Douglas Emmett Inc (DEI) 2010 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Douglas Emmett 2010 second quarter earnings conference call. Today's call is being recorded. At this time all participants are in a listen-only mode. A question and answer session will follow management's prepared remarks. At that time instructions will be provided to queue up for questions. 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 have been filed on Form 8-K with the SEC and both 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, certainties and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they're 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 filing which can be accessed in the investor relations section of the Douglas Emmett website.

Please note that the market data sources that are referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office market, REIT for the Los Angeles office market, MPF Research for the Los Angeles multifamily market, and Property and Portfolio Research for Honolulu multifamily market.

Once we reach the question and answer portion, we request those of you who will be participating limit yourself to one question and one follow-up per person. This is in consideration of the others who are waiting on the line. Thank you.

Now, before I turn the call over to Jordan I would like to announce that we will be hosting an investor day on Wednesday, October 6 in Santa Monica. A formal save the date notice will be sent shortly with more details. Jordan, please proceed.

Thanks, Mary. During the second quarter, Douglas Emmett achieved several important goals and set in motion other initiatives that we expect will produce meaningful results. In terms of our fund, we reached our goal of obtaining at least $500 million in equity commitments, including our original $150 million investment. On June 30, we closed the subscription period with total equity commitments of $549 million. This includes a $41 million increased investment from the Company. With the subscription period closed, the Company's ownership interest in the six existing fund owned properties is now fixed at 49%. These properties total roughly 1.4 million square feet, the majority of which is in Beverly Hills. Currently, $267 million in equity commitments remain available for acquisition opportunities with the Company having a 20% direct investment in the fund's future acquisitions.

In addition, and as previously described, the Company received some fees and generally participates in the upside in excess of an 8% IRR to fund investors.

Also during the second quarter, we were successful in acquiring Hawaii's largest office project, Bishop Square. It encompasses almost one million square feet of office space located at the center of Honolulu CBD, one of Douglas Emmett's core submarkets and is widely viewed as the best business address in Honolulu. We paid $232 million, or approximately $240 per foot, a compelling price by historical standards for fee office projects in Honolulu. The possibility of new supply in Honolulu is theoretical, due to the lack of building sites, but if development were possible, it would cost in excess of $650 per foot, over 2.5 times our cost basis in Bishop Square.

Bishop Square is an excellent acquisition on its own merits, as well as achieving important strategic objectives for Douglas Emmett. It's leased to a little under 200 tenants averaging roughly 4,600 square feet, which fits perfectly with our small diversified tenant focus. By increasing our market share of Class A office space within the Honolulu CBD to 37.1% from 15.4%, we are now in a position to complete the integration of our operating platform in Hawaii, which should pay dividends across our entire Honolulu portfolio.

In terms of additional acquisitions, the environment remains very competitive. However, we are making progress within our core Los Angeles markets to buy office properties at prices we believe represent tremendous long-term value. We expect these acquisitions will be made in our fund.

With the fund fully capitalized, our internal cash resources, the attractive acquisition debt, we believe there's ample capital for our acquisition targets over the foreseeable future. While our capital is sufficient, we filed our first shelf registration in June and will likely establish an at the market stock offering program as prudent steps toward providing flexible funding options in the future.

During the second quarter, we set in motion several initiatives concerning our debt. As Bill will discuss in more detail, we are working on a $400 million term mortgage loan and are moving forward to refinance the 2012 maturities for both our existing residential debt and our office debt. We have targeted the fourth quarter for completing these transactions.

With that, I will turn the call over to Bill Kamer, who will provide details on our second quarter operating results. Bill.

Thanks Jordan. Our second quarter results include two days of operations from our newly acquired Bishop Square Project. In the second quarter, the Company reported FFO of $46.8 million or $0.30 per diluted share. AFFO for the quarter was $34.2 million or $0.22 per diluted share. Same property net operating income in the second quarter of 2010 decreased 1.4% on a GAAP basis and was flat on a cash basis when compared to the second quarter of 2009. Same property total revenues in the second quarter of 2010 decreased 0.6% on a GAAP basis and increased 0.5% on a cash basis when compared to the second quarter of 2009.

The trend in our leasing fundamentals that we have seen during recent quarters continued during the second quarter. Excellent leasing volume offset by space reductions primarily from our larger tenants resulting in a modest occupancy decline. The decline was slightly less than we anticipated three months ago, however, we still suspect that we will see a loss of approximately 200 basis points for all of 2010.

The second quarter 2010 was our fifth consecutive quarter of strong leasing activity. We signed 167 new and renewal leases totaling approximately 733,000 square feet of office space compared to 155 new and renewal leases totaling 511,000 square feet last quarter. Our total leasing volume was higher during the second quarter than in any prior quarter since we began tracking the data as a public Company. Our leasing volume included 69 new tenant leases signed during the quarter totaling approximately 257,000 square feet. Douglas Emmett's portfolio continued to fare better than the overall market during the quarter. The office percent leased for our ten submarkets declined 30 basis points sequentially to 86.4%.

Comparatively, the overall lease percentage of our REIT owned office portfolio declined 20 basis points in the second quarter to 91.1% and occupancy declined by 70 basis points to 89.7%. Including the fund properties, our office portfolio was 89.6% leased and 88% occupied.

Tenant improvements, leasing commissions and other capitalized leasing costs remained relatively flat during the second quarter, totaling $20.38 per square foot compared to $20.67 per square foot for the first quarter of 2010.

Our multifamily portfolio was 99.3% leased at June 30, 2010, compared to 99.5% leased at March 31, 2010.

During the second quarter our mark-to-market and rent roll metrics are as follows. On a mark-to-market basis our in place cash rents were 8.1% higher than our starting rents. On a straight line basis, the average rent from expiring leases was 0.7% 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 9.2% higher than the beginning cash rent from new and renewal leases signed for the same space.

Turning now to our financing activities. We acquired Bishop Square for $232 million utilizing cash on hand and drawing on our secured revolving credit facility. As of the end of July, the outstanding balance of our credit facility was approximately $146 million. As Jordan mentioned, we are currently at an advanced stage to obtain a $400 million term mortgage loan. In connection with this contemplated financing, we have entered into a forward interest rate swap that commences on September 1 and fixes floating rate LIBOR at an approximate 2.45% rate until July 1, 2015. The loan will be secured by Bishop Square and six of the Company's office properties located in Los Angeles. A portion of the proceeds of this new loan will be used to fully repay the outstanding balance of the credit line, which will then be retired as part of our long-term financing plans. The balance of the loan proceeds will be retained by the Company, increasing our available cash on hand. The debt markets continue to be attractive and we are still targeting the fourth quarter of this year to refinance our 2012 loan maturities, which we believe can be accomplished on favorable terms.

Now turning to guidance. We are increasing our full year 2010 guidance range. It is now $1.24 to $1.28 per diluted share. This is an increase from our earlier guidance range of $1.19 to $1.25 per diluted share. This increase primarily results from somewhat better operating results in our existing portfolio and the impact of the Bishop Square acquisition, partially offset by the cost of the contemplated $400 million additional term loan mortgage financing.

Except as noted, this guidance excludes any impact from future acquisitions, dispositions, equity purchases, debt financings or repayments, recapitalizations or similar matters.

The aforementioned guidance range 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 $169 million and $171 million.

This excludes the impact of any new or refinanced debt other than the new term loan previously discussed and assumes that non-cash interest expense relating to the Company's pre-IPO interest rate swap contracts will approximate straight line amortization.

Our prior guidance assumed that one month LIBOR will average 100 basis points from August through December of 2010 and we are maintaining that assumption in our current guidance.

Based on the foregoing estimates and assumptions, our 2000 (sic) guidance range is consistent with 2010 same property cash NOI decreasing between 1% and 2.8% when compared to 2009.

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

(Operator Instructions)

And your first question comes from the line of Chris Caton with Morgan Stanley.

Hi, good morning, guys. How are you doing today?

Good morning.

I'd hoped you could talk a little bit more about the closing of the fund. And it is two questions. One is whether or not the new investors were buying into the existing assets? And then two, are you going to be making any changes to the way the joint venture is disclosed on the supplemental as the fund becomes a bigger component of your overall activities?

In terms of the way it played out, we -- to answer your question simply, the new investors did not invest in the pre-existing fund properties. So, they set up a new joint venture investment vehicle that the pre-existing investors invested in alongside with them.

In terms of your question about the changing the way the disclosures work, I think maybe we are looking at that, but I don't have a real answer for you there.

I guess then the follow-up would be, was it a disagreement about value in the previous investments? And going forward as you look to make acquisitions what level of involvement will the joint venture partners have in terms of oversight on price and perhaps slowing your ability to react to market conditions?

Okay, so in terms of -- they are in on the exact same basis so they don't have any involvement other than we tell them what's happening. So the new investors, the old investors, the whole thing together, we make the acquisitions and say this is what we bought. And it is done, right. There are some limited exceptions, like if something is too big for the fund and it needs a JV partner where we have some arrangements with people that can come in as JV partners. They could say they don't want to do the JV. But other than that, as we go forward and buy buildings, it's totally within our discretion as to what we buy and what we do.

Yes, I thought I'd just ask. And then the first part of the question, which was with regard to the decision not to participate in the earlier investments?

I think it started out -- I mean, we've been raising the fund for what feels like a decade. It started out that the thing got separated because they didn't want to invest in the pre-existing properties. Now, that turned at the end because we got some queries about being able to take a position in the pre-existing properties, but by that time, the investors in the pre-existing properties weren't showing a huge inclination to want to give up their position and when these investors came in, one thing they made really clear was they didn't want us to continue spending time raising money past June 30 and so we just -- I can't say exactly today where they stand because the way things changed at the end, but certainly it was originally done because they didn't want to be in the pre-existing properties. And then, as things changed, it got too complicated to put them into those deals.

Got it. Thank you.

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

Yes, hi. Good morning.

Hi, Alex.

Good morning.

Perhaps it's too soon to know, but you guys -- your traditional financing strategy has been the floating with the swap. Given the Fin Reg passage, just want to know if your advisors are -- what they are indicating so far. I know, obviously, still a lot of regulation to write and people are still going through it, but just curious what the initial reaction from your advisors has been to you guys.

Thanks, Alex. That's a good question. We've obviously been following the Fin Reg process very closely to see whether there would be any impact. So far, in checking both with our swap advisors and directly with counterparties, we don't believe that there will be any change that's terribly noticeable to us. There might be a slight increase in cost. When I mean slight, I mean a couple of basis point cost range, but not much else. And we've been touching base and actually working hard to increase our group of counterparties and our swap capacity to deal with upcoming financing, so I think we're in pretty good shape on that.

Now, having said that, while you're correct, that's -- our mode of financing has been typically on LIBOR floaters that we swap out. The life Company fixed rate market is extremely attractive at present, both in terms of availability, terms and pricing. So we're taking a fresh look at that and that may play a role in our refinancing activities as we move forward.

Okay. And just the follow-up question to that is just a little more nuance on there. With regard to the swap commentary that you're getting, are you seeing any breakout like are the overseas banks more competitive than the domestics? Any change there? And then as far as your European lenders, have you noticed any impact from the Greece, all the issues that have been going on there or the European lenders are still pretty eager to lend?

Okay, on the first part, I was a little unclear, Alex, whether you were talking about in terms of the swap market or the underlying mortgage loan market, but on the swap side mainly the swap counterparties have been historically for us domestic lenders and with a little bit foreign and again, I don't see that there's any significant change there. I think that overall market has changed over years and we're evolving with it to source counterparties, as I said, to have sufficient capacity going forward.

On the mortgage loan side, which maybe where your question really was and I just wasn't hearing it carefully enough, I think it's been a mixed bag. I think we've seen a -- overall, taking everything into, all factors into account, the debt markets are more attractive now than they were earlier in the year, both in terms of pricing and capacity, and so we feel very good about it.

In terms of Europe and Greece, I think there's been some back-end filling on that. I think the early indications after the crisis hit was that we were seeing a lot of advantage coming in our direction with European lenders focusing more of their attention on investing in the US rather than in the Euro zone. I think, however, as that -- both that crisis continued on and as currency exchange rates with the -- got --

More volatile.

More volatile, the internal funding costs and as the stress tests were done in Europe, the internal funding costs of the European lenders has backed up somewhat. So that's been a negative, although countered by the underlying interest rates going down.

Yes. They're still pretty competitive, but I think they've backed up a little bit, not tremendously.

Okay. Thank you. That's helpful.

Your next question comes from the line of Jamie Feldman with Bank of America-Merrill Lynch.

Thank you. I was hoping we can focus a little bit more on the market fundamentals. In terms of the pick-up in leasing activity in the quarter, can you characterize what kind of activity that was and whether you think that's going to carry through. Is this the beginning of a recovery? Kind of what kind of tenants? And then also in terms of expected occupancy loss for the back half of the year, where exactly that's coming from?

Okay, Jamie. As I said in the prepared remarks, I think, we really have not seen any significant change in trend from what we reported last quarter. So the activity, the vibrancy of the new leasing activity and just the volume of renewal activity, it's coming pretty broadly across both our submarkets and industry groups.

And in terms of seeing it continue, your other question on that, as I mentioned, this is now five quarters in a row. Early on we were concerned that there was some pent-up demand that built up during the depths of the recession onset and that we might only see a few quarters of that before things throttle back and that has not been the case so far and I'd say that as we're heading into third quarter, I think that the general trend on leasing volume is continuing. In terms of the back half of the year, as I said in the remarks, we're still thinking that we may see the total 200 basis point drop or so for the year as a whole.

For all of 2010.

For all of 2010. So that implies a drop of about the same pace in the second half of the year as what we saw in the first half of the year. We're hopeful that things will be better than that. We were, as I suggested in the call, modestly surprised that our leasing volume was a little stronger in the second quarter than we had initially anticipated, therefore, the occupancy decline was a little less than we anticipated. Hopefully that trend continues in the second half of the year, but cautiously we're still sticking with the range of a 200 point drop.

And in terms of leasing activity this quarter, I mean, has anything changed in the market? Are free rent periods coming in? Are concessions coming in or are they still getting worse?

I would say we haven't seen material either improvement or worsening in those conditions. As I said, I think the best quick take-away is that the trends that we saw last quarter are pretty much in place this quarter.

Okay. All right, thank you.

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

It's Josh Attie here with Michael. On the financing would you consider refinancing the $2.3 billion of term loans in stages in order to both ladder the maturity and also preserve the portion of the debt that goes floating this month for as long as you could?

It's definitely being done in stages. The process is a ladder almost, and you can see the process beginning with the $400 million loan we're working on. I wouldn't say, though, that we have as an objective to hold on to the floating rate. We like where rates are now, so I want to get my loans done and I want to swap them out or do fixed rate deals and have that debt now for the next seven to 10 years. It's just -- it's a lot of moving parts and to strategically do it in a way that's best for the Company and least expense for the Company just takes a lot of work and a lot of steps.

So the way -- do you see it all being refinanced in the fourth quarter or does it -- is it a multi-quarter process?

Well, we've started already the process, so by definition it's multi-quarter. And we hope to complete it by the end of fourth quarter. Maybe it will slide a little bit into the first quarter the following year, but we're working on almost all the 2012 maturities. I mean, we're working on the residential debt. We're working on the big $2 billion, $2.3 billion debt. It's going to move around. It's going to move to different properties. Hopefully we'll have chunks that have a little longer term, as Bill said, the life companies are great at providing ten year. I mean, we're attempting to mix it up and move the debt around without ever having our back against the wall or being trapped with having to take the next steps or being forced without knowing we have it done. It's just a tricky process. I don't want to trap myself, but I want to take advantage of what's going on and we're trying to move the ball as quickly as possible.

Okay. And on Bishop's Gate (sic), can you give us some details on what the in-place rents look like versus market, what the lease roll is and also what the in place NOI is so we can think about what the contribution of that asset is in the back half of the year.

I don't think we're going to give out details about that specific building, but Bill has some information he can give you that is broader about the impact of the building on the Company.

Yes, I think probably the best thing to provide until there are results that you can start running with is that for the six months that Bishop will be in our numbers this year, the GAAP NOI should contribute about $0.06 a share to our earnings just looking at the GAAP NOI. Now the $400 million term loan that we're working on, we're currently estimating that the additional cost of that would be about $0.04. So that's why when on our guidance the midpoint of our guidance range went up $0.04 and half of that increase, approximately, is the Bishop contribution with the NOI offset by the anticipated cost of $400 million of debt, even though remember the acquisition cost was $232 million. So we're loading in the full bore effect.

It's not a perfect match.

Yes, just to make that clear. And then the other half of the increase in guidance was the somewhat better operating performance that we've been experiencing this year that caused us to raise that side. But I think that probably allows you to hone in pretty well on Bishop.

Okay.

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

Thanks. Good morning. Bill, a question on the balance sheet and just the balance sheet strategy, I suppose. If we look at just on the office side, the amount of the modified term loan and the term loan, about $2.6 billion of debt relative to your current cash NOI yield outside of Bishop Square would suggest that the debt yield on that is around, by our numbers, around 11.5% maybe 12%. Is that -- so is the strategy to refinance that full amount of debt such to carry a balance that would be comparable going forward? And then would the ATM be there just to fund new opportunities or would it be there to reduce your leverage a bit over time?

I'm taking the second part first. We're proceeding with, as Jordan's describing, a series of steps involving addressing debt. And again, I want to be clear that it's not just the $2.3 billion on the office side with the 2012 loan maturities, but also the $388 million residential debt as well to put all of that away over the next several quarters at hopefully maturities ranging from seven to ten years, depending upon the mix of what we do. And we're proceeding in a way where we shouldn't have any need to raise any capital through an ATM program or any other way in connection with accomplishing those goals. I'll let Jordan comment on our longer term view of where we want to be on debt.

Oh, okay. So we've said in the past and I've said to people a number of times, I mean, I would like to reduce our debt roughly 10%. Now, that carries a cost and I'm not saying that because we can't refinance the debt as it exists today. We can refinance all our debt today and we don't need to pay it down to refinance it. But I had the feeling when I look at a number of factors that I would like to be, let's say, 10% lower. That has a cost and part of that cost probably is that we're going to have to match that in some way with issuing equity and that also has a cost.

So there might -- we will look for an opportunity to reduce our debt through, A, the fact that maybe we could get much cheaper debt if we were refinancing less. I don't know if that's really the case, though. I don't know if we'll see it be much cheaper. And B, an opportunity to issue some equity in order to achieve my just general 10% reduction goal.

But we don't have any need to refinance the debt and we don't have any plans right now to issue the equity.

Really, the ATM program was just one more thing, it's easy to put in place and it was one more thing we thought we should start working on and get in place as part of generally having filed our shelf registration and those types of things.

And is the goal to reduce the debt by let's call it 10%, is that driven by the experience over the past couple of years and just realizing that maybe a little bit lower leverage is probably the way to run the Company or is that a view of looking at some of your peers and the multiples that they receive relative to the multiple on DEI stock and suggesting that maybe a lower leverage level will increase your multiple and then make your cost of equity issuance a little bit cheaper as you look forward?

I think there's a little bit of both those things in it. I don't want to be that far off of our peers. That's one of the things. Now, we took a look at going back of whether you're -- how you're having higher leverage, how it impacts your multiple and your stock price and it really is a flavor of the month thing. Sometimes having higher leverage is better in favor and sometimes having higher leverage is in disfavor. Obviously it's in disfavor right now, but you can look back to prior periods when it wasn't.

So part of it's the peer's. But also part of it is looking at the Company and wanting to be just absolute bomb, super bomb proof comfortable and I feel like when I look at the cost of $200 million, $300 million of debt reduction and I look at what it does around here, I feel like that's something that is worth probably pursuing under the right conditions.

Sure. Thank you.

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

Jordan, I think all of the investment bankers who are listening to the call just got off the call and have booked their flights to Santa Monica to talk to you.

Yes, you know what, they've been reading minds and (multiple speakers)

They're already calling us.

I guess the other side of the equation is that, as you well know, there's probably never been a better time to sell quality assets which have long lease terms in place. Anything on the horizon in terms of selling assets that you may not want to necessarily hold but do have long lease terms in place?

Yes, we have looked at one thing like that and I'm also working on that actually.

Surprised you thought of it, but yes, that is also a possibility.

Okay and then as a follow-up, Bishop Square shows up in CoStar as 893,000 square feet, shows up at 960,000 in your press release. Can you give a little more color in terms of where the discrepancy might be, whether it's remeasuring or retail space or (multiple speakers)

Well, I can tell you this. When it was being marketed, it was even bigger, so I wish it was the marketed number. I think marketed it was like 980,000 square feet.

I can't tell you with CoStar what's going on. I can tell you this, we do remeasure every building that we buy and sometimes that remeasurement gives us additional square footage, sometimes it doesn't. I can't tell you that this gave an exceptional amount of additional square footage because there's also whatever load factor that that market, in particular in the Honolulu market, would bear. I actually think that when we remeasured Bishop Square it might have come out even a little larger, but we went with a load factor that we thought the market would bear.

But I don't know what -- the CoStar number is a -- I'm not -- I can't tell you where they got it. That's not a number that's in anything but there, like in any of the seller's rent rolls or anything like that. They had some numbers I saw that were in the middle of the 900s.

To make a broader point that interrelates with this, is you know this project was developed decades ago and has never sold. So in a lot of ways, having people come in and buy a property at this point after having sit for so long and things getting measured, I don't know if that has an impact on it or not, but clearly, we feel fortunate to be able to buy such a good asset that's never been sold since it was first developed decades ago.

Okay. Just how many retail square feet are in Bishop Square?

Boy, I don't think it's a lot. I mean 20,000, 30,000 feet, something like that.

Very little.

All right. Thank you.

Your next question comes from the line of Sri Nagarajan with FBR Capital Markets.

Thank you. Good morning, good afternoon. Jordan, you talk a little bit about integrating the Bishop Square building into the portfolio and I was just wondering if there were any significant operating cost synergies to be expected in 2011?

I think it's starting to happen already. Let me say this about Bishop Square. When I look at what I have to do for this Company, aside from the debt, I had two big acquisitions that I felt like I needed to make and Bishop Square, and I'm talking about career acquisitions, was one of them. I mean, it was that instrumental, that important to our platform in Hawaii.

So on the other side of the coin, I look at the Blackstone, the EOP portfolio in this west LA market to be an equivalent move if I could get control over that the way it matches up with our portfolio to us getting control of Bishop Square in Honolulu. It has huge, big -- that level of ramifications to our level of expense savings, control, the way we lease the space, everything in that market.

It's a game changer for us. And when I said it allows us to complete our platform out there, our leasing platform, our construction platform, our property management platform, I mean, it really does.

And the other thing it does, which people that haven't had the experience we have of having moved into a market and becoming dominant, is it allows us to change the way the whole market operates in terms of its sophistication. I mean, as I said, it's not going to go in -- I was being asked about the load factors that the market will bear. Well, guess what, that market right now is bearing a much lower load factor than let's say these West LA markets.

We saw the same thing happen when we moved into the Valley. When we moved into the Valley, we changed the way space was leased there. A lot of that was on a usable. We changed it to rentable. Then from rentable we moved it up to higher load factors.

That -- you can't do that of you own one building in a market. But once you start getting up to these numbers, 37%, you can change the sophistication level. So I'm very optimistic about what it's going to do for us out there.

Just to elaborate on that, it seems that 37% would rather be a low number but given -- just give us some background of what other players are dominant in the market, perhaps, or is it just fragmented, the rest of the market just fragment?

I think the rest of downtown market there's nobody that owns other than one building. So maybe the next closest guy would be 7%, 6%.

With the buildings we previously owned, we were the largest owner in the downtown Honolulu market of any owner that owned multiple properties. Bishop Square alone, just by owning Bishop Square that was the largest and we were second largest but with multiple buildings. So you put them together, there's no one.

I don't think there's anyone that's higher than about 7%.

Okay. Just shifting tracks, I know Jordan, you've talked in the past about Northern California as a possible market. Obviously some of your peers have recently acquired some properties. Did the deals that come to market not work for you or simply did the properties not fit your profile of what you're looking to buy in the funds?

I still feel like, as I've said earlier, that there will be properties that will come available directly in our markets and we're working on some right now. That's where I would rather spend my money before I would like to leap across to another market and have to set up a whole other platform.

As I was just saying about Hawaii, I would say right now -- and we've been working on Hawaii for five, six years -- six years. I'd say this is the year we finally completed our platform and strategy out there with this acquisition. All right.

So to start that process in another market and use our cash to do that as opposed to when I think there are good opportunities coming up in the markets that we're already in that fill out even better our positions there and our control there -- we watch all those deals because they are good, they are alternatives for us, but I still feel like this is where we want to be focused and spend our money.

All right, thank you.

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

Hi, guys, just a quick question on the gap in lease versus the occupancy. It looked a little bigger this quarter. I assume that's just because of the leasing volume that you had. Is there anything else we should know about there?

No, you said it right.

Okay. And then, Bill, can you just help us understand what the cost difference might be in terms of when you're thinking about refinancing, in ballpark terms perhaps, between swapped debt versus the traditional.

It definitely in terms of in ballpark terms, we previously talked about a 5% to 6% range and given where the market is now, I think we feel comfortable saying that at present it's below the bottom of that range. It's a number below that. We're (multiple speakers)

Below 5%.

Below 5%.

And is that true for both types or is the swap still cheaper, you think, at the end of the day?

That range would be true of both types.

Okay. And is that what's giving rise to, I think I heard you say, Bill, that you sound like you have a little more propensity going forward to use a traditional life financing on the debt side rather than just strictly swapped.

No.

The life's better at ten year. That would be the -- it looks like life at ten year might be a little better than our swap seven year in some cases, if we want to stretch things out because our seven year guys don't do as well going to ten years.

Okay. And then just one more question, if I could. Jordan, you touched on it a little bit but can you just remind us of where you're at now in the integration of Hawaii in terms of operating platform. I know when you first came public I think you had a JV partner that rolled into OP units. Are you fully integrated now?

I'd say we are very close to it. I mean, we're within weeks or so. I mean, we've done the hiring. I think we're safe. I would say we're weeks to a month away. We're doing it now. Now that we have the bulk, there's a lot of things that you can do with leasing, setting up construction for TIs to bring down your TI cost. I know we started the space planning. We've now got it integrated. We're now set up with a full property management structure out there. I suspect now we have 60 people out there. We finally have the bulk to spread the cost of some more expensive people that are very valuable across the buildings and we're in that process. We just closed. It takes a little bit of time to get it done, but now we can do it, whereas it didn't make sense to do when we only had the three office buildings out there.

Right. Thank you.

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

Thanks, good morning, everyone.

Hi, Rich.

What is your percentage ownership of the pre-existing fund assets?

49%.

Okay. That's all I needed on that. And then second, the issue with the larger tenants creating some disruption despite the fact that you're having some good leasing volume. Do you ever see any end in sight? Discussing some of the prospects, some of your larger tenants, is there a sense that that dynamic comes to an end this year or do you see it trailing into next year as well?

Well, I think we're already seeing that that dynamic is somewhat slowing down as we work through things and as recoveries gets further entrenched. But as I indicated before, I think at where we sit today I would say that we would feel that that trend is going to continue for the second half of this year.

Right. To get you that 200 basis point down, but it --

It's got to decline eventually because as we run out of large tenants to shrink and as we back-fill them, we're moving to the smaller guys.

What goes down, must go up, something like that?

Some version. We're going to soon run out of large guys to shrink if this keeps going for much longer.

Got it. Thank you, guys.

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

Follow-up on the secured, the new secured term loan or the facility. Bill, I think you said you'll take out the $400 million new line, which will have Bishop and six other assets secured by it, and that will replace the existing $350 million facility which has $154 million drawn and my understanding is that had about nine assets backed by it. Is that -- that's correct?

All that is correct. So there will be -- those other assets will now be unencumbered.

Yes, they are moving out. The grouping of the property loans is changing, as part of what we're doing.

So when you think about six versus nine, so the six are the same and then three are just coming out?

Correct.

Yes.

And what's the undepreciated cost of those three that are coming out?

The undepreciated.

What's the cost basis of the nine versus the six, basically?

I don't know.

I mean, it's -- let's just say this way, the six properties that are in at the lion's share of the value, obviously, it's two-thirds by number of buildings and by building size it's bigger than that, so it's a smaller part of it.

Are you creating excess proceeds because Bishop Square being $232 million but you're only getting an extra $50 million of proceeds, it would seem --

We're getting an extra $170 million.

I thought the line was $350 million.

In terms of the --

I don't consider the line to be long-term.

The way we really -- sorry to interrupt. The way we really viewed it, we've never in our planning given a lot of attention to the credit line because it's short-term money, and by doing this we're putting this away on a long-term basis, so it's long-term money that we have and we can use for the rest of our plans. But again, I think the key thing in mind is that this is part of, as we've said now a number of times, a multi-quarter process that we're going through that's going to go through several steps. So it's a piece in that process that we're working through as we address all the loan maturities.

Right. Do you envision having any line or capacity outstanding or you view that as being the ATM? Do you view (multiple speakers)

We may when this is over, because I said through this process we may, probably will, end up with another group, not the same group that we used to have but a different group, of properties that are totally unsecured. And then we can take that group and we can put a credit line on it. But that's a last step in a long set of stairs.

Yep. Understood. And then the pricing of it, you said 2.45% is what you fixed LIBOR at. What's the spread over that? What's the all-in cost of --?

Well, what we said to an earlier question, which we'll stick with, is that we're viewing the cost of debt now as sub-five and we'll stick with that until we have something to announce.

So you are not -- you won't break out the spread on the $400 million above the 2.45%?

You're more than free to do that.

(multiple speakers) know the maximum.

And then you answered Rich's question. So you own 49% of the original assets and then of the fund, it's the second fund with the investors, what's your ownership going forward?

20%.

20% going forward?

Right.

Okay. Thank you.

Your next question comes from the line of Ross Nussbaum with UBS.

Hi, guys, good morning.

Hi, Ross.

Couple questions. First, Jordan, you mentioned a little earlier in response to a question that there are two assets that you've got to own in your career. You mentioned Bishop Square.

Two acquisitions that I felt like were key for me to do. One was Bishop Square.

What's the other one?

The EOP, the EOP portfolio that, the West LA EOP portfolio that Blackstone owns.

So when do you buy that?

I don't know, we could put John on call, John Gray and find out. Believe me, I ask him every month.

I'm half joking, as I think you are too, right? The other question I have for you, Jordan, is on the multifamily side, have you looked at using one of the revenue management programs like LRO or YieldStar or does it not make sense given the number of assets you have?

No, we don't have those programs, although we get asked all the time about whether we manage to a -- we should be managing to a lower vacancy rate to push rents and for our portfolio, I'll just say this. It makes sense to manage it the way we are because we're in these rent control areas where you can't force -- we're in very strict rent control areas where if you decide that you're going to force rents through vacancy, a lot of times you might just be left with a vacancy and you haven't forced rents, so it's a little trickier than I think in other totally non-rent control markets, especially considering the amount of units we have in Santa Monica, which has a particularly tough rent control rules.

Can you remind us how what percentage of the portfolio is still subject to rent control?

Well, LA has its own version of rent control, which is not horrific. It's just tough. Santa Monica has very, very tough rent control. The only stuff we have that really isn't under rent control is the stuff in Hawaii, which is about 1,000 units out there. So the rest of the stuff has some version of rent control with about 7, with about 1,000 of those units, little more than 1,000 of those units being in Santa Monica.

And then the other thing we just -- to make it a little more complicated, where the value, where the real dollars are is in -- what we have left are about 290 units all in Santa Monica, that were what we call pre-'99 units before the law changed where the rents effectively were the rents in effect in 1999 with very small increases since then, which as they roll, they get marked up to market and that's really where the big impact is for us.

Those were really the ones I was looking for. I had lost track of that number.

Yes.

So it's like, what did you say, 290 or so?

Yes.

Okay. And then just lastly on multifamily, the year-to-date recurring CapEx of about $157 a unit just looks a little light. Is it light and is it going to ramp a little or are you guys just doing a great job on the expense side?

Well, we certainly do that. But what we've said, I think we said it at the beginning of the year when we gave the original full year guidance, was that for the year 2010 full year in a 400 to 425 range. So we are a little light, which is always the case -- the first half of the year is always a little lighter than the second half of the year. So we're sticking with the idea that we'll be in that range of 400 to 425 for the year as a whole.

Okay, lastly, on the term loan, Bill, is it open for repayment at all earlier than August of 2012?

You broke up a little.

Yes, there is no prepayment penalty on those loans. You could pay them off right now with no penalty, no fees, no charges, no nothing. But as a separate issue, we've swapped them and so there's just straight up swap breakage costs that are rolling off very quickly over the next 12 months.

Or we can leave those swaps.

Or we can leave them in place and use them in the next one.

Okay. But they are open for prepayment (multiple speakers)

They've been opened since the first year or so that we did them. They usually only have prepayment penalties during the first 12 to 24 months.

Thank you.

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

Just a quick follow-up on the guidance. I think I heard you maintained G&A at $25 million to $26 million. The first half run rate is something under 12, under 24 on a run rate basis. So is there -- can you help us understand what the back half looks like, is there something seasonal or are you expecting a higher run rate on, say, the expansion of your platform in Hawaii and maybe something related to the fund or -- ?

No, it isn't that. We're just not prepared at this point to say that in our original guidance, original budget for the year that the savings that we see in the first half of the year will hold up throughout the year but (multiple speakers)

That's pretty close. You're talking about $1 million difference on $25 million.

Yes. I think we're actually I would consider us to be pretty much in line with it.

Right.

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

I had one other one. Just given Bishop came into the portfolio and it's almost 7% of square footage, what was the occupancy and leased rate just to know whether it affected your sequential stats or (multiple speakers)

You know what? If it was -- it so didn't affect the stats that when I saw the numbers that first came out I thought it was a mistake and we didn't include it. You have to go out two decimal points for it to show up in the overall number. But the number for Bishop when we bought was --

91%.

90.5% on the day we bought the lease.

Okay. Thanks. Bye.

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

Hey, guys, just a question on Brentwood. It looked like the occupancy, or excuse me, the percent leased there went down a fair bit. I'm just wondering if you can give any color there and then while we're on the topic maybe just a little bit of commentary on the specific submarkets within West LA to the extent you think there are interesting comments to be made about some of the different areas and what you're seeing.

(multiple speakers) utilizing the tour bus going around in Beverly Hills that you see a lot of these days they give some interesting commentary.

On Brentwood, it's really a timing issue involving something that we've discussed for at least one quarter, maybe for two quarters, which was in the Brentwood submarket we renewed a Time Inc. -- the Time Magazine's office space that down-sized from three floors to two floors and in our numbers, in our lease numbers, it was effective in this quarter. So that was 18,000 feet. There was another tenant in that market that in the same quarter went out of occupancy from a default of about 9,000 feet, so those things hit in this quarter and that almost entirely accounts for that decline.

I wouldn't -- I don't know that there's anything else I would say that's interesting color although I would say the Sherman Oaks/Encino market has been performing very well. Occupancy and lease percentage has been up there. We had a fair amount of roll, as you know, in these quarters, so that's holding up extremely well and as we've been saying, it's good to be able to validate the comment that we've made many times, which is that we see that submarket performing very similarly to the rest of our west side markets and should not be viewed as performing in the same way that the west valley market does (multiple speakers)

The Woodland Hills market, that market they're very closely tied between that Ventura, Sherman Oaks/Encino and what we're doing in Santa Monica, Westwood, Brentwood, et cetera.

Right. Thanks for that. And then just to clarify, Jordan, when you talk about the 10% of debt, just to clarify, you're talking literally about 10% of your total debt amount, not 10% on a leverage ratio or something.

I'm thinking of around $300 million.

Thank you.

Well, I think that's the end.

There is no questions at this time.

Okay. Thank you everybody. It was a pleasure speaking with you this quarter and we look forward to talking to you again next quarter.

This concludes today's conference call. You may now disconnect.