Douglas Emmett Inc (DEI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call to discuss its 2010 fourth quarter and full-year results. Today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's prepared remarks. At that time, instructions will be provided to queue up for questions. I would now like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you. With us today are Jordan Kaplan, President and Chief Executive Officer and Bill Kamer, Chief Financial Officer. Also joining us is Ted Guth, our new Executive Vice President. 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 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. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of these risks, please refer to the Company's press release and the current SEC filings which can be accessed in the Investor Relations section of the Douglas Emmett website.

Please note that the market data sources that may be referenced in management's remarks are, CB Richard Ellis for the Honolulu and Los Angeles office markets, REIT for the Los Angeles office market, MPF Research for the Los Angeles multi-family market and portfolio and property research for the Honolulu multi-family market. Once we've reached the question and answer portion, we request that 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. I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thanks, Mary, and good morning, everyone. Welcome to our 2010 fourth quarter and full-year earnings call. To start things off, I would like to introduce Ted Guth, who joined us in January as our Executive Vice President. Ted has an exceptional background, both as a lawyer and a manager. He has expertise in the public markets, capital formation and accounting. Although Ted is new to our senior management team, he has been a key advisor to our Company for many years beginning prior to our IPO, when we were introduced to him by Bill Kamer. Ted has assumed a key role managing our institutional funds, as well as other aspects of our capital markets and accounting functions. Over time, I expect that his involvement will extend into most areas of our business.

As we move into 2011, we are beginning to see the economic recovery take hold in our markets. The recovery is being led by our multi-family business where we expect that our NOI will be slightly higher in 2011 than in 2010. We are also feeling optimistic about our office markets. Space reductions have been abating and the fundamentals for strong new demand seem to be continuing. Although our leased percentage declined during the quarter, our negative absorption was only 17,000 square feet, or 12 basis points. While we expect to see fluctuations from quarter to quarter, we based our full-year 2011 guidance on the assumption that occupancy will be flat for the year. However, we are hopeful that 2011 will actually see a return to meaningful positive absorption.

As I have said on many occasions, we believe in the long-term strength of our submarkets, based in large part on the vibrancy of our local industries. Many of the key industries in our market, such as healthcare, medical research, education, international trade, entertainment, and technology are well suited to compete long term in the global economy. Of note, health services and technology were the largest industry sectors represented in our fourth quarter leasing volume. Together with entertainment, they accounted for close to 40% of our leasing activity. Our financing program which we began last year, is one of our highest priorities in 2011. Bill will provide a detailed update on our progress in his remarks. That being said, we are very pleased with the financing proposals we have been receiving and we are working diligently to complete the process.

As we discussed at our investor day, we are laddering our loan maturities so that they range between 5 and 10 years by accessing life companies, domestic and foreign banks and the residential agency market. This approach is time consuming to organize and execute. Nevertheless, we remain optimistic that we will substantially complete the process by the end of second quarter. When we originally announced our refinancing program, we established a goal of obtaining loans at interest rates under 5%. Since then, treasury and swap rates first declined, but have recently backed up. Conversely, spreads have been tightening. Taking all of this into account, we continue to believe that we will achieve this goal unless lending conditions change significantly.

I would like to conclude with a brief update on the acquisition climate. In 2010, we acquired two office projects, aggregating 1.3 million square feet of office space at attractive pricing. These acquisitions significantly increased our market share within our Honolulu and Brentwood submarkets. There have about a few other trades in our markets that indicate valuations are continuing to firm up and seller confidence is returning. We are working on several acquisition opportunities within our core market and still feel good about our acquisition prospects. With that, I will turn the call over to Bill.

Thanks, Jordan. For the fourth quarter of 2010, we are reporting FFO of $43.6 million, or $0.28 per diluted share. For the entire year, FFO was $194.4 million, or $1.24 per diluted share. AFFO for the fourth quarter was $29 million, or $0.19 per diluted share. AFFO for the full year was $143.8 million, or $0.92 per diluted share. As we have previously advised, our fourth quarter FFO and AFFO results were impacted by a one-time cash and non-cash expense of $13.9 million, or $0.09 per diluted share, for the termination of interest rate swap contracts relating to the $388 million loan that we repaid on November 1. The $13.9 million fourth quarter swap termination expense is comprised of $3.5 million of interest expense recorded in our GAAP earnings and an additional $10.4 million charges that also reduced FFO. In the absence of the swap termination costs, our fourth quarter FFO would have been $0.37 per diluted share.

Same property net operating income in the fourth quarter of 2010 decreased 2.6% on a GAAP basis, and 1.2% on a cash basis when compared to the fourth quarter 2009. Same property total revenues in the fourth quarter of 2010 decreased 1.6% on a GAAP basis, and 0.5% on a cash basis when compared to the fourth quarter of 2009.

G&A in the fourth quarter of 2010 was $9.4 million, up $2.3 million from the third quarter resulting from the costs relating to our multi-year equity grants that were announced during the fourth quarter. Going forward, we anticipate a run rate of approximately $7.1 million per quarter, or $28.5 million for 2011.

Tenant improvements, leasing commission and other capitalized leasing costs on a blended basis for the fourth quarter averaged $22.76 per square foot compared to $19.68 per square foot in the third quarter of 2010. The fourth quarter increase resulted from several large longer-term leases. Annualized leasing costs in the fourth quarter were $3.83 compared to $3.63 in the third quarter. We have now had almost two full years of strong office leasing activity. We signed 169 new and renewal leases totaling 781,000 square feet of office space in the fourth quarter compared to 190 new and renewal leases totaling 681,000 square feet in the prior quarter. Our leasing volume during the most recent quarter included signing 63 new office leases, totaling 260,000 square feet compared to 70 new leases, totaling 204,000 square feet in the third quarter.

In the fourth quarter, the leased percentage of our entire office portfolio declined by 30 basis points to 88.6%, while the occupancy percentage declined by 50 basis points to 86.9%. Excluding the Wilshire Bundy project that our funds acquired during the fourth quarter, the leased percentage declined by 12 basis points during the fourth quarter to 88.7%, and occupancy declined by 34 basis points to 87%. As in recent quarters, our office leasing activity was offset by tenant space reductions, predominantly from our larger tenants.

Excluding the properties that we acquired during the year, occupancy during 2010 dropped by 200 basis points, in line with our guidance. The percent leased at December 2010 in our multi-family portfolio was 99.2%, compared to 99.3% at September 30, 2010. During the fourth quarter, our mark-to-market and rent roll metrics for the office portfolio were as follows. On a mark-to-market basis, our in place cash rents were 11.4% higher than our asking starting rents. On a straight line basis, our average rent from expiring leases was 4.4% higher than the average rent from new and renewal leases signed for the same space. On a cash basis, our ending cash ramp from expiring leases was 12.9% higher than beginning cash ramp from new and renewal leases signed for the same space.

Now, turning to our financing activities. On September 30, we closed the $400 million loan we swapped to an effective fixed rate of 4.45% for approximately five years, and that matures in October, 2017. On October 22, in connection with our fund acquisition of the Wilshire Bundy property, the fund assumed a $56.4 million amortizing loan with a fixed rate of 5.67% that matures in April of 2016. On November 1, we closed loans with Fannie Mae, totaling $388 million that we swapped to an effective fixed rate of 3.65% for seven years that matures in November, 2020. On January 27, we extended the $18 million loan relating to our Honolulu Club property that was scheduled to mature on March 1. The loan was paid down to $16.1 million at a floating rate of LIBOR plus 185, and now matures on March 1, 2014. Later this month, we are scheduled to close on a $350 million loan with a fixed interest rate of 4.46% for the first seven years that would mature in February, 2020. We are actively working on several other loan proposals, and we believe that we will refinance our remaining 2012 loan maturities over the first and second quarters of this year.

Finally, turning to guidance, we are providing a full-year 2011 FFO guidance range of $1.23 to $1.31 per diluted share. This guidance assumes that we will complete the refinancing of our remaining 2012 debt maturities in the timeframe that we have discussed and that we do not terminate any of our interest rate swap contracts this year. However, I should note that we may elect to terminate our $322.5 million swap that expires on August 1, 2012. Except as noted, our guidance excludes any impact from future acquisitions, dispositions, equity issuances or repurchases, debt financings or repayments, recapitalization or similar matters.

Our guidance range is based on the following key estimates and assumptions for 2011. As Jordan said, we decided to base our guidance on the assumption that office occupancy at the end of 2011 will be the same as that at the end of 2010. The weighted average diluted share count for 2011 is estimated to be 158.2 million shares. Total FAS 141 income is estimated to range between $20 million and $21 million. Straight line income is estimated to range between $7 million and $8 million.

G&A is anticipated to range between $28 million and $29 million. Total interest expense affecting FFO is assumed to range between $151 million and $162 million. Recurring capital expenditures for our office portfolio are expected to be approximately $0.25 per square foot, and recurring multi-family capital expenditures are expected to range between $425 and $475 per unit. Based on the foregoing estimates and assumptions, our 2011 guidance range is consistent with 2011 same property cash NOI, decreasing between 3.1% and 4.5% when compared to 2010. 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 Mitch Germain.

Hello, Bill. Can you talk about the accounting impact of swap termination? $3.5 million is a one-time event, or does it have a carry-forward?

Okay, I guess there has been some confusion about this. In -- we, as we gave advanced guidance last quarter, the hit to us on FFO and AFFO from our swap termination is a full $13.9 million. It is not offset, or we have no benefit from any other amount. The issue is that the amount of the $13.9 million, as I said in my remarks, is split between an amount of $3.5 million that pursuant to GAAP is recorded in our interest expense, and the remaining $10.4 million is an adjustment to our FFO numbers. So, it is the full $13.9 million hit. Going forward, that $13.9 million is amortized over nine months. Nine months starting in November of last year. So, it will go -- you will continue to see that adjustment. But it is a zero effect on FFO going forward. It is an addition in the interest expense line item, and then it will be an adjustment on the FFO adjustment since we've taken the full hit in the fourth quarter.

And your next question comes from the line of Jamie Feldman with Bank of America.

Thank you. Still focusing on the guidance, can you just walk us through the sensitivity to your refinancing on the guidance? What kind of swing could we see here around the range based on your execution of the re-fis?

Well, the biggest swing in sensitivity is on the timing of the refinancing. And I think the timing we've given is a realistic timeframe over the first and second quarters. It is true that if the -- if we were delayed in that timetable to later in the year, the results for the year would be better than the current (inaudible) we would have a longer time period at the current low floating interest rate. That would be where the biggest swing is. It is not terribly sensitive to changes, certainly in the floating rate assumptions. And we're looking at, in our guidance range, probably a swing of about 50 basis points or so in terms of the all-in rate that is within our upper and lower bounds in our guidance.

And your next question comes from the line of Michael Bilerman from Citi.

It is Josh Attie with Michael. Can you talk more about your assumption for flat occupancy in 2011? Is this where you think the markets will be that you're in? Or just your portfolio? And can you talk about the assumptions for retention and new and renewal leasing?

Well, we're -- as I said, we used an assumption that things were flat during the year in terms of absorption because we've just been through a very tough period. It is clear that things are turning. You can tell that a minimum, that you've bottomed out, and I'm feeling pretty optimistic about the year. But we've just been through a rough ride, and we didn't want to over promise. With that said, we're seeing some pretty good signs in terms of tenant attitude and even broker attitude. And you just heard a pretty good set of stats for last quarter. So, I hope that we've set something out that is reasonable but that we can beat.

Well, and I think also, clearly, if we're talking about flat number, it is not -- the assumptions are not drastically different than the assumptions that went into -- that have gone into prior quarters in terms of leasing -- we're assuming obviously leasing volume remaining strong at the levels that we've seen and a continuation in the trend of dropping off of outflow from contractions. As we mentioned during the remarks, that number had decreased to 12 basis points, 17,000 feet of net falloff. So, it is not much of a change in assumptions, really, to stick with guidance for the year of it being flat. And that's why we've sort of indicated that's in our guidance, but we're hopeful we're going to do better than that.

Okay. Thank you.

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

Good afternoon. Given the sort of rebound in property values that we've experienced over the past two years, what would you say your current Prop 13 adjustment would be?

Our current -- you mean our --

Well, what your Prop 13 adjustment would be today?

If we were to resell all of the buildings today at today's values --

Yes.

-- asking, as opposed to where it's at right now?

Yes, that way -- yes. We use it in our NAV analysis, and that way it helps with understanding when we hear cap rates being discussed, the difference.

I'm not sure. With the way various things were assessed and reassessed at the time we went public, I'm not sure what is above, below, where it all would be. I can't tell you that there would be a humongous difference. I'm not aware that there is a huge spread.

Okay, from where it was at the time of the IPO?

(inaudible) Or where it is now, yes.

Okay, okay. Thank you.

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

Thank you. Bill, it is always a little bit confusing. Can you crystallize what sort of top line revenue hit you expect as your FAS141 burns off on a quarter by quarter basis? Let's say your top line revenue on the office is about $100 million. Do you expect that to -- $100 million a quarter, $400 million a year. How do you expect that to drop off?

Well --

We gave the range, $20 million to $21 million.

Yes, the dropoff in FAS for the year, from 11 to over 10 is about a dropoff of about $8 million. The dropoff on FAS accounts were about $0.05 a share of FFO, if that's what your question is.

Okay, perfect. Thank you.

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

Thanks. Good morning out there. Jordan, just to follow-up on your comments in the prepared remarks, I think you said you could see meaningful positive absorption in 2011, and I know you've got flat occupancy assumptions for guidance, but can you just put a little bit of color around what the potential impact occupancy growth could be in your portfolio as you look out, both in 2011 and then beyond? And then where you need to get to from a portfolio basis to start moving, asking rents north?

Sure. Well, first of all, it is very hard to go quarter to quarter and figure out what the impact of what we see happening is going to be. But to take a longer view, to take a, let's say a two or three year view of how we see the thing transitioning, I'm feeling very good. We went through the recession, we held our own extremely well. Our peak was 95. Now we're 88, 89. If you look at actually the same properties that we went into it with. So, maybe we lost 500 or 600 basis points.

We are still up at a point where you could feel pretty comfortable that 100 or 200 basis points of absorption will start moving rent. So, it feels like if things are turning over the next four to eight quarters, we ought to be able to see some real rent movement, and the faster we can get that positive absorption, the faster that will happen. The reality is, this was a recession that was sort of finance industry in, and then everyone put all of their dollars, particularly the government, TARP and everything, into pulling the finance industry out. Alright, so a lot of our industries, which are -- have been great industries throughout weren't huge beneficiaries of sort of all the dollars spent for the economic recovery. But they are recovering, and there are new businesses forming all the time. And you see it in the statistics we're giving you.

If we were giving you statistics that we were signing 100 leases or 90 leases a quarter, you should be nervous. But we're doing these humongous number of deals, huge amount of new deals in there, every quarter. That makes us feel real good, and especially since you are already seeing a falloff in defaults and a falloff in the larger tenant reductions, and you saw that in the numbers. That's why I pointed out in my portion of the script the 17,000 feet. This is set only at 17,000 feet on swings of 17,000 feet roughly going in both directions. So, the feeling, the broker attitude, the tenant attitude is feeling pretty good. And in a real sense, I got to say, 100, even 100 basis points, maybe 200, and it will feel much more back like a landlord's market, which allows to you push rents. So we're -- I feel better now today than I have felt for a couple of years. And I like what we see happening with the industries, and I like our view of the next eight to 10 quarters.

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

Thanks, everybody. So when you look at the refinancing market for you, this is Bill, I suppose, when you consider the ups and downs of rates and then also the tightening of spreads, when you look back today versus say three or six months ago, would you say the market is -- it's a wash in terms of what it would cost you, or is it even -- is it possibly even better today considering all of the moving parts?

Let me say this. When we set this out originally and we sort of said where we thought we would wind up, and we're talking about interest rates that are stable fixed interest rates over a long period of time, not a spot in a moment in time, we always understood that in going through that process, that interest rates are very volatile. And you don't make -- you certainly don't make long-term planning decisions on spikes up or down in interest rates. So I will say this. Obviously, in that time, there have been -- you as well as I can know the movement that has occurred in treasury rates during that time period. There obviously have been times where it was better and times where it was worse. But I will say this. Overall, I think this is completely consistent with where we thought we would wind up at the beginning of the process.

Okay. And then turning to occupancy, and I could probably do this exercise myself, but have you guys done -- like if you were to get 100 basis point upside in occupancy for 2011 versus 2010, what the per share potential impact that would be on your numbers and on your guidance?

Yes, we've said before, actually, with that in the numbers been pretty consistent quarter to quarter, that 100 points in occupancy, now that is an average over an entire year. 100 point -- not a point in time. About 100 points movement in occupancy is worth about $0.03 of FFO.

Okay. Thank you.

And your next question comes from the line of Dave Aubuchon from Baird.

Jordan, you can comment about general valuations you're seeing on the investment opportunities that you're looking at? And then perhaps what your desire is for value add or lease-up deals to the extent that they exist in the market, just given your relatively more bullish comments than in the past?

Sure. The -- in terms of valuations, where we've -- where in general, where I've seen valuations move the strongest has been on properties that are relatively secure, that have large leases, that have credit tenants. But we've seen really strong valuations in that area. We bought a lot of the deals that have lease-up risk because we're more comfortable with that. So, we've been the winning bids on those. I think as the deals come up over the next six or 12 months, you're going to have a mix of some more secure ones, but also I think there may be a good number that have some real leasing risk and some rehab that is needed. I still feel like those with the rehab and leasing risk, we will be the winning bid because I think we're most qualified to sort of deal with those risks, quantify them, and we've been willing to take on that risk more readily than others that have come in the market. We've lost a bid on others that come into the market when it has been against -- up for a building with -- that's fully leased with good credit, because they're willing to go to a lower cap rate or a lower return for that comfort or that security in the deal.

And since the turning of the year, turn in the calendar year, have you seen the investment opportunities increase or spike up?

There have been an increase in deals. At the end there, a couple of them were fully leased like I was talking about, right? The one in Playa Vista, the one over -- the one with Cedars. So that -- those weren't our kind of deals. But yes -- look, what is really happening, which we've talked about, this a quarter ago or so, and I said that I was optimistic, that we were -- that the flow would improve, is that as more trades happen, sellers become more confident and they feel like they could get a good feel for where their thing will trade at, and there will be a real bid. And so then they start bringing their product to market.

And also, everybody knows there has been a real return in values, at least as driven by the capital markets so far. And so whatever they wrote it down to, they now have an opportunity to take a real gain, coming off of the last couple of years. So, I feel like that's going to cause some trades. And some of those trades will be people that have just real deal fatigue in terms of buildings that they've been fighting the lease-up on, and fighting value and dealing with the fact that they have a re-fi that is probably going to be tough to do. And so I think we will make some deals.

And last follow-up real quick, do you feel like the Playa Vista trade is a good comp for your portfolio?

Well, I guess it's -- every time a comp happens, I have a real mixed feeling. A comp like that makes me say, good, that shows the value of our properties. And that also makes me think oh, God the next thing I'll buy is going to be a bear because they are going to point me at that comp. I would rather have the costs stay low for a while and buy more. I'm confident about the value of our portfolio, so I don't need those comps to make me feel even better. But it is one more disturbing comp that is going to make my job harder to buy good properties at reasonable prices.

Thanks, Jordan.

Your next question comes from the line of Rob Stevenson with Macquarie.

Can you provide some color on a few of your major markets in terms of what is going on on the ground today? Brentwood, Sherman Oaks, Warner Center maybe. And then, which out of all of your markets do you think has the greatest relative operational improvement in 2011 over the fourth quarter of 2010?

Sure. The -- as you saw, in the fourth quarter, our West Valley Warner Center, Woodland Hills market, which has been the sub-market of ours that has had the biggest occupancy of decline was actually stable in the fourth quarter. And on the relatively basis, we think that market's improvement has been and is likely to continue to be stronger than the other markets, but that's also in large part because it declined further than the other markets did. But we're definitely seeing that.

The -- our Brentwood sub-market, just explained that, it looks on the surface, in our information that we released that there was a significant drop in occupancy there. It is not really the case. It really is the inclusion of the Wilshire Bundy project that we acquired with significant vacancy. That market has continued to be very stable. We're very pleased with the outlook going forward in Santa Monica and in Century City. And really all of our west side marks in terms of recovery -- markets in terms of recovery and really, all of our west side markets in terms of recovery for some of the reasons that Jordan alluded in the call, which is that we are seeing, particularly in the west side markets, some real growth and change in terms of tenant demand coming from expansions in the growth industries that we mentioned on the call. It's not a normal situation for us historically to have so much of our leasing volume coming from health services and tech. Entertainment is a significant component, but health services and tech were the largest growth.

We're seeing a lot of that activity going on, both expansion and new tenant formation, and a lot of that is on the west side. So, just to recap, Warner Center because it fell the most and it is heading up already is the one that we're most excited about in terms of the prospects for improvement. But the other markets look like they're stabilizing and have some pretty interesting tenant demand going on.

Okay. Thanks, guys.

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

A quick question on rent rolldowns. It looked like the rent signed in 2010 had a cash starting figure of $32. And just looking at the rent rolldown, it looks like it is $36 ending rents in 2011 and 37 in 2012. A couple of questions, one are those lease rents in 2010 of $32 a foot, is that reflective of your overall portfolio rents? And two, should we expect rolldowns of 10% plus here in 2011?

Yes, this is a question we get asked from time to time. There is no question that as you look forward to our leases that are expiring in 2011, 2012, since we mainly do five year leases, those are leases signed originally in '06 and '07. And so you're getting to the market peak and ones where we had the highest fixed annual bumps in our leases.

So we -- there is no question that target in terms of rolldown is moving up on leases that are expiring. And if you assume rents at a flat level for a while, then that rolldown level is going to increase. The real question though that we ask ourselves, and I think one should ask, is how meaningful is that statistic for anything we all care about? And that is really, it is such a small factor compared to the changes in occupancy that we talked about. And the reality is if we're able to see the kind of positive absorption over the next couple of years that we're hopeful of, that should swamp everything else in terms of the impact on our bottom line.

And it raises rents, and so you don't have the rolldown. It is the important number. That's the number.

Okay. I guess just one follow-up. It looks like the expense ratios were up near the back half of 2010. Should we expect that sort of low 40% ratio to continue into 2011?

Okay, I'm not sure of that metric, but I think our expenses are, by and large, on an apples-to-apples basis, on a same property basis, fairly flat going into 2011 from 2010. There is an increase in the growth number because of the inclusion of a full year of Bishop Square in our numbers in 2011. But overall, the expense side is pretty flat. So, I think the real issue -- the whole thing -- we can talk about every other thing we want to talk about, but it is like occupancy and absorption going forward is the key thing, and particularly the key thing in terms of those kind of ratios.

Great. Thank you.

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

Bill, just to follow up on that a little bit, can we just talk a little bit about the components of the same store decline? You're talking about in the context of, I think you said 3% to 4.5% is the expected cash NOI decline next year.

Right.

And I guess maybe the average occupancy decline is pretty great, and it is sort of offsetting the fact that maybe the rent bumps -- are the rent bumps maybe not coming in as high as they have been in the past because you have more leases that were signed in the last couple of years with maybe lower bumps? Is that part of why that number seems more negative than we might have thought?

Okay. I know I'm sounding like a broken record here with making this all seem like it is one question and one answer, and then we're done. But the occupancy for the year, the guidance assumption of ending next year at the same level we ended this year, on the average occupancy for the year, for 2011, based on that assumption, is lower than in 2010. That accounts for about half of change that is in our guidance on same property.

And then the rest is -- you remember talking about cash, so the rest is a mix of -- the bumps are helpful in that process, but they're offset by some modest increase in expenses, miscellaneous other types of revenue that are dropping and some impact from the rolldown that we talked about that comes from a variety of sources. But the dominant part of the component is the average occupancy being lower based on the assumption that we end the year of 2011 flat.

Okay, and then this is for Jordan and Bill. I haven't heard the $300 million of equity that's been contemplated in the past couple of calls talked about. Is that something that we should continue to factor, or is that kind of at the back of your mind now?

Well, to the same place that it was, and it has been for a while, which is that we have said in terms of raising equity and doing paydowns or using it to buy buildings, we're going to match that up with a very clear opportunity. And one of those opportunities may be created as we go through this financing process, if there are some paydowns we can do and some minor ones that we can do that use some cash. And we might decide a good way to generate that cash is through equity issuance, and -- because we want to stay levered at a point where we're getting best pricing in terms of the cost of debt. And so that can -- could mean that we have some paydowns in the loans that we're doing.

Another reason why we'd issue that equity is because we have a large acquisition. You know we are sitting on a lot of cash right now, but we have a large acquisition that we need additional cash for, and we don't want to stress our balance sheet. So, it is still there. It is in our minds. It is in the front and the back. But I need to match it with something.

Got it. Thanks.

And your next question comes from the line of Steve Boyd with Cowen and Company.

Thanks. I'm curious about the same store NOI guidance. What would that be on a GAAP basis, do you think, for 2011?

I really don't have that. One of the -- it gets caught up. I think you can see it. We gave out our guidance for the GAAP components of FAS and straight line, so you can get a good idea from that, but I don't have that information right now.

Okay. And in terms of the interest expense, I think you said 151 to 162. That portion would be cash and what would be amortization?

Well, there is not a lot left of pure -- the amortization is from the old swaps that we have in place, of which there are now only 600 and -- $645 million of swaps, half of which expired August of this year, so that will be gone for the last five months of the year. And the other is the $322.5 million swap that expires in August of 2012 that I mentioned before. So, that number has dropped off quite a bit. It is -- out of the whole thing, maybe it is about $5 million or so for the year.

Okay. And I don't know if you have this, but if you were to terminate the August 2012 swap early, do you have a sense of what the charge might be?

I hesitate to talk about it, because there is a lot of variables in that number. The main one of which is when during the year, if we were to do it, and as I said, we have not made a decision --

And what are interest rates when we do.

And what are interest rates. So, it is a pretty -- it is probably a pretty big swing. I think the best thing to say is this. We will update this as we go through the year. And so I think in terms of an understanding of this coming about, I don't think it is going to catch anybody by surprise.

Okay, thanks, guys.

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

I guess most of my questions have been answered, but I just wanted to kind of welcome Ted to the organization here. It looks like Ted can wear a different number of roles. I was just wondering if you could describe what your vision is in terms of your role in the company for the next couple of years?

Well, as Jordan said, I think I started off by taking some -- a role with the funds and with some of the accounting things and also some of the special projects that we have going on here. And I think that this is also a fairly collegial style of management, so that has involved me in a lot of the other processes, and I think we're still feeling out exactly how that will expand over time.

Let me say that, and I know I kind of said it in the script, but when we first were even thinking, we hadn't even decided if we should go public or not and Bill and I were making these pilgrimages to New York and trotting around to see everybody, Bill, who had worked at (inaudible), and Ted has been in the securities industry for a long time, said we should get this guy. This guy is the best at it, and have him come in as an advisor for us.

So, I brought him in, Bill wanted to bring him and I started getting to know him. Through the entire process, he was like our best advisor. And I did everything -- every question I answered, I asked him what he thought, it was great. So once we went public, he kind of stayed on and became an outside/inside member of the team. He sat through all of our board meetings. All of the critical decisions that we've made for the Company in terms of our capital markets and financing decisions and equity decisions and all of those decisions, he has been in all along.

And when the opportunity presented itself, that he was moving and we could bring him in house and then not be spending $1,000 an hour to talk to him for a second and all that and have him actually working here, that was just a great opportunity for all of us. To have him here, to spread some of the most senior work around, between -- because it is, right now, the most senior is between Bill and Ken and me Nan, and now we have Ted who I believe when -- which is why I said will work his way into all of the areas of the Company. And he has already been involved in all of our major decisions for the past, I want to say six years. So, I'm real excited about his being here.

Great. Thanks for the color. A couple of quick bookkeeping questions, if I may. Bill, obviously no acquisitions and no acquisition related costs on the guidance there, right?

That's correct.

And how should we again, in terms of the ATM, you are assuming 158.2 million shares here, so pretty minimal ATM usage for the rest of 2011?

We're -- we have had no ATM usage, and our guidance assumes no ATM usage.

Alright. Thanks.

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

I just want to follow up on the refinancing. Thanks for the color on the deal you're planning on doing later this month. Can you give us a sense of the other types of debt you said you may access in terms of LIFO money or Fannie/Freddie, how that might factor in the mix? And also on the quality of the properties and the quality of the credit in this prospective deal versus what you expect to refinance later this year?

Well, like every good property owner, we only own A-plus buildings. So, the quality of the properties are top quality, and the ones we are refinancing are top quality. Seriously, I don't think there is any difference in the quality of properties we financed and the qualities of the properties that we're planning to finance. They are all -- it's is a very homogenous portfolio. In terms of who we're doing the deals with, as Bill told you, we've got some -- we've done a Fannie deal. We've done a bank deal. We're moments from closing a life company deal. We're working on literally a life company deal, a bank deal and another bank deal. So, I think you should expect that that's where we're going to be getting our debt.

I guess part of the question is linked to, I think you said LIFO money is typically a 10-year fixed. I think you said your -- the deal you plan to close later this month is a floater that is swapped out for seven years. So, I guess part of it is duration.

Yes, it is actually a nine year deal, and --

Yes, it's a nine year term, and we have locked in a fixed rate for the first seven of those nine years. And we said -- we really described the direction that we're going in at our investor day when we talked about a variety -- accessing these various markets, really because the sources of capital are so attractive in the several markets now, so we want to take advantage of that. So, it is a mix in terms of duration, term duration, loan duration. Between five and 10 year terms. You can see when I was laying out the deals we've done, they are already, the ones we've been doing, are already staggering varying loan maturity dates.

In terms of cost of money and fixing money, we said back at our investor day that we felt that the back end of the curve, the eight, nine year part of the curve, was really expensive additional money to pay for loans that likely would be refinanced sooner than that. So, you're really seriously overpaying. So, we said at that time that you would likely see us in terms of the duration of fixing rates, whether through swaps or fixed rate, that we would be likely to stagger those in the five to seven year range. And that's what we're doing, that's what you expect to see us doing going forward.

Thank you.

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

Thanks. Just a quick follow-up. Can you talk about your lease expirations for 2011 and what you're assuming for renewal rate and any known move-outs?

Well, as you might have seen on our schedule in our supplemental, the lease expirations for all of 2011 are somewhat lower -- on the lower -- we typically, as you know, it ranges between 11% to 14% per year, because we have a pretty consistent role with our small tenant focus. This year, in 2011 it is on the lower end of that focus.

In terms of retention assumptions, as you know, historically since we've been public and keeping very accurate data on this, we have run retention rate in the upper 60s. I think it has been 68% over the entire length through the up and down cycles going forward. We find that that number doesn't move around an enormous amount, even in the best of markets and the worst of markets. So -- but somewhere in that range. It is a horrible stat to look at in short time periods, because it is extremely volatile and not very useful in terms of predicting exactly where things are. But if you look at it over the long haul, that is pretty much where it has been.

As you think about this 13.4% of annualized rent, what percentage of that do you think is in the bag? What percentage is probably going to move out? And what percentage is kind of in negotiation?

I don't really have. That I don't really have that. I don't have it diced quite up that way.

Okay, alright. Thank you.

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

Bill, just on the guidance, the 123 to the 131 obviously is going to be pretty volatile during the year based on the timing of the refinancing. So, as you look forward to the fourth quarter, what is that run rate as we head into 2012? Assuming all of the other assumptions get done, where does that FFO on a quarterly basis end up?

You know what? I really don't --

You want him to predict our 2012 FFO for you?

Well, first I got to predict -- and before we do that bridge, I've got to do the beginning of the bridge with where we are actually going to be in Q4. And I don't -- the movement quarter to quarter on this is enough -- it is hard enough to give a good range for the year, let alone know where we are going to be in the fourth quarter and then on top of that, know whether that is a good bridge to 2012.

Well, I'm just saying that your 123 to 131 is $0.31 to $0.33 a quarter. You're heading out of this quarter, $0.37, $0.38 on a real core basis, right? So, you're starting the year a lot higher, which means 4Q is going to be a lot lower unless the guidance is really conservative. So, I'm just trying to put the pieces together to understand really the trend, the movement of FFO during the year.

Well, I mean in terms of -- I don't know if this is responsive or not, but the -- obviously, the first -- I think the major swing in that range -- let me say this. In our guidance range, the operational -- all of the various operational issues in that range are half or less than half of the range, and the rest of the range is within the range of financing, as I mentioned on an earlier question, primarily driven by the precise timing of refinancings. So when --

All of that, any version of that range has some assumptions for some floating rate portion, and we hope that we are moving in the next year with no floating rate portion. And so he is trying to get a handle on where that all ends up, but we don't have that number here right now.

Right. Well, let me ask a different question then. Where does the debt stack stand at the end of the year in terms of debt rate and duration?

Well, I think we've given you for rate, we've said we think we're going to be under 5%.

But I'm saying the total, you look at your total debt stack, not just the stuff you're refinancing. When you look at your total debt at the end of the year, where does that stand up in terms of --

We haven't done that number. For this call, we would have to sit and I would have to take all of the loans and figure it out, but we don't have it right in front of us.

Okay. Thank you.

And you have a follow-up question from Alex Goldfarb with Sandler, O'Neill.

Thank you for the time. Just a quick, just to be clear, the interest guidance, the 151 to 162, that is the GAAP interest that we will see in the income statement? And then down in FFO for the first three quarters, there will be the $3.5 million amortization add-back? Is that the way to think about it, or --

It is the reverse of that. It is subtract -- what you will see is a higher number in the GAAP interest and the amortization, so the $13.9 million, divided by 9, for the monthly amount, you will see as an FFO adjustment that will reduce the -- effectively reduce the interest expense since we've already taken the hit.

Okay. So for -- so the 151 to 162 is effectively the FFO interest and then that -- in the fourth quarter, I guess going off Michael's question, in the fourth quarter, that interest run rate will then be pure interest, no more amortization, and that we can then -- whatever our assumption is for fourth quarter interest, we can use that heading into 2012? Is that correct?

If we break the swap.

Right, if we don't break the 2012 swap. If we broke it, then we would be going through that same scenario.

Okay, okay. And then just the other follow-up is, I appreciate your comments on the all-in cost from the lenders from sort of last fall to now. Can you give us a sense of if they've kept LTVs the same, or what the LTVs were then and what they're telling you now?

LTV's?

Loan to value. The loans --

(laughter) Well, I know what the acronym is. The -- I can say this. I think we're -- to get best pricing I think on each one of these building deals, they're coming in somewhere in the 60% range. Whether it be 58%, 62%, 59%, that's where they are all thinking they're doing these deals.

And is that the same as the original conversations in the fall?

Yes, yes, I think so. I don't think that they're -- if you're asking, are we all of a sudden getting substantially more proceeds because values seem to have run up even more? No, I wouldn't say we are. But I would also say before we weren't very pressed on proceeds, so if we haven't been pushing on proceeds to see if we could get more.

I will say this more generally, Alex. From six months ago until today, you can see this as we got into this year started, the amount of activity of lenders, various lenders across the different markets and their appetite and desire to put money out, particularly to borrowers that, like us, who are the kind of prime borrowers, there is no question that that market is way more competitive now than it was six months ago. And the choices and options we have are greater --

And it is probably more competitive at higher LTVs, but we're at higher proceed levels, let's say. But we haven't been pushing for higher proceed levels.

Okay. That's helpful. Thank you.

You have a follow-up question from Michael Knott with Green Street Advisor.

Maybe you're precluded from doing this, but to the extent the investment environment remains kind of slow, could you consider or would you consider selling any wholly-owned assets into the fund?

Would we consider selling -- yes, oh, I see. It would be almost impossible for us to do what would be effectively a trade with ourselves where we're the fiduciary for the fund investors and also on the REIT side to do a transaction between the two. Or let me say it would be horrifically complicated.

Okay, and then just any color you guys have on -- I think you mentioned you're working on some deals. Is that West LA and the Valley, or maybe just one of the two areas?

There's two in the Valley and a few in West L.A.

Okay.

And one in Hawaii. Two in Hawaii.

Thank you.

There is a good -- I think some other stuff is going to trade. As I said, it is really, when you -- when I was asked the question, what do I think of -- they asked about the Playa Vista comp, and they make me shiver, really. I've got good belief in our portfolio. I don't need a trade to make me realize it is valuable. What it does is it makes it hard for me to buy other stuff and people then point to it and go, that's what I want. So, I'm hopeful that some good amount of trades are going to happen before there's -- before the whole thing gets heated up again.

Thank you.

And you have a follow-up question from Rich Anderson with BMO Capital Market.

You guys keep talking, your stocks recover.

(laughter) Really? That's good.

A little bit. I just have a quick question. On the lease negotiations, at the height of it all, you were able to get 4.5%, 5% escalators. What are you getting today, and how has it changed?

Pretty much across the board in al markets, 3%.

Okay. Thanks.

Alright. Well, I think we've answered everybody's questions, and I hope particularly with regards to guidance. So, thank you all for joining us today, and we look forward to hearing from you again next quarter. And we look forward to seeing most of you at the Florida conference, Citigroup's conference. Bye.

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