Douglas Emmett Inc (DEI) 2011 Q1 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 2011 first-quarter financial 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 like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Thank you. With us today on the call are Jordan Kaplan, President and Chief Executive Officer; Bill Kamer, Chief Financial Officer; and Ted Guth, 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 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 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, MTF Research for the Los Angeles multi-family market, and Property and Portfolio Research for the Honolulu multi-family market. Once we reach the question-and-answer portion, we request that all participants limit themselves to one question and one follow-up per person. This is in consideration of the others who are waiting. I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thanks, Mary. Good morning, everybody. I will start with a brief update on acquisitions, financing, and leasing fundamentals. Ted will review our first-quarter financial results, and Bill will conclude with more detailed comments on our financing activities, and some additional color on our revised FFO guidance for the year.

Our recent acquisitions of 150 South Rodeo and Wilshire Bundy exemplify our core acquisition strategy. Both are high quality buildings, well-suited for smaller-sized tenants. Both are in superior locations. One in the heart of Beverly Hills, and the other on Wilshire Boulevard in Brentwood. We purchased one of the buildings out of bankruptcy, and the other from a mezz lender, following foreclosure. Both buildings also had greater vacancy than their sub markets.

During the past 12 months, Douglas Emmett has purchased 1.3 million square feet of office space, and we believe that we will continue to seek good acquisition opportunities throughout the remainder of this year. While acquisitions are important to the future of our Company, the completion of our financing program remains our highest current priority. As Bill will describe in detail, we closed some exceptional financings in the first quarter. We believe that we will substantially complete our $3 billion financing program over the next several months.

Our use of property-level debt is very labor-intensive, however, as in the past, the flexibility and pricing that our debt structure provides should position us favorably over the coming years. Our office portfolio benefited from another quarter of solid leasing velocity, and we are continuing to see rental rate recovery on our multi-family portfolio. The headwinds that we faced in prior quarters from tenant defaults and downsizings are abating. Our new office leases, like our overall portfolio, continue to reflect the diverse industries that support our sub markets.

In the first quarter, financial services and entertainment accounted for over 40% of newly-leased square footage, while the technology and health services sectors were particularly strong in the fourth quarter of last year. We had ten basis points of positive absorption in our office portfolio during the first quarter. Excluding the Wilshire Bundy project, which we acquired with the knowledge that there would be tenant move outs during the first quarter of 2011, we had 20 basis points of positive absorption in our first quarter.

Overall, we are seeing the psychology of our markets shift in a good, fundamental direction, and we remain cautiously optimistic about the remainder of 2011. With that, I will turn the call over to Ted.

Thanks Jordan. Funds from operations for the first quarter of 2011 totaled $64.4 million, or $0.41 per diluted share. AFFO for the first quarter was $47.8 million, or $0.30 per diluted share. Accelerated recognition of balance sheet items associated with the loans we repaid, combined with an increase in straight-lined rents caused approximately $0.025 per share of the FFO increase. However, amortization related to our terminated swaps had no impact on either FFO or AFFO, for this quarter.

GAAP interest expense was first increased by $4.4 million, as a result of that non-cash amortization, which was then, in calculating FFO, offset by an equivalent $4.4 million, leaving a net zero impact. FFO was only affected last year at the time of the swap termination, when its full impact was recorded for FFO purposes. Please note, there will be a similar add back in the next two quarters.

G&A in the first quarter of 2011 was $7.5 million, which was in line with our guidance for 2011 G&A of between $28 million and $29 million. On a blended basis, tenant improvement, leasing commissions and other capitalized costs in the first quarter, averaged $15.22 per square foot. This is more in line with our current normal costs, while last quarter's $22.76 per square foot was, as we said then, impacted by some long-term large leases. Annualized leasing costs in the first quarter were $3.63, down from $3.83 in the fourth quarter.

Same-property net operating income in the first quarter of 2011 decreased 5.1% on a GAAP basis, and 4.6% on a cash basis, when compared to the first quarter of 2010. This quarterly fluctuation does not affect our guidance for all of 2011. We still expect a decrease of 3.1% to 4.5% in our same-property cash NOI. Same-property total revenues in the first quarter of 2011 decreased 2.7% on a GAAP basis, and 2.2% on a cash basis, when compared to the first quarter of 2010.

As Jordan mentioned, we had another quarter of strong leasing volume. During the quarter, we signed 185 new and renewal leases, totaling 709,000 square feet, compared to 169 new and renewal leases, totaling 781,000 square feet in the prior quarter. The drop from fourth quarter is consistent with the higher renewal activity we typically see in the second half of the year, because of December 31 lease expirations.

During the first quarter, we signed 81 new office leases, totaling 261,000 square feet, compared to 63 new leases, totaling 260,000 square feet in the fourth quarter. Our new tenants, coupled with lower space contractions, allowed us to achieve positive net absorption of 12,486 square feet for the first quarter. The lease percentage for our total office portfolio increased by 10 basis points to 88.7%, while the occupied percentage declined by 20 basis points to 86.7%. Our multi-family portfolio was 99.6% leased at March 31, 2011, compared to 99.2% at December 31, 2010.

During the first quarter, the mark to market and rent roll metrics for our 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 6.5% higher than the average rent from new and renewal leases signed for the same space. On a cash basis, our ending cash rents from expiring leases was 13.7% higher than the beginning cash rent from new and renewal leases signed for the same space. With that, I'll turn the call over to Bill.

Thanks Ted. I'm going to provide an update on our financing activities. During the quarter, we closed three loans totaling approximately $876 million. In January, we closed a $16.1 million, three-year loan extension. It bears interest at a floating rate equal to one month LIBOR plus 185 basis points, and matures on March 3, 2014. In February, we closed a secured non-recourse $350 million, nine-year term loan, which matures on March 1, 2020. This loan bears interest at a fixed rate of 4.46%, until March 1, 2018, and a floating rate thereafter.

In March, we closed a secured, non-recourse, $510 million seven-year term loan maturing on April 2, 2018. We have effectively fixed a floating annual interest rate on this loan, through an interest rate swap contract at 4.12%, until April 1, 2016. Overall, between September of last year, and the end of the first quarter of this year, we closed five loans, totaling more than $1.66 billion, as part of our $3 billion loan program.

With the exception of the $16.1 million floating rate loan, the loans were fixed at an average interest rate of approximately 4.16%. As Jordan mentioned, completing our financing program is our highest priority. We are currently working on several potential transactions, and expect to be substantially done with this program within the next several months.

Now turning to guidance. We are increasing our full-year 2011 FFO guidance to a range between $1.27 and $1.35. The new mid-point is $1.31. The $0.04 increase in the mid-point from guidance we established last quarter is primarily due to a revised assumption on 2011 interest expense, and, to a lesser extent, our acquisition of 150 South Rodeo. We are lowering our range for total interest expense affecting FFO in 2011 to between $147 million and $155 million.

The reduction of the mid-point by $5.5 million, or about $0.035 per share, is primarily due to lower than anticipated interest rates on the loans that we recently obtained, and to longer floating rate periods under our existing loans. We have not made any significant changes to the other key estimates and assumptions in the guidance we provided last quarter. We are assuming no change to office occupancy.

Given the uncertainty of quarterly fluctuations, and the time lag between signing leases and occupancy commencement, we are still projecting that occupancy will be essentially unchanged at the end of this year, when compared to the end of last year. A minor change to the weighted average diluted share count for 2011, to 158.5 million shares, from 158.2 million shares. This increase does not include any equity issuance's. Specifically, we note that as of this date, we have not issued any stock through our ATM program.

No change to total FAS 141 income. We still estimate it will range between $20 million and $21 million. No change to straight line income, it is still estimated to range between $7 million and $8 million. No change to G&A. We continue it anticipate it to range between $28 million and $29 million. No change to our other debt assumptions. Our guidance continues to assume that we will substantially complete the refinancing of our remaining 2012 debt maturities in the next several months, and that we do not terminate any of our interest rate swap contracts this year.

No change to recurring capital expenditures for both our office and multi-family portfolios. We continue to estimate $0.25 per square foot for our office portfolio and a range of $425 to $475 per unit for our multi-family portfolio. Except for assumptions relating to the completion of our $3 billion loan program, our guidance excludes any impact from future acquisitions, dispositions, equity issuance's or repurchases, debt financings or repayments, recapitalizations, or similar matters. With that, I will now turn the call over to the operator so we may take your questions.

(Operator Instructions). Your first question is from the line of Ross Nussbaum with UBS.

Good afternoon. A question regarding Honolulu, which tends to not get a lot of focus, but I'm just curious what your thoughts are there on what's going to happen on office demand over the immediate future, following the events in Japan?

I don't know that the events in Japan are going to have a substantial impact on what's going on there. As of a few years ago, actually, which if you are thinking back to the 80s, the Japanese tourists made a tremendous impact in that market. But for the last quite a few years, they have had a much, much lesser impact. And in fact, as I think I have said on previous calls, the largest impact to tourism and where we are expecting to get a larger impact to tourism going forward, is sort of the aging of Americans and east coasters that now seem to be willing to cross the continent and head for the Pacific. They are -- the highest dollar per day spending is coming out of east coast Americans right now.

I'm sure we'll have an impact to California and Hawaii, but it may not necessarily be that perceptible. It may not be that important. So we are not expecting much, particularly on the office side. Which is for the downtown market is where we are is even less impactful. Does that answer your question?

Yes it does. Great. Thank you.

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

Josh Attie with Michael. Maybe you could talk about how did the first quarter compare to your internal expectations. I remember on the last call, you talked about occupancy rolling down in the first half, then maybe increasing in the second half, to result in flattish for the year. I know maybe it doesn't impact the FFO numbers, but how did the leasing and the absorption for the first quarter compare to what you were expecting?

Well, last quarter, I had some people say to me, you all of a sudden sounded pretty happy. For many quarters, I was accused of sounding overly optimistic. But people related to where I saw the capital markets going on the financing program that we had. Frankly to I had to say, yes, you are probably right because the fundamentals were not thrilling me. Last quarter people said, wow you sounded pretty happy about where the fundamentals are going, I said, you know what? I am starting to feel a lot better about the fundamentals.

I'll tell you. I mean, I felt great that we are now seeing some positive absorption. I have been saying to you guys for a while, we are not going to see things really turning the way that everyone's going to enjoy. The first step will be positive absorption. This quarter, we had positive absorption. I think we were a little nervous, but I was real happy that we had it. This is my biggest emotional take away from these numbers. Bill, if you want to say something about that.

I would say we were somewhat pleasantly surprised in the first quarter. Last quarter, it was a hope of positive absorption, which is definitely the first step in the process, and actually seeing it show up for the first time in 11 quarters was very encouraging. Overall in terms of the occupancy, we want to be cautious. Because quarterly numbers bounce around, and it doesn't take much of a move, one way or another, especially when you are right at the cusp of going up or down to be in an up direction or a down direction. But I would say it was a very encouraging quarter.

In order to get that volume, did you have to sacrifice rent at all to get that positive absorption?

No, rent was completely stable. As you see in the capitalized costs, capitalized costs were actually down at, or even really slightly below or long-term trend line for that. In addition, just in general, rent concessions in general, which were never too extreme in our market, are also abating. So, I think it was definitely not at the expense of the other factors. Same thing on rent bumps too. Rent bumps, pretty much across the board 3% where we have been. So this, it's, like I said, I think we are very encouraged by the quarter.

Okay, thank you very much.

Your next question is from the line of [James Mylan] with Sandler O'Neill.

Hey there, I guess I just wanted to follow up on that last question and dig in a little bit further. It looked like rent spreads were down sort of an accelerating rate where they were over the last quarter. Could you give us a little more color, you just said rent is essentially flat, but maybe talk about what's going on with the rent spreads and when we can see those start to turn back up or at least flatten out?

Yes. The big issue with rent spreads is the -- what rents you are coming off of. So what we are seeing right now, is if you go back, the average leases are about five years. So if you go back five years ago, we are now in a period of very high rent growth, with very large bumps, which sort of further increases that cash thing. So the two factors that are really going to change those numbers are going to be the time when we get those high rents start coming down, and/or, as we start to increase rents going forward. At some point, those will then cross again. I would hasten to mention that factor is not as important as one might think. That in terms of the cash rents we are getting, that factor, because it only applies to the 10% a year or so, 11%, 14% of leases that are terminating, it is actually swamped by the somewhat-smaller rent bumps on the overall remaining 90%. So again, the real message in terms of where our cash rents ongoing is really now and probably for a few years, going to follow occupancy.

To put even a point at the end of that, the particular roll down metric that you are looking at, is very much a lagging indicator, and for the reasons Ted said. It is not very predictive of where we are going, either in terms of the strength of the leasing market or the thing, I think that everybody is most focused on. When we are going to see NOI and in particular cash NOI turning and moving up, and moving up strongly. The first real indicators of that is really positive absorption. And what we'll see, it is just simple math.

And we are going to see the roll-down metric continue to lag for awhile. We are going to be coming off of higher leases, higher value leases in 2012, and with rents at the current level or frankly, even rising, we are going to see that metric continue to show a negative number. And then, what we are going to see is down the road, as we get towards the peak of the next cycle, we are going to see that metric as it did in 2006, leap ahead of the overall market and lag on that side as well. So it is an interesting metric, but not terribly predictive of where we are, where we are going.

Okay, great. Thanks for the color.

Your next question is from the line of Jamie Feldman with Banc of America.

Thank you. Can you talk a little bit more about the acquisition pipeline? What you are seeing out there, and how that's changed over the last three months?

Sure. There is, I mean, and I might even have said it better on a one call ago. But it just seems like as trades happen, more trades happen. So, as we are seeing buildings change hands, particularly when we might not be the only buyer, but we are very present and people see us buying regularly. We are getting approached more and more by people that are getting comfortable about where the value of their building is, or they feel like they can zero in on what would be a fair price.

And so, I feel like more transactions are going to happen. The pipeline, there is a little bit in Hawaii. There is not much in the way of residential, a tiny bit. And most of it is sort of office, West Side and a little in the Valley.

Then in terms of pricing, how would you say it's moved over the last quarter?

The last quarter?

Where would you say pricing is today? In both Hawaii and LA?

Well, in general, I would say pricing hasn't been rising as fast in Hawaii. I mean, obviously pricing has been rising now for, I don't know, like eight quarters or something. But I would say it hasn't been rising as fast in Hawaii as it has here. And here, it's been rising much faster for fully-leased buildings, where the person doesn't have to take any sort of leasing risk and they have certain large-credit tenants that as been for buildings with vacancy. Which is why we have been saying, trying to kind of outline that, where we expect to win the bid is buildings with vacancy and good locations, where we can have a real impact on the cash flow going forward, instead of our trying to buy some cash flow that somebody else created. The situations where you have fully leased buildings, we have been winning the bid.

Then of the more value-add type, what are the sub-markets? Are you willing to kind of buy more in the Valley now if there is more available? And grow your portfolio there? Are you trying to maintain kind of a distribution across sub-markets?

The question are we willing to buy in the Valley, the answer is yes. Are we trying to maintain a distribution across sub-markets? Maybe there is a little bit of that. I actually think, most what's coming up is on the West Side. And, if given my preference, the market that I love and believe in the longest term, is probably the West Side market. So that all lines up well for us.

Okay, and then can you talk about how those two, how fundamentals are acting in the Valley versus the West Side?

Well, yes. I mean, I think in parts of the Valley, we are seeing the recovery a little faster than we are seeing on the West Side. All our Encino, Sherman Oaks markets held up well in the recession, and actually are now, you might say they are doing the best, in terms of everything.

Actually, actually, I'm sure you noticed that the Sherman Oaks Encino market was our best performing sub-market in terms of occupancy in the quarter, that was pretty well concentrated on the Sherman Oaks part of the Sherman Oaks Encino sub-market. We have been saying for a long time that market is a small tenant market, that performs just like the West Side market. I think we are going to have to amend that statement slightly to say it is performing actually better than the other West Side.

As one of the West Side markets.

It is really great. And then in Warner Center, that is definitely firming up at this point. It obviously took the biggest drop, and it is firming up, and we are feeling good longer-term about that as a great growth opportunity. But that's as we've always said, it is a different market, it is bigger tenants, and there was supply that came on-stream right before the market dipped, unlike the rest of our sub-markets. There is just a different environment, it is going to be a longer push there. But Sherman Oaks, Encino and the West Side markets, are performing pretty much along the same grounds. But we are real particularly pleased with Sherman Oaks Encino, and both the strength of that increases, as well as the quality in industry groups that are going into Sherman Oaks and Encino as well.

That is actually my next question. What is the difference in industry groups you are seeing? Who's looking where?

Well, we talked about the last couple of quarters, how we are seeing and encouraged by the diversity. And it is not one particular industry. It is not a situation where you might see in other markets where the financial industry suffered its big decline in 2009 and had a major recovery that was sort of in large part engineered by government programs. So you see a big snap back in that industry. With us, it's been a variety of industries we normally support our industries. In last quarter, we had a big spike up in technology and health services.

This time, it was entertainment and financial services, which as we said on the call was 40% of the leasing volume across the board. We are seeing a lot of that activity, because as I just said before, a lot of the pickup has been in Sherman Oaks. We are seeing a fair amount of entertainment tenants and tech tenants in the Sherman Oaks Encino market, and then we are seeing we are generally across the board. A nice, diverse support from our industry groups that are supporting us.

Okay. Thank you.

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

Just a follow-up on that, Bill. Your leased rate has kind of continued to move higher, or the spread between the leased rate and the occupancy rate are going to continue to widen out. You guys now have 300,000 square feet of leases that signed but not yet in occupancy. As you think about the portfolio, going through the rest of the year, do you think that spread narrows? And the leases that are signed, but not yet commenced starts to go down, and your occupancy can move up?

Let me first say that is a very healthy condition, which I think --

If it narrows, we've got problems.

We are kind of were saying in different ways in our prepared remarks, which is, when you see a market recovering, that is an obvious way in which it starts to happen. Where you see the signed leasing pace moving faster than the ones that were already in the pipeline, and occupied, and as I mentioned, when I was talking about guidance, one of the reasons why we are sticking with the flat occupancy number, because we would hope to see, as we move through the year, that pace continue. And that actually, perhaps, that number even widening. Now quarter-to-quarter, it moves around, it is very hard to predict. But it is definitely the sign of a healthy market for that spread to increase, because it shows the leading edge of activity is increasing.

So your occupancy number is, call it, flat. But your leased rate number, hopefully or presumably is moving up.

We certainly have those hopes, but it is not something that we forecast or it really where we are critically able to forecast that in any tight time period. But that is certainly the hope. You mean when I say positive absorption, what I'm looking for is leased. Because as space is leased, it's off the market. Then it puts pressure on other tenants in terms of availability. That is the step that you need to take to then put pressure on rents for rents to go up. So, it is an extremely important number. The wider the better. It means, they are just leasing faster and faster, and we haven't gotten the people into the space. That is a fantastic problem to have.

Sure. Okay. And then just a question on the guidance. If I guess I'm understanding the comments right the net kind of interest expense or impact to FFO in the quarter was $27.5 million, if you look at the roughly $31.5 million, plus the $4.5 million adjustment. So, if your outlook for the year kind of mid-point is $150 million of interest expense, does that sort of suggest that we are looking at around $45 million as we get into Q4?

As we said last quarter, give us one more quarter to give you a good fix on the run rate in Q4 interest, which also then would mean the run rate for next year. We have a band around this in terms of where we think we are going to wind up. We are very pleased we have been able to lock up such a high amount $1.66 billion fixed at 4.16% over the long hall. We are very pleased with that number. It was never in our contemplation that we would do that well. And the markets and the way in which interest rates move around is, has a lot of volatility in it. So give us another several months to try to nail that down with the range, we'll be able to do better than we are doing now with the range. But right now, that is our best guess where the range is going to be.

Sorry. Just a quick follow-up. Is the shift in the guidance just on what's been done thus far? Not on the forward outlook? Or did you assume the additional financings that get done are at a lower rate than the initial five?

It was done on two things. It was done in part on the lower interest rate that we have achieved so far. And then, about the same amount of impact from the pacing of the refinancings, and the fact that where we sit today, we have had a longer period and contemplate over the next few months, having a longer period of interest at a lower, at the lower floating rate than we did three months ago. In addition, LIBOR, which was at a very low rate, and we had some room in that, in terms of movement, actually has dropped a little bit. So there is a pickup there.

So those are really the components. In terms of what I think you are getting at, which is the contemplated rate for the new financings, those have moved around. We have a range that we think, we have said we contemplate getting it under 5%. That is always been what we have achieved. You put a range on that, in a band and that is where we expect to be. We hope not to do worse than that, and we like to do better than that, going forward. Those factors move around quite a bit.

Sure. Okay. Thank you.

Next question is from the line of John Guinee with Stifel.

Jordan, we have talked about this before. You have got 1,100-plus leases under 2,500 square feet. Sort of like apartments. Do you have any office suite business embedded in your core numbers or are all these individual leases with our own front door and that sort of thing?

Yes, they are individual leases with their own front door, and suites. You are right. I think a lot of what we are doing here acts more similar to apartments than a lot of other office complexes. Look at the volume we do on the office side. We don't even count in the amount of residential leases we do. But that, for us, works extremely well. That is why we are able to keep our costs down between leases. We don't have the higher GI numbers and smaller tenants, obviously, are less rent-sensitive than these real large guys that negotiate you for, until the cows come home.

I will say again John, something we have talked about from time to time, and it is clearly true now. Is in terms of us building out, having as-build spec suites that we build out, which are great for us, because they are very efficient, they last multiple generations for tenants. It is just great product to put out. It is a lot of demand. When I said in our weekly operational meetings, one of the continuing themes is we can't -- it's a product that we try to keep up with the demand, because for these small tenants, they want to plug and play and move in. That is one of the techniques we use when we build a building. First thing we're looking at is what is the inventory of as-built suites to put out there. They do have their own front door, but they are still a product for the smaller tenants that is very much in demand.

Switching to the other end of the spectrum, are Time Warner and SunAmerica AIG both fully utilizing their space?

Time Warner, as far as I know, is more than fully utilizing their space. And I do not know on Sun.

First of all, as we have mentioned sometime before, the building, which is the bulk of the Time Warner space in Burbank, that's in our Studio Plaza building, that is very much integral to their operations. When you go on the studio tour, it begins in the lobby of that office building. That is very much a key to them. In terms of, I don't know specifically, in terms of the SunAmerica building. In terms of their space utilization. But I think it is fair to say that we sort of have no indication that they are either underutilizing that space or they don't intend to stay there for the long haul.

Last question, as I recall, someone told me recently, there is a lot of up-zoning going on in current and future mass transit locations. I recall, there is a line that is in some sort of bay coming all the way out to Santa Monica. Any up-zoning in your core markets? And does development make any economic sense in these transit locations?

Well, it may make sense and I think a lot of people would like to build, because people see the same thing we do and have the strong belief in the long-term strength of the market. But the answer is no, we have not seen any signs of up-zoning taking place. There are around transit hubs, there is the ability in certain areas to do very small amounts of building. But the short answer to your question is no, we are not seeing any up-zoning.

Okay. Thank you.

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

Hey guys, can you talk a little bit about what you are seeing in terms of big block tenants for the Warner Center, Woodland Hills area? The number of tenants that are looking out there these days? And then, can you also remind us where the bulk of your vacancy is there? Is it in Warner Center?

Well, we have vacancies scattered around in the various buildings we own in Warner Center. There is definitely a greater pulse these days to larger tenant requirements. As I have mentioned before, not in our portfolio. But we have seen, there is a building in Warner Center where we own the land under an office building that is owned by someone else. And we have seen groups like Universal Music, who are large space users, move out there, because it is the only place in our area, West Side and Valley, where you can get large blocks of space.

On the West Side, it is not even a question of pricing, there are just not in our portfolio and our market. Large blocks of space available. It is an alternative, so we're seeing that demand pick up. Our longer term plan, which has always been in that market, which we are executing on daily, is that the Warner Center market is transitioning to a smaller tenant market, and we are implementing on that strategy and we think that is where our biggest gains come from long-term.

I can think of a lot of larger tenants that people are talking about, that might go there. But I've got to tell you, more of the story there and more where we are getting our absorption from is from smaller tenants. It is not from chasing larger tenants. And I don't feel like we have, even for a large tenant, we would have to do a lot of jockeying around of space to accommodate them, if you were talking about, a multi-hundred-thousand-foot user.

Okay, and then can you just talk a little bit about the Olympic corridor, and what you are seeing in terms of market dynamics there?

Not dissimilar to what we are seeing on the other West Side markets. Good demand from diverse industries. Smaller-sized tenants.

Okay, thanks guys.

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

Just curious if you can comment on the news about J&B and trying to build a 37-story tower in Century City. Do you think that has any legs? Also, is there any other viable development elsewhere in the West LA area?

By asking the second part of your question you've answered the first part. Because you have characterized it as other viable developments. That means you think that's viable development?

That's a fair question.

As far as I know, first of all, hey, that's great news. I mean, they have decided to climb one tall mountain to try and build an office building there when there is no entitlements for it. But it tells you that they are really believers in what is going on in that market, because that is going to be a long and expensive process. As far as I know, they don't have entitlements to do it, and I will be very impressed if they are able to acquire those entitlements. I don't see any structure that you would typically look for, for that process to occur, in place. So that answers that part of that question. Although I wish them luck.

And the second part is similarly, I guess, anyone could take a site anywhere around here and decide they are going to buck zoning and go buck everything else and try to build a high-rise building. We have actually seen things go in the opposite direction, where people feel like they have zoning to build something. They go for some type of discretionary approval, and even though their zoning allows them to build X, the city council says yes, it is great, but what you can really build is X minus 20%. We have seen that happen up and down Olympic, and actually, have seen it happen to ourselves. So I'm hoping for them, but I wouldn't be very optimistic.

Then for my second question, can you just comment on how you guys are currently perceiving the strength of the tech media entertainment business relative to the last couple of up cycles. It feels like tech generally is really improving a lot. I'm wondering if you are starting to see that budding in your markets?

Yes.

Go ahead, Ted.

I think as we have said, there has been a lot of tech activity, more actually than we would have expected out in the near Valley and Sherman Oaks and Encino. I don't think it's to the point that it was in 2000, or so forth, when things were absolutely crazy. But it may be getting there.

I think it is better tech, too. I'll call those the old days, the 2000s. They were companies that you had a hard time, reading their finance statement and not laughing. You have a lot stronger, well capitalized, they have better management in place, they are more organized about what they want. They're not trying to take 500,000 feet because they plan on conquering the whole United States in the next couple of weeks. It is a better tenant base. They are more tied-in with other related companies. It is a better version of the last one, although they're certainly not gobbling up hundreds of thousands of feet at a time.

I'll say another thing about it too, which is again, comparing it with prior bits of demand we have had from tech-related companies. That is when you look at the businesses that these tech companies are in, it is very diverse. It is the thing we've seen a lot of them in our area, which is tech companies that are integrated with some aspect of entertainment, and that is the synergy in our market. It is also companies that are really unrelated to entertainment, just pure tech companies, the kind of companies and businesses that you would see up north as well. We are definitely seeing that kind of activity and again, not just in the West Side, but also in the Valley.

Although, in general, I will say having gone through the tech cycle a couple of times ago when everybody talked about convergence between technology and entertainment, it never really seemed to be happening all that much. I think that this time, I do see a lot more of that convergence being important, which is good for us. Because I think that will bring a lot of people like Google for example, it's been coming down into our markets, because they need to have that convergence where they cemented with the Hollywood crowd.

Right. Thank you.

Next question is from the line of Rich Anderson from BMO Capital Markets.

Rich, are you there?

Can you hear me now?

Yes, we heard you.

Can you hear me now? Bill, to you quickly first. Not to split hairs. But can you define several months?

Well I don't know if I can define it. But I can give you a little more clarity on it. Whatever months you are referring to is the several months to complete our financing program?

Yes, excuse me, yes.

For anybody who came in late. But what I think we are trying to aim at is by next quarter, when we are speaking to you, that we can say, here's, as I said kind of a little bit earlier, to give a lot more clarity on what I think we and everyone else want to get to really know, which is how the picture looks for Q4 as a run rate going forward. Will every loan be closed at that point? Maybe or maybe not. And, as they said, I think that's really our objective. Our objective is by next quarter, to be able to say with a lot of specificity, here's where we wound up on the program. And, there may be a little mopping up to do. But we have a pretty good handle on what our interest picture is going to look like, going forward for the next several years.

So you are not telegraphing that? You always said by the end of the second quarter, I think that's what you had kind of put the line in the sand on that number. That is pretty much what you are saying still today?

I mean, you can say that. But it is really what I said. I don't know that everything is done and closed by the end of the second quarter. But, within a quarter or so, I think what we should have more accomplished, and see the end of the story, and be able to give real good information on where we were winding up.

Okay. Fun. Second question is to, whomever. Jordan, you said in the beginning that the issue with your larger tenants kind of pushing back and giving back space, that issue is kind of abating. I guess you saw that in the first quarter. But can you comment on some of the conversations you guys are having from a forward-looking perspective? And if you think, judging by what your tenants are telling you about their plans, that this sort of abatement issue, abatement of a risk issue is something that will carry forward through the rest of 2011?

I think that we do think that that's going to happen. Now, on any given quarter, first of all, we obviously don't know what all of our tenants are thinking. But on any given quarter, we are going to have some fluctuations. But I think that yes, the answer is we still see that being true. Frankly, I think that's generally true in the economy generally, that people have, their downsizing programs were really in-vogue a couple of years ago. They then started to go out of vogue, and now I would say you are actually starting to see people think about expansion of their business operations. Again, there is a little bit of a lag in terms of when their leases come up, as to when that is happening, but I think we are expecting to see that trend that we, that I think Jordan talked about maybe the last two quarters, but especially last quarter. We are expecting to see that continue.

Don't they have an obligation? Or isn't there sort of a, within, a few quarters or so that you guys are having a conversation by now, to know what they are going to do. I mean, it is kind of surprising to hear you say, we don't know what our tenants are going to do. I would think by now that would be kind of a conversation that's already been had.

Rich, hey look, we have got loans we are deeply in negotiation on, and we can't tell you when they are going to be closed.

The loans can't speak.

The lenders do. Your question actually raises a real point. That we have tried to discuss before. Which is in terms of where precisely, we are in leasing and tenants. Because of our, the short-term leases and smaller-sized tenants, the decisions that they make are really much closer to the actual expiration date than our peers that you are familiar with, in dealing with on the east coast. And as a result, our activity, our leasing activity is much more realtime than the other companies. Much closer to where we are. We look ahead at renewals for the balance of the year, we have better idea, obviously as we go through the year. But just continually, the real, the decisions don't get made in our portfolio until much closer to lease expiration than you're used to.

To answer to your question, very simply, yes. We have been telling you we feel better about what's coming up. And the reason we feel better is we have a feel for what these guys are doing. So we feel better.

Okay good. Thank you.

Your next question is from the line of Steve Sakwa from ISI Group.

Good afternoon. I wanted to just circle back on the lease expiration and rent spread question, I'm not sure Ted fully answered it. When you look at the leases that you signed in the quarter, that had a cash rental rate that was a little under $30. About $29.60. If you look at the roll over schedule, you have ending rents that are almost $35.11, $37.12, and $41.13. So I guess, how quickly does the market need to turn for you to try and get back to even? Or basically, aren't we looking at potential rent roll downs for the next three years in the portfolio? While you begin to gain occupancy.

I think first of all, one of the reasons why, if you are comparing ending rents after all the rent bumps to starting rents at the beginning of the things, that's almost, unless you are in a really hot market, that is almost always going to show a roll down. Which is why, typically what we think is a much more useful statistic is go with the straight line to straight line. Because that gives you the full economic value of the lease, compared to the full economic value of the prior lease. That is a much smaller number. Again, we do see that rolling off, as you say, there is going to be tough comps going forward for the next couple of years. That is just absolutely right.

And so the question really is, how after that period of time, the comps get a lot softer. Until that period of time, we are only going to do a cross over. If we really get back into a hot market. Now again, one of the things that, because I think one of the things we try to also caution is that number only translates somewhat into what happens to our cash NOI, because so few of our leases are rolling, and most of them are subject to the bumps. But again, I would go with straight line in comparing it. And I agree with you, it is going to be hard comps for us for the next couple of years.

I guess, where would you guys peg the friction point or the real turning point in terms of getting pricing? Where do you think your other occupancy or lease rate would need to get to, for you to really start to see an acceleration of rents in the portfolio in new leases?

I think we think that it is about, say, a couple hundred basis points to make that turn.

Actually maybe even less than that. As Jordan said, it is really the tip of the spear stat, which is the leased percentage. We are starting to see positive absorption. On that, we are right around 89% currently. So it might even be more like 100 to 150 basis points of move up in that, before we start to see some activity, so we are definitely heading in the right direction.

That may also be a market to market basis some of the markets become tighter quicker, and obviously, we have a lot more vacancy out in Woodland Hills.

Okay, thanks.

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

Hi. I was hoping you could -- one more leasing question here, talk about Wilshire Bundy. When you bought it six months ago, you were still getting your arms around the business plan. Sounds like you were executing it now, can you let us know kind of what your plans are and what that will look like over the next year or two?

Well I think when we bought it, I don't know if we didn't have our arms around the business, but I think when we bought it, we knew that there were a whole bunch of tenants in there that would be moving out. In particular, there were a number of tenants that were associated with the prior owner, who were going to be moving out. We have actually, it as it turns out, they have moved out a little slower than we anticipated, and so the vacancy has not come down as much as we have anticipated. In terms of the plan for it, we are doing some things to, the building was, as you may recall, that building was owned by somebody who was in bankruptcy, so the tenant, the building had been undermanaged for some period of time, so we have implemented some plans that will reverse that process and bring it up to the standards of our portfolio and we'll be leasing it up as we do with the buildings that we own can which are comparable across the street.

Thanks. The second question, related. Thanks for the I suppose expanded disclosures on the fund. How will, how are the fees, the asset management fees that you get paid for the fund, flowing through the income statement? And how will any share in promoted interest flow through?

Well sadly, I think the question of promoted interest shares flowing through is a long way away. So I don't know at this point that it is worth spending a lot of time on those, because we are not going to have it for these, funds as you probably recall after their investment period ends, which will probably be in the next few years, or I guess the next couple of years. They have a ten year life on them, and truthfully, we would not expect to see that in terms of where the other things are. I think that on the balance sheet, those come in through our interest in the funds. It's in equity income.

Ted can give you more details but let me just mention. He didn't mean sadly, it's a long way off like sadly because we don't have a promoted interest in the deals. He meant sadly that, in the public market forum, a promoted interest isn't really seen in your numbers until you sell the building. So, even though we might see that hey, we have a big interest in this thing, you won't see that reflected in FFO or even in GAAP or anywhere for quite awhile, until we actually realize on it and sell the building. So it's going to be undervalued. By its nature, it will be undervalued. You have no signs of it other than maybe guess. There are no financial signs accounting today that provides you what kind of value is there.

Let me state another reason why I said I don't think it is even worth talking about the accounting at this point. That is because, if in fact we go to fair value accounting, all of that will be extremely different. But today, if our carried interest was worth $1 billion, you would not see it on financial statements.

Thanks. That just begs one last question. Do you get, is interest on an asset by asset basis? Or is it as the fund winds down?

There are, oh, the way this works, is essentially fund wide.

Thank you.

Next question is from the line of Michael Knott with Green Street Advisors.

I was curious if you could comment on the Sherman Oaks trade that we saw happen fairly recently? I was just curious if you guys bid on it. Looked like the price was maybe in the high 100s a foot, so it didn't seem like a great comp for your portfolio. Just curious if you had any thoughts on that one?

It's so much not a comp for our portfolio that I don't know even the trade that you are talking about. Can you describe it a little more? Was it an office building?

Yes. Majestic bought it, $50 million. Sherman Plaza. I think it is a little north of the 405 on your holdings. Obviously not in a relevant comp. Real quick the other question I had was.

It wasn't on Ventura.

Right, yes.

I think I might know the deal you are talking about. Oh well, whatever. It is not comparable on location or in any other way to us.

Right. Got you. Similarly, from I guess the contrast to that, can you just talk maybe about what your purchase of Beverly Hills sort of implies for the value of your existing portfolio there given there is some leasing needs at that building, as I understand, and also the fact if it is south of Wilshire, if that has sort of a value hit compared to your stuff the Triangle proper?

You mean what it implies for you guys? I already knew what I thought the value of our Beverly hills buildings were and therefore, we were willing to pay that for that building. But that is a good building. It is on Rodeo, I think there's only maybe three office buildings where you can have a Rodeo address, it's an extremely nice building, and similar to the Bundy Wilshire deal.

It was a seller that was like, I just want someone to make the deal and close and I won't have any hassle. And so we were able, and he was happy because right, he had foreclosed. He was a mezz guy that had ended up with the property and he didn't want to be running and he wanted it off his books and we wanted to own it, so it was all make it happen in a very efficient manner. I like that deal a lot. You could take what we paid for that and look at your own calculations about where you were valuing the Beverly Hills portfolio and figure out how that relates.

All right, thanks

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

Most of my questions have been answered. I had a couple of quick -- I wanted to know your thoughts on the ATM. Did see a lot of your peers issue stock, obviously in the $300 million to $350 million range. Obviously you guys have cash at hand here. Wondering what your thoughts on the ATM on going forward were. It is very tempting to issue it given the cushion and the interest rates that you're getting and the guidance upside here.

I'll tell you my view and I got it that you think we should be issuing. I think for us to issue stock whether it be through the ATM program or any program, we have to feel like we have a good use for the money. We already have a pretty good amount of money and we are pretty-well capitalized. There might be a place for the ATM or for stock issuance in general, in the remainder of our debt program, or as we complete the debt program. There would certainly be a place for it in new acquisitions, but it would be one of those two. So as those tighten up, you'll see that we'll either feel that was a reasonable move or not.

Okay. I had a token dividend policy question here given your AFFO payout ratio, what your thoughts were?

Well our thoughts are that we realize our dividend is extremely low, relative to our kind of comp set and our space,.

And also compared to the income.

I meant very low coverage in terms versus the amount of cash flow we have. We don't ever want the dividend to be a drag on the stock price, but we are not trying to buy stock price with dividend either. As we try to balance those two things, really, the dominating thing is we want to finish our debt program or 99% finish our debt program, so just like with you guys, we have a clear view of the future, at least in terms of our capital structure, and we can be more comfortable with what we should do with that dividend, leave it, move it up, whatever.

Thank you.

Your final question is from the line of Jamie Feldman with Banc of America.

Jamie, how are you?

My questions have been answered. I'm all set, thanks.

There are no further questions. I will turn it back over to you all.

Okay. Well thank you everybody for joining us on this call and we look forward to speaking with you again. Next quarter.