early terminations.

G&A in the first quarter of 2010 totaled $5.9 million, which is down approximately 8% from the first quarter 2009, and interest expense in the first quarter 2010 totaled $45.1 million. With respect to liquidity, our cash position continues to improve. At March 31, 2010, the Company had $94.3 million in cash and cash equivalents on hand, which is an increase of $21.6 million from December 31, 2009. In the first quarter, recurring office capital expenditures totaled $0.03 per square foot and recurring multi-family capital expenditures totaled $31 per unit.

Turning to operations, the office percent leads for our ten submarkets declined 90 basis points sequentially to 86.7%. Market rents for our ten submarkets declined 1.5% sequentially. As Jordan mentioned, we continue to see healthy leasing activity during the first quarter. We signed 73 new leases, aggregating almost 176,000 square feet, compared to 58 new leases totaling 192,000 square feet in the fourth quarter. Overall, we entered into 155 new and renewal office lease transactions, totaling 511,000 square feet, compared to 715,000 square feet of office leasing done in the fourth quarter of 2009. At the end of the first quarter, our office portfolio excluding fund properties, was 91.3% lease and 90.4% occupied. Including front properties, our office portfolio was 89.7% leased and 88.6% occupied. Our multi-family portfolio of 99.5% leased March 31, 2010, up 50 basis points from the fourth quarter of 2009. Tenant improvements, leasing commissions and other capitalized leasing costs during the first quarter totaled $20.67 per square foot, compared to $17.84 per square foot for the fourth quarter of 2009.

During the first quarter our mark-to-market and rent world metrics are as follows. On a mark-to-market basis, our in place cash rents were 6.8 percent higher than our asking starting rents. On a straight line basis, the average rent from expiring leases was 0.4% higher 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 8.8% higher than the beginning cash rent from new and renewal leases signed for the same space.

Now, turning to guidance, we are maintaining our full year 2010 FFO guidance range of $1.19 to $1.25 per diluted share. As previously stated, this guidance excludes any impact from future acquisitions, dispositions, equity purchases, debt financings, recapitalizations or similar matters. Further, our guidance is based on the following estimates and assumptions for 2010. Total FAS 141 income is estimated to range between $25 million and $26 million. Straight line income is estimated to range between $6.5 million and $7.5 million. G&A is anticipated to range between $25 million and $26 million. Total interest expense is estimated to range between $164 million and $165 million.

Consistent with previous guidance this excludes the impact from any new or refinanced debt and assumes that the non-cash interest expense related to the Company's pre-IPO interest rate swap contracts will approximate straight line amortization. Further, this guidance assumes that one month LIBOR, which is currently 29 basis points, will average 100 basis points during the period from August through December of 2010, the period following the expiration of the $1.11 billion of interest rate swap contracts. Based on the foregoing estimates and assumptions, our 2010 FFO guidance range is consistent with 2010 same property cash NOI, decreasing between 1.4% and 3.7% when compared to 2009.

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

(Operator Instructions). We will pause for one moment to compile the Q&A roster.

Our first question will come from the line of Alexander Goldfarb with Sandler O'Neill.

Good morning.

Good morning.

Your comments were pretty upbeat and on the market on acquisitions on fundraising, on everything, but wanted to delve into the business confidence. Just looking at some of the leasing stats, it looked like the LA market overall had a significant amount of negative absorption, including on the west side, and there were some blocks in Century City and Santa Monica. So just want to get a little more color on what gives you the optimism on how we should contrast that with some of the leasing stats that we're seeing from the brokers?

Well, in terms of the leasing stats, I mean when you look at what we've come through and where we've been, I feel like we're now much more confident in our prediction. We do seem to be scraping along the bottom, bouncing along the bottom. What gives me the most good feeling on the leasing stats is the incredible amount of leasing this organization is doing, positive leasing it's doing, in terms of new deals and renewals. Yes, we're also losing space, but as things improve and that space loss, especially from the large tenants, the 20,000-foot guys going to 10,000 feet or whatever, we feel like that's tapering off. Defaults have already tapered off considerably and that the machine we've built that's actively leasing so much 700,000 feet two quarters ago, 500,000 feet this quarter, is -- that's not going to go away. So, that's why I'm optimistic about the underlying economics.

In terms of the capital markets, I'm more in the capital market side, and things have been relatively quiet for quite a while; and it feels great now to see deals happening and to be working on deals and deals that I think are very good deals in terms of the acquisition front and also to be -- have debt going to where we thought it would go in terms of spreads and things. I think, we feel great that we did do stuff last year. We called the cycle right. We targeted where spreads were going to go. They seem to be going there at a pretty good clip. Rates, hopefully, with fingers crossed, haven't backed up too much on us.

I do feel very, very good about this year in terms of what we're going to do with our debt, what we're going to do with acquisitions, our fundraising on the fund front, because we've been through a couple of very tough years on those fronts. So that's why -- maybe I just have been held down for so long that now a little bit of release of the pressure I'm giddy about it, but I do feel very good about this year.

Bill had something he wanted to say.

I wanted to say, Alex, that the stats in terms of where the leasing fundamentals are this quarter are really right down the center line of what our expectations were when we commented a quarter ago. We've been saying that we thought there would be some continued erosion and it is really consistent with that.

The reason for some greater optimism this quarter than before, when we first started seeing an increase in leasing volume in '09, we did have a little bit of concern that maybe there was some pent up demand from the really bad quarters of the end of '08 and beginning of '09, and we were concerned about whether that increase in activity was going to be a short run phenomenon or whether it was going to build from there.

We're getting more and more confident each quarter that we're seeing a continued build of leasing demand and activity and it seems like it's sticking and that we're being building on it; not withstanding the fact, as we've said and we're continuing to say, we think we've got some headwinds with existing tenants that are going to damp down the occupancy numbers for a while, but the underlying pulse we're feeling better and better about.

Okay. And then the second question continued the refinancing theme.

In fourth quarter it sounds like you're going to target all the $2.6 billion of the 12 roles or should we expect that there may be some prepaid penalties or what are the lenders thinking about that; and then as we think about that role, should we think about all debt or the potential for some equity to be included to manage to $2.6 billion?

Well, there's no prepayment penalties. There aren't any now I mean, so you're probably talking about the $2.3 billion on the office or on the residential stuff that comes up in 2012?

No, no. It would be -- sorry, my mistake -- more on the office side, not the GFC stuff.

Okay. So on the office side there are no prepayment penalties. There is no yield maintenance in it because just the way we normally do debt, it's LIBOR floaters that we've swapped. So, you have to deal with breaking the swap if you want to re-swap for a longer period of time, but that's the only charge, swapping that positive or negative value, but with where rates are today they have negative value.

Now, our swaps are burning off and that's why we've said for a while as these swaps burn off, we're in a very good position in the latter half of this year to do refinancing. So now the other thing you needed to have happen was for rates to stay low, which they seem to have stayed reasonably low, and you need -- and we wanted to see -- we believe spreads would come in and spreads have come in from 350, 400, over to the point where now we're optimistic they will be 200 over or less than 200 over. That's a big move there with the rates being low. Now, we will move aggressively to take advantage of that situation with respect to the $2.3 billion at the end of this year, if that answers your question.

Okay. Thank you.

Our next question will come from the line of Brendan Mejorana with Wells Fargo.

Hi, thank you. This is actually Young Ku here for Brendan. Just had a question regarding your comments.

It sounds like everything is firming up and your outlook's looking good and you guys have a lot of scale in your local markets with a lot of operating leverage, so to say. What's your strategy going forward in terms of dealing with your tenants? Just looking at it, because you guys have so much scale and so much local presence you guys might have the negotiate the leverage versus your tenants, and the tenants might not have the space as available to them, so was just thinking about what you guys are thinking going forward.

Well, I mean in a -- the market right now still has -- I don't know -- 12% vacancy or something like that. To really get negotiating leverage, we need to pick up 200 or 250 basis points of occupancy before we can start -- before things shift back into what you might call a landlord's market. The good news is, and why we feel good about what's going on and what we're doing strategically about it is, that since the market didn't really just crash, right? So in the early '90's we were dealing with markets that got down to 80 and sub-80.

To be where we are today and to feel the bond and feel -- feel the bottom and feel the energy that we can pull back out of it, I think what it's done is it's caused a lot of tenants -- I don't know if you call this our strategy or not -- they're trying to lengthen their lease. They're willing to make deals. They want to make deals and I think what the feeling is when they sense the market is that the rates that they're making deals at today are good deals for them. They want to lock them up and that feeling comes from the fact that they expect, probably rightfully so, that as things tighten up it doesn't take a lot to pick up a couple hundred basis points in an occupancy in the market and then guess what? Rates really start moving again because there's no new supply here; but right at this moment I'd say the strategy that we're pursuing is we want to keep our portfolio as well leased as possible so when things turn, we are in a position with not too much space that we have to fill to put pressure on rents in the space that we're leasing.

That's very helpful.

Just to go back to your comments regarding small tenants versus large tenants, it sound like you guys are having better luck with small tenants, but when we hear from your competitors, not necessarily on the West Coast, but some other markets it sound like larger tenants are doing better.

Could you just perhaps explain what could be possibly different from your markets?

Yes, because in our market, a large tenant is a small tenant in New York. We say large tenant for a tenant that's 20,000 feet, 30,000 feet and when our average tenant size -- I think it's 5,800 feet and our median is like 2,500 feet -- so when you lose a 20,000 or 30,000 foot tenant, think about it, we have to do what, about ten deals to backfill that space.

That's a lot of work and when you think about the guys in New York and they're talking about tenants that are 300, 500, maybe a million square feet and they're these huge investment banks. They're not really defaulting on their leases, so they're carrying them through, even though that space may not be very well occupied, maybe they're sub-leasing or who knows what they're doing.

Our guys, we don't have a lot of sub-lease. We don't tend out a lot of shadow-type space. Our guys are in or out; and our larger tenants, when they have a chance to shrink down, they could end up, as I said -- we have some examples of guys that have gone from 40 to 20 and so it's a lot of work for to us backfill that space.

Now the good news is that as you -- the more we go multi-tenant and refill those spaces with a number of smaller tenants, just the more protected and diversified the portfolio of tenants becomes, but it's always work to make those shifts.

Great. Thank you.

Our next question comes from the line of John Guinee with Stifle.

Hi, John.

Thank you.

Hey, Jordan, can you just discuss the dynamics of how you basically downsize these buildings, which I think is essentially what you're doing? We notice that your new leasing activity was 176,000 square feet, 73 tenants. That averages about 2,400 square feet per tenant. My guess is you have apartments that are larger than that.

If you could just walk through the cost to take a 15,000 to 20,000 square foot floor plate and subdivide it down to six or ten smaller spaces? Are you running that all through your leasing costs or are you not running through some of the costs of putting in a common area corridor, et cetera?

Bill's going to do a better job answering that question, so I'm going to let him. Hi, John. Yes. We do run all those costs through. We have a very active program in building what we call "spec suites," and I know in our parts of the country tend to be called "as built suites" and we have actually -- we go through a very proactive program with that where we have different levels of finish for TIs to anticipate the demand.

That -- frankly, our operational people are straining to keep up with that demand and we try to stay just -- keep the carrot just a little bit ahead of the horse on that, so that your CapEx, you're not putting in a huge amount of CapEx on a spec basis, but that you've got the product to be able to deliver. We're able to modulate that pretty well. Our operations people do a fantastic job of getting that mix exactly right and meeting that demand without basically wasting CapEx by front ending it too much.

Great. Thanks.

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

Thank you.

Jordan, just go back to the rate question. Given its spreads have contracted to 200 basis points or so over and that base rates haven't moved much since your last call, where do you think the all interest cost is to refinance the 2012 office maturities, if you ignore the in-place swaps?

Well, I think Bill's been saying between 5 and 6% and while I hope to beat, that I think that's a very good range to use.

Okay. And are you concerned at all with the recent backup in the forward swap curve?

Well, I want rates to stay low and anything that predicts that they're not going to stay low is a bad piece of news, but I will also say that my general attitude or my whole executive group's general attitude, because we talk about interest rates and this debt issue constantly, is that there is enough window left that we should be able successfully to take advantage of where rates are -- basically where rates are today and lock in some pretty good new swaps that ought to protect us from rate risk for many years into the future.

I'd also add to that we're -- our anticipation in terms of our timing for addressing the loan maturities takes into account an assumption that the underlying index rates will be increasing during that time period.

So we have that in mind. The analysis is that the advantage of both declining spreads, but frankly even more importantly, the burning off of our overmarket swap interest rates, that combination more than offsets our anticipated increase in the underlying base rate, but to be clear we are assuming in our planning that the underlying index rate will increase between now and the end of the year.

That's helpful. Thank you.

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

Josh Doty with Michael.

Just a follow-up on the refinancing. Can you just repeat whether you think you'll be able to roll over the entire amount and also how much you think you might be able to lock up from your existing bank syndicate?

I don't have a good answer about how much of the existing bank syndicate will want to stay with the deal and whether we'll replace any of them, although the feedback we've gotten so far is that the very, very high majority want to stay with the debt. I mean maybe one or two that aren't in a position to, but only that; and we have a real good -- aside from them we have a real good group that is anxious to get into the deal. So I think I have probably the right mix of pressure in terms of demand for our debt to -- we're well-positioned to make a deal that makes a lot of sense for us.

In terms of -- there's a lot of grades of can we replace -- we for sure can replace the debt, all right? Now, what will we choose to do at the end of the day? Will we choose to replace the entire $2.3 billion or a lesser amount? That has to do with our feel for what additional pricing benefits we can get and what -- where we're comfortable in terms of the leverage in the Company and the leverage on those properties.

I don't know where that's going to fall out, but we haven't taken off the table the option of doing a paydown, but if you ask me, the simple question could you if you had no money replace that debt today the answer is yes, but that doesn't mean that's what we're going to do.

And the 5% to 6% total costs, you think that assumes rolling the whole thing?

Yes. I think we could probably roll the whole thing and stay within that range and not do a paydown. We may not choose to do that, but I believe we could.

And what are your thoughts on the duration of the new debt?

Well, we're going to try -- if we do this floating, we're going to try and push it as long as we can because a lot of times, there's not a lot of extra cost. Someone wants to do five year to push it to seven year or later.

Seven year seems to be the sweet spot for a lot of these guys coming into debt and in the debt. So, I don't know. We would effectively add five years to the current maturity.

Are you considering laddering the maturities at all or will be a prepayable along the way with the final bullet at the end?

I think probably -- I don't know the answer to that question. We are considering laddering it. We are considering some spots where maybe we can use some tenure, but I think probably it will take two rounds to actually have something that's laddered. First round, get everybody all settled and re-extend it seven years and then maybe take another chunk of it after we've done that in a year or two and take that out maybe another seven or ten years and break it up that way less stressed environment because we might be -- .

Because there's all the lenders are in this whole same debt even though it's across these various pools, we might be asking for a too complicated transaction to try and not only extend everybody we can and have the proper demand pressure on it and people staying in and have them recognize the benefit effect that they're going to get higher spread on the earlier part of the loan, to mix that in and also say and by the way, this piece is going to be five, this is going to be seven, this is going to be ten, just might be too much for this

Okay. Thank you.

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

All my refinancing questions have been answered.

When you think about the acquisition environment, what do you think the forces are that are in place that are -- will stop -- and I know this is a rhetorical question, but there won't be any fire sale situation if banks start to unload some loans and all that stuff? What are the forces that will keep you within a very reasonable cap rate range in your mind?

Well, I will start by saying I don't think there's fire sales right now.

No, I know there's not, but I mean how do you not see an uptick in cap rates if suddenly the banks start to move on some of their portfolios?

Well, it's harder on that question for me to speak to other markets around the country, but in terms of the markets we're focused on here, primarily Honolulu and the LA markets, there's just not that much quality product in the hands of banks, quite frankly, for them to dump.

When I look at what's going to trade and people love to bring up Blackstone as a potential for us because it's an incredible match for us and it would do a lot for the Company. Well, they're real sophisticated bunch over there. I mean they are -- it's going -- it's already going to trade expensively. I think stuff's trading -- in a relative and historical sense, stuff's way down, but in a current sense I think cap rates are low and if they were to bring that on, I don't think they'd bring it on in a way that would -- you'd say oh, good, now they're dumping their property and cap rates are going rise again. I don't really see a scenario like that.

As a matter of fact, I don't really see any seller that could meaningfully sell property in any of our markets being the type of seller that would bring it on in a way that would do anything that would depress values because the supplier product out had out done the demand for it.

Did that answer your question?

Yes. Just a quick follow-up.

Who do you think all these buyers are, then? Are they -- and where's the money coming from for them to finance it?

Well, the good news for us is we're not seeing a lot of REITs in our markets trying to be buyers, but we're seeing plenty of private funds and private capital and wealthy individuals and wealthy foreign individuals and separate accounts managed. I mean we're seeing all that.

Okay. Thank you.

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

Hi, guys. If I can ask a similar question, just maybe a little bit differently.

Jordan, you mentioned that you feel Douglas Emmett is as well-positioned as it's been in your 25 years, and I'm assuming part of that includes a view on acquisitions that you've had before. I'm just curious what gives you confidence that you think you'll be able to find deals that will fit your return characteristics that you look for, et cetera?

Well, the main thing that is I'm looking at our pipeline right now, deals we're working on, and I feel good about them. Now to go beyond the pipeline of what we're working on now? I feel like -- it might sound self-serving -- but I feel like we just went through this whole bit about, smaller tenants, our largest tenants and the smaller tenants you look at the number of transactions we're doing, we're just in a very abusive market in terms of being in an operator and it's hard for people to come in and be competitive with us in terms of buying properties that are filled with smaller talents.

If you're back -- well, you're not back east, but if you're someone back east and you're thinking about making an investment in a building and you say -- what do you do? You say well, what can you cover? Really the income is coming from three big income talents that I know, so I'm comfortable with with that deal and I'm comfortable riding that out. There's nothing that trades here that does for them. It's all little tenants they never heard of and so like wow, I get in the game and I right away have to do 30 leases the first year or 50 just to keep things rolling; and it just makes it harder for them to get comfortable with with what's going on. Whereas that's dead center our comfort zone, but it's because we've set up this huge assembly line operation and we're very comfortable with the the flow that we have going through the Company and being able to direct that flow.

So I feel like that edge which we're better now than we've ever been on that operations front. When you combine that with I see the deal fatiguing people. People are going to sell buildings, not distressed or anything, but they're fatigued. They've owned them for a long time. They wrote them up. They then wrote them down. Now they're back up a little bit and they're saying we want to get off the roller coaster and we're not going to be criticized because values will come back a bit and now we can get out of these. I see those deals coming, right now, and so I think we'll make those trades and be the winning bids in our markets on those buildings.

I think that's a great position and I think we're operating extremely, extremely well and I'm optimistic in terms of the -- it's another one of the same old stories, but there's no new supply. So as the market picks up, we have a couple hundred basis points to recover and it's going to be -- one day the market will go down again, but I do feel we'll have some real good sailing for a couple years.

Let me just pick up on that last point that Jordan raised.

Part of our feeling about the optimism on a relatively basis with prior periods is, if you look at earlier periods when we were buying, the outlook in terms of the underlying leasing fundamentals was not nearly as strong as it is today. It was way more of a leap of faith years ago in terms of the demand, but more importantly, the supply that was still available to come on stream.

We really have only had one up cycle in our experience where we could enjoy the constraints on supply that have existed and when we look forward now, we say okay, that remains in place and as we continue to build going forward, it's a lot easier for to us feel comfortable with the long term strength of the underlying west LA and west LA market as we look forward than it was years ago.

Thanks. That's helpful.

Then my second question is what's your outlook for Warner Center? How long do you think it will take to get back to a stabilized level? What do you think is a stabilized occupancy level for your portfolio there, compared to your west side portfolio?

We gave you such a big answer to your first question, I don't even know if you should get a second question.

Come on, Jordan.

Okay.

At Warner Center is another -- I don't want everything to be a story, but we still believe very much in that market; and it's going through -- now we discussed it one or two calls ago that the life cycle of that market and what it's going through. I think it will stabilize in the 90s, which most of these markets stabilize, 92 to 95 and we had a very rare moment when we got up to 96, but that was very rare.

It's going through a -- it's not a bad market. It's actually a great market if you look at this, the demographics of the people living there and the energy, the businesses that are there and are forming there. It's just that it's going through restructuring. A large guy moves out, a couple 100,000-foot guy moves out and you're backfilling it with 5,000-foot guys, that's a very painful process.

It doesn't mean that when you look at that market in general, it doesn't have a great future in terms of the amenities and the schools and now the supply constraint that's moving in there because the residents have created home owners associations. See those things didn't exist there ten years ago when they were building Warner Center when Voight was doing their work there and building it out. So we saw that and we're long term. We're not quarter quarter and we thought that's a good market to get into because it's the next, if you will, Century City or west side for LA, but it's still a couple years out.

Everything we're going through is painful to go through in a down market to have to be losing more the larger attempts and to be backfilling them. We are doing backfilling, but it's not tay we don't have any more negative view on that. We don't have a negative view on that market.

Okay. Thanks, guys. Helpful.

Our next question comes from Mitch Germain with JMP Securities.

Good afternoon.

Could we get a sense, Jordan, of what the deal pipeline looks like today? The size, location, asset type?

It's office in LA and Hawaii, and we're trying to get -- I'd love to get some residential in. We bid on some residential, but that was in the valley, and we missed -- pretty big miss on our part, because we didn't have the competence out there that hasn't seen on the west side. We haven't seen as much come up.

One deal that we worked on, but it ended up it was a structural reason why it didn't sell at all. We're having more trouble getting residential in and I would say what you'd expect to see from us is office -- Honolulu office and west LA office.

I'm sorry, I missed your prepared comments.

Do you still have about 60 days left in the fundraising or has that been extended?

No. It ends June 30th.

Okay. Thank you very much, guys.

All right.

Our next question comes from the line of Chris Kattan with Morgan Stanley.

Hey, good morning.

First question is what type of capital costs do you anticipate to lease some of the office vacancy? The questions are what state is the vacancy in, in terms of finishes? Then two, the annual lease transaction costs for this quarter jumped up to about five bucks a foot and I wonder if that's a good number to think of going forward or if there was something unusual in the quarter that led to a higher number?

Well, let me just say by and large that the space that we're turned around is in good space. It's conventional buildout and we've been saying for a number of quarters, that we have not seen a notable change up or down in our CapEx costs. The stats from quarter to quarter bounced around. They were down significantly a few quarters and we said don't view that as a decrease longer term trend. It's been relatively flat, maybe edging up slightly.

It tends to get skewed again. I know this sounds like a broken record on this theme, but it really is as with some of these other metrics we've been talking about it's largely a function of large versus small tenants, way more that than it is new versus renewal space. So when we have a quarter, like we did Q1 where we had a number of the stats skewed by several for us relatively larger tenants, the capital costs go up and some other metrics change a little bit as well in that context.

So I think, probably the numbers you are seeing this quarter are a little on the high side in terms of a good run rate and a more normalized run rate, because we're really not seeing any significant change, whether -- there may be the occasional larger block of space where there's a greater CapEx cost that might skew a quarter in the future as well, but the blend normally is that we're at a pretty flat level and we really are not looking at -- there's really nothing in the way of significant blocks of first generation space or big blocks of space that have to be basically demo-ed back to that level. Pretty by and large it's good space to use for second generation.

Thanks.

The second question is on the multi-family portfolio. Looks like same store cash ticked up 2.3%. I'm wondering, qualitatively what you're seeing in that portfolio as far as rent escalations on renewal and whether or not there are any move-outs related to the housing cycle?

Well, for people who have followed us for each quarter since we've been releasing data since October of '06, you can see each and every quarter we've had or at least percentage in our multi-family portfolio at 99% and it's either been a little under it or, this quarter it's on the high end of it at 99.5, but it's really within that tight range and that's a dynamic that in large part comes from the fact that we have rent control in the units that we have.

That tends to both keep a good stabilized base for us and also adjust, bumps in each year. They tend to be more regular increases that don't spike up in -- at certain times and now don't decline very fast. So we have been continuing to see is a very modest decline in rent levels in terms of role that's offset by pickup that we have in some older units that are at very low rents, so the rent controls that tick up. So it's been fairly flat, likely to continue so for the foreseeable future.

Yes. So the rent control, is that on a level basis or on an annual escalation basis?

There are annual escalations that in the LA jurisdiction tend to approximate CPI and in Santa Monica, they vary it year-to-year. Sometimes they can get as close to CPI.

Sometimes it's pretty nominal, but in both cases the rents go to market on vacancy and we tend to roll the entire portfolio of market units every 18 months or so. We get up to market pretty quickly. In that way it doesn't constrain us. It just becomes -- I would call it a stabilizing force.

Thank you.

Our final question comes from the line of David Harris with Gleacher.

Just under the barrier there. Hi, guys.

Hey, got a question for you on the west side in downtown. Is there any new dynamic to that story with rents coming down on the west side? Are you stealing tenants from downtown?

I don't think so, because I think any talent that was downtown that wanted to come to the west side already came and I think, if someone is downtown today, they're there for a reason.

We get -- what you see a little more and I wouldn't call it stealing, but you could have a law firm that needs to have a presence downtown to be near the courts, but they also have a let's say high end business practice presence that's in Century City; and you could definitely watch the flow where the Century City office grows and the downtown office shrinks, because more lawyers want to be here on the west side and work near where they live unless they leave in Pasadena, I guess.

So, we see more shifting there where they're growing offices here and the same goes with the investment banks, but in terms of a wholesale, we're leaving downtown and heading for the west side to make a move because it's affordable, I don't -- does anyone around this table -- has anyone heard of any of those? I haven't heard of any of those.

There's two very distinct markets and frankly, in either direction you don't see big moves going backen and forth.

No. I guess downtown is more characterized by your big spaces, so you really couldn't accommodate the meetings they want to accommodate.

Well, there's a lot of government, union. I mean they're not coming to west side. They got to be down there near the --, the offices of the city and the state and the courts and don't --

Okay.

My second question is on the fund and your exclusivity there. If you were to find a property vendor that wanted to take OP units, for example, do you still have to offer the property in the first instance to the fund?

Well, what we have to do -- if someone wants to sell a building and they would only do it with OP units, we're able to do it, but we have to first try and get them to take an interest in the fund as opposed to OP units, and our obligation is to try and make it a deal that works well for the fund, but if there is no possibility of the fund doing it, it would come under the classification of being an equity deal. It has a name in the agreement and then we do have the ability to do it directly in the REIT using OP in it.

Okay.

I mean it's a leading question, but I mean is there any more interest from your side or from the potential seller's side to use OPs in the current environment?

We have one deal we're working on that's a possibility and we -- not a lot. One's a possibility that we're talking about and if I think about four or five that, hopefully, are more imminent, then I would say one's a chance, but no. Generally, I don't see that as a huge carrot today.

Is that more a reservation on your side or the other side?

I think it's probably other side because when someone crosses the mode and commits and says I'm selling, I think they've just decided they're selling; and some people are selling because they're worried about taxes going up and they want to have their gain this year.

Okay. All right, sir. Thank you. Thanks, Bill.

Okay. Thanks, David.

And thank you, everybody, for joining us on this call and we look forward to speaking with you again next quarter. Bye, bye.

This concludes today's teleconference. Thank you for participating and you may now disconnect.