Douglas Emmett Inc (DEI) 2011 Q3 法說會逐字稿

Welcome to Douglas Emmett quarterly earnings call to discuss its 2011 third-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 will now turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Joining us today on the call are Jordan Kaplan, our 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 7 days. Our press release and supplemental package have been filed on Form 8K with the SEC and those are at also available on our website at douglasemmett.com.

During the course of this call management will be making forward-looking statements. We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. 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, these 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 Honolulu and Los Angeles office markets, REIT for the Los Angeles office market, and PF research for the Los Angeles multifamily market, and Property and Portfolio Research for the Honolulu multifamily market.

Once we've reached the question-and-answer portion, we request that all participants limit themselves to 1 question and 1 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?

First, I would like to thank those of you who participated in our Investor Day a few weeks ago. At that time, we announced our third consecutive quarter of positive absorption in our office portfolio. We achieved positive absorption of 40-basis points over 58,000 square feet. Third quarter 2011, represent our largest positive absorption quarter since the first quarter 2007. The office leasing recovery in our markets remains on track with continuing tenant demand from a variety of industry groups. Law and accounting firms were particularly strong in the third quarter. And new business formation from tech and entertainment companies is generating additional demand.

Sherman Oaks/Encino and Santa Monica are currently our strongest submarkets. Our apartment communities are over 99% leased, more importantly, we continue to see strong rent growth in our residential portfolio. Despite our recent strong leasing activity, we know that some economists are projecting a long period of relatively modest economic growth. Even if that comes to pass, we believe in the competitive advantages of our strong-operating platform, our high-quality geographically desirable properties, and the diverse industries supporting our markets.

Before I turn the call over to Ted, I want to touch on our cash flow and dividends. In today's world, cash flow and dividends represent a higher percentage of expected total return. As we discussed in detail at our Investor Day, our cash will has been steadily increasing during the 5 since our IPO. Currently our dividend represents only about one-half of our AFFO. Together with our other sources of cash, we have ample liquidity for external growth, deleveraging and future dividends. Ted?

Thanks, Jordan, and good morning, everybody.

For the 9 months ended September 30, 2011, funds from operations increased 17.5% and adjusted funds from operations increased 15.6%, compared to the same period in 2010. For the third quarter of 2011, FFO and AFFO decreased by 2.3% and 2.6% respectively. FFO per diluted share for the third quarter of 2011 was $0.34, compared to $0.36 for the same period in 2010. AFFO per diluted share for the third quarter of 2011 was $0.25 compared to $0.26 for the comparable quarter of 2010. As we've mentioned in prior calls, the amortization related to the swaps we terminated lasted December had no impact on either FFO or AFFO this year. In the third quarter, GAAP interest expense was increased by $1.5 million as a result of that non-cash amortization, which was then, in calculating FFO, offset by an equivalent $1.5 million leaving a net-zero impact. FFO was only affected last year at the time the swaps were terminated when their full impact was recorded for FFO purposes. Early in the third quarter, we fully amortized the GAAP impact of that swap termination. As a result, the amount of amortization was significantly lower than in previous quarters, and future quarters' results will no longer be affected by the 2010 swap termination.

With respect to GAAP income, the third quarter saw an $11.2 million decline in depreciation and amortization, because the in-place lease asset created at the time of our IPO was fully amortized at the end of our second quarter. G&A totaled approximately $7 million, or 4.8% of total revenues, for the third quarter of 2011 and $21.3 million, or 4.9% of total revenues, for the 9 months ended September 30, 2011.

Our same property metrics for our office portfolio were down in the third quarter. While our multifamily same property metrics continued to improve. Overall, same property net operating income in the third quarter of 2011 decreased 5.1% on a GAAP basis and 3.5% on a cash basis when compared to the third quarter of 2010. Same property total revenues in the third quarter of 2011 decreased 2.7% on a GAAP basis and 1.5% on a cash basis when compared to the third quarter of 2010.

We continue to see improving demand from tenants, despite quarterly fluctuations within our portfolio. As Jordan noticed, robust office leasing in Sherman Oaks/Encino resulted in 140 basis point increase to 91.6% leased. Our Santa Monica office portfolio reached 98% leased by the end of the third quarter. Warner Center continues to have our lowest overall occupancy, but we achieved 40-basis points of positive absorption during the quarter. Overall, we signed 170 new and renewal office leases, totaling 641,000 square feet during the quarter, compared to 204 new and renewal leases totaling 666,000 square feet in the prior quarter. The third quarter included 74 new office leases totaling 237,000 square feet compared to 86 new office leases totaling 263,000 square feet in the second quarter. This leasing activity resulted in over 58,000 square feet of net absorption in the third quarter. The lease percentage for our third office portfolio this quarter increased by 40 basis points to 89.2%. The occupied percentage for our total office portfolio was also up by 40 basis points to 87.1%.

On a blended basis, annualized tenant improvements, leasing commissions, and other capitalized leasing costs for office portfolio decreased to an average of $3.84 per square foot per year, compared to $3.94 in the second quarter. On a blended basis, our total lease transaction cost for our office portfolio in the third quarter averaged $16.84 per square foot, compared to $18.71 in the second quarter. Our multifamily portfolio was 99.6% leased in the third quarter. We continue to see strong rent increases. As a result, the average in-place rents across our multifamily portfolio, including units that did not have vacancies, were 4% higher at September 30, 2011 than a year earlier.

During the third quarter, the mark-to-market and rent-roll metrics for office portfolio improved from the second quarter. On a straight-line basis, our average rent from expiring leases was 5.7% higher than the average rent from new and renewal leases signed for the same space. On a mark-to-market basis, our in-place cash rents were 11.0% higher than our asking starting rents. On a cash basis, our ending cash rent from expiring leases was 12.1% higher than the beginning cash rent from new and renewal leases signed for the same space. This largely reflects the effect of the built-in growth in the 3% to 5% annual rent escalations contained in almost all of our office leases.

With that, I'll turn the call over to Bill.

Turning now to our balance sheet, our cash position continues to strengthen. We now have approximately $350 million in cash and cash equivalents compared to approximately $272 million at the end of 2010. We also have access to additional capital as needed. Our fund has approximately $167 million of undrawn equity commitments, which we can lever for new acquisition. Another $189 million remains available under our existing ATM program as we did not raise any equity since our earnings call last quarter.

When we completed our financing program in July, we had obtained 7 term loans totaling $2.55 billion over a 10-month period. And we had repaid all but 1 of our loans, which was scheduled to mature in 2012. Last quarter, we were planning to repay that loan with a significant portion of our cash on hand and from the proceeds of a new secured revolving floating rate credit facility that we would put in place over the next several quarters. Since then, long-term treasury and swap interest rates have further declined. So we are now considering the possibility of 1 more term loan to repay a portion of the remaining 2012 loan maturity to take advantage of the compelling interest rates.

Although we continue to review our options, we still expect to repay the balance of the existing $522 million loan from our cash and from the proceeds from the credit line. This would allow us to further the process of reducing our leverage as we have previously discussed. As we said last quarter, we anticipate terminating a $322.5 million swap before the end of this year. We currently estimate that the cash and non-cash cost of terminating this swap will be approximately $10 million, which was reflected in our previous guidance estimates. However, the actual termination cost will depend on market conditions at the time of the termination.

Now turning to our guidance for the balance of the year. As a result of higher office and multifamily NOI, and lower interest expense than we previously anticipated, we are increasing our full year 2011 FFO guidance to a range between $1.35 and $1.37. In providing this guidance, we are assuming the total interest expense effect in 2011 FFO will be between $147 million and $148 million, slightly lower than our prior guidance. A weighted average diluted share count for 2011 of approximately $160 million, no change from our prior guidance. Total FAS 141 income will range between $20 million and $21 million, also no change from a prior guidance. Straight-line income will total approximately $8 million, which is at the high end of our previous guidance.

G&A will total approximately $29 million, slightly above our prior guidance as a result of the write-off of financing fees and revision to accruals. We still expect the 2011 G&A will aggregate less than 5% of our total revenues. No change to recurring capital expenditures in our office and multifamily portfolios. We continue to estimate approximately $0.25 per square foot for our office portfolio in a range of $425 to $475 per unit for our multifamily portfolio. This guidance excludes any impact from future acquisitions, dispositions, equity issuances, or repurchases, debt financings or repayments, recapitalizations, or similar matters. As stated above, our guidance does include a $10 million reduction in FFO resulting from the anticipated termination of our $322.5 million swap before the end of 2011.

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

(Operator Instruction)

Brenda Maiorana, Wells Fargo.

So, Bill, I just wanted to clarify, so, the $300 million or $350 million of cash paid down, the delay in doing that or not doing that, I guess in Q3, is more just based on the decision around what the balance of the capital takeout will be as opposed to thinking about using the cash for means other than debt repayment?

Well, what we have indicated, I don't think we ever talked about completing the repayment of the remaining loan and putting our credit line in place in Q3. We've talked about it being over the next several quarters.

And in terms of a dollar amount, our thinking was and still remains, that we will use a significant portion of our cash in connection with that payment. So it does not indicate any change from what we previously said.

And -- I mean the balance and the decision if you guys choose not to use all the cash to or either bring your cash down to what you would think of as a minimal level would be because you see opportunities out there? Or would it be for some other reason that you would like to hold some level of cash on your balance sheet?

No. As we have indicated, and again, there is no change from what we previously discussed. We have liquidities to meet our anticipated acquisition targets available to us.

So, you know, it doesn't reflect that. Really what we are looking at is the optimal mix in our refinancing, in terms of the best implantation in terms of floating rate or fixed rate to take advantage of interest rate -- the interest rate climate. That is really all that we are saying.

Okay. Sorry, and then just to clarify the interest expense guidance that you gave for the year, I guess if we look at that for Q4, does that assume that there is pay down in Q4 or is that as assuming that you are kind of your current --

No, it doesn't assume that. It -- the reduction which is -- our guidance when up about $0.02 at the midpoint. About half of that increase is from lower interest expense and about half of that is from the higher multifamily and office NOI that we have in our guidance 3 months ago.

The interest reduction, little bit of it is from the floating rate portion of the debt at lower rates than we had anticipated. And the rest is the thing you alluded to before, which is as we are going through our alternatives, between some term loan or floating rate loans. We've pushed back the date of completing that from -- assuming it being earlier in the fourth quarter to more like in the beginning of next year. So, the answer is it does not include any pay down of the debt.

Jamie Feldman, Bank of America

I was hoping you could help us understand when you think same store NOI my turn positive? I guess it's framing it around what you think your leasing spreads would be -- what your mark-to-market is on your current leases rolling in 2012? I know you had mentioned 3% bump on all your leases, just looking year-over-year in your same-store now and you had a big -- you had a decent decline in expenses, granted occupancy is down. I'm just trying to figure out what it's going to take to get to a positive quarter of same-store?

I think we have been saying throughout the process, that the real story for in terms of increases in NOI and the short-term, really comes out in terms of occupancy. And that, that really swamps the other issues in the portfolio. In terms of the rents, obviously, we still probably have a couple of years of where the rents are rolling off from pre 2008 time frames. But the real question will be, how fast we can see the increases in occupancy going up.

So, I guess what kind of occupancy growth do you need to see? Thinking about 2012, what kind of occupancy growth do you think you need to see to negate the negative spreads? I mean you're up 40-basis points --.

You're talking about -- Hi, this is Jordan. You're talking about the negative spreads in the rents. And at the same time is NOI and those 2 can move very differently. Right?

Remember and I think we talked about this in the last couple of calls, that within -- we have in our existing people who are in place, we have sort of 2 things that are happening. The first one is, we have on that portion of our portfolio, call it 10%, 11%, 12% of the portfolio that is rolling, we have the roll down of rents to the extent that be in-place rents are above current market rents.

At the same time, on the 80% -- and those statistics we gave you on a variety of different levels is what it is in place. At the same time, on the other rents or the other office which is not rolling, which is that -- call it 80% of the portfolio, that has built into it, each year a 3% to 5% rent bump. And so, that rent bump of 3% to 5% on 80% as it turns out is about equal, probably a little bit in excess of, that it depends on exactly where we are, of the roll-down effect.

As a result, the truth is that, that is not going to change much in the next year or 2 years in terms of the contribution that the rental rates will make to NOI in the portfolio. And that is why it comes back to the real question is when do rents go up? And when your occupancy goes up.

So summing it up for 2012, the in terms of cash same-store NOI, the rent bumps and the roll down of rent more or less offset one another. Usually the rent bumps do a little better than that moving up. Occupancy -- our guidance has been better occupancy will be at the end of 2011 and starting 2012 will be higher than where we started this year.

So, with higher -- if that trend continues and without giving a guidance at this point, for our occupancy or FFO or AFFO for next year, that's just where we are now in the trends continue, we will have higher occupancy in 2012. The rent bumps and roll downs will be offsetting one another. So we certainly anticipate based on those trends, that same state property revenue will be higher next year than this year.

And then how much more do you think you can squeeze out expenses? I see you're down 2% year-over-year on the office side?

Well, we continue to make progress on that front. The variable number where we have some control, but not a lot, would be on the utility side. We saw an increase in that this year. Trends now are starting to head down in that direction in terms of rates with the price of oil coming down. So hopefully we'll see some help on that and as well.

But that would be the key driver otherwise things are --

It's a the biggest -- it's the variable that we have limited control over. Things we do have control over, we are able to keep them well contained and are continuing to make progress to reduce.

Although, I think we have made a lot of progress in recent years, and it always gets harder as you keep pushing down the things you lose at the low-hanging fruit. While our operations group is superb and working very hard, it's hard to keep pushing it down.

Rob Stevenson, Macquarie.

Can you talk a little bit about what's going on in Honolulu? You guys had a sequential decline in occupancy of, I think it was, 130-basis points there. Is that just 1 tenant moving out or is there some weakening in that market? And how you look -- when you look over the next 4 quarters you have about 10% of your leases rolling their, how does the outlook there look for you?

Yes, the thing that is important to understand, is why we always talk in terms of 10 submarkets that we are in, the 9 in LA have a lot more in common with one another than they do with Honolulu. So, in Honolulu -- Honolulu never saw the spike up in 2007 that the LA markets did. We were never this high in occupancy there as were in LA. Conversely, in the decline in 2008 and 2009, it did not come down to the same degree as daily markets. It has been a relatively very stable market.

So we are in kind of a range there, a range there. And so we are down a little bit. It is not from 1 source.

I think the likelihood going forward as you will see is in that market, you'll see that market continue to perform that way. So, we don't view this as any significant negative in the market. We see it as a continuation of a fairly stable market.

And then can you talk a little bit about what you've been seeing not only this quarter, but the last couple of quarters in terms of lease renewals? Given your smaller space user, have they been giving back space in any significant amount relative to historical norms, or does that stay relatively consistent?

I think we have seen relatively consistent performance. Again, it's like a broken record over a lot quarters. We're the most pleased with our smaller tenants and the least pleased with our largest tenants. The largest tenants, which follows a trend pretty much nationwide, you have seen space contraction, which we've discussed in great detail in the past that has been a headwind to our occupancy going up.

But I think among the smaller entrepreneurial tenants, they didn't have the kind of layoffs, they don't have -- they never had the ability to utilize space in a way to allow them to do space contractions. We feel very good about that. As a matter of fact, we are seeing, as Jordan alluded to, in a number of the industry groups among smaller entrepreneurial tenants, we're seeing new business formation that has been a significant positive driver.

We still also love for our large tenants, though. (laughter) I want to say that we're displeased with them.

Michael Bilerman, Citi.

Hi, it is Josh Attie with Michael. The absorption in the third quarter and some of the lease most likely set in motion in the first half of the year. Can you talk about the current activity in the portfolio and if you have seen any change in velocity as you transition into the fourth quarter?

Yes, Josh, I know this is a thing we talked about a lot, and it is always important for everyone that is focused on the New York centric reads and their leasing patterns and how they do things to kind of change their gears when they are talking about our markets. But our markets are really not, they don't have that time lag. This is not leasing set in motion in the first half of the year as you said. It's much more realtime activity.

And then to go to your -- the thrust of your question, we're seeing that trend in terms of that high-leasing volume and all of the trends that we discussed. So for the first month in Q4, we've seen a continuation of those trends.

Can you also talk about your outlook for the Warner Center market where you have a lot of vacancy and what you think the time frame is to lease some of that out?

I think we are still pleased with that market. It is obviously further down the curve than some of the other markets, and it's still making its transition from large tenants to smaller tenants. And so while that average is coming down, it is still bigger than our portfolio.

We did see increases in that leasing in that first quarter. And I think we expected continued to make steady progress in that. We're hoping that the economic headwinds abate. But even without that, I think we expect to see continued steady progress.

And the most -- in terms of the near-term performance there, the fact that Sherman Oaks and Encino has been performing as well as it has, is a very positive development for Warner Center. It is the closest submarket to it, and as we see that market continue to perform well. And particularly since I think we are in a position in Sherman Oaks/Encino in the not-too-distant future to see rent increases take hold their given the strength in occupancy. That in the near-term should have a positive impact on Warner Center.

Alex Goldfarb, Sandler O'Neil.

Question on the financing on the capital markets. Just given some of volatility -- obviously, Europe continues to have its issues it's trying to sort through, but in the US the unsecured -- I know you guys aren't unsecured borrowers, but that market in the state of flux. The mortgage market sounds like it's also good for the trophy assets, not so good if you are some of the others. The banks seem pretty eager to put money out and put their deposits to work.

So just sort of curious if you guys are talking to your lenders, are you seeing any new people suddenly show up wanting to give you more capital? Or anyone who you were speaking to early on who has pulled back?

You mean other than investment bankers? ( laughter) It's coming to year end, I'm sure that the phone calls will be increasing.

No, you sum that up well. The capital markets have moved pretty strongly towards top-quality sponsorship's, top-quality locations, top-quality assets, and there is definitely a have- and have-not market. And we have seen a number of new players show up in the past year or so.

I mean, obviously, we had a very broad sampling of this market when we put away the $2.5 billion of loans that we did. It's a very favorable environment for us, but as you suggested, it is a rapidly changing one, which is why we constantly have to make sure that we are putting together the right formula to get the best implementation because the choices and where the opportunities are shift. So we have to keep on top of that to keep performing as well as we have been.

And that's what I guess I'm asking, is over the past few months, maybe since August, folks that you were speaking with, has anyone said, hey, we want to give you more money? Or people who you were talking to in August or early September now coming to you and saying, actually, we cannot commit what we originally agreed on?

We certainly haven't had anybody go back on commitments.

I don't think they will back away.

But the markets are good.

Mitch Germain, JMP Securities.

Bill, just some commentary on the revolver discussions and some perspective on timing potentially?

Right. As we said, it's over the next couple of quarters. We're trying -- we are looking at the options between terming some of the loan out and doing a revolver and then using cash to pay this down. And we're -- it's going to -- it should play out over the next couple of quarters.

Okay, so probably before August. It is an August maturity, correct?

You'll definitely pay all our debt off before it matures. (laughter) But if your question is it a Q4 -- is it more likely to Q4 2011 or more likely Q1 2012? I think more likely to be Q1 2012.

I think one of the problems people are having with this last piece of debt is? And why we applied the cash to it already? And we're getting questions like that. It is that we want to structure it as flexibly -- make it as flexible as possible.

So in 1 sense, we want to apply money to it, but we want to have that liquidity still available on the properties. Or have some completely delivered properties that have no debt on him, the key flexibility in our structure. We are at the finer point of the game now; deciding how much -- do we create some properties and put a credit line on them and just pay them off, and have 0 against them? But still we have the liquidity there? Do we do it with all the properties?

Do we take -- because we like interest rates, 1 or 2 of the properties and shoot them out long term? Those are the things we are playing with. That is the reason I think in 1 of our earlier questions, that is the reason why you don't see us saying, hey, we're sitting on all this cash. We were told that we were going to deliver, let's just apply the cash to it.

We haven't organized the properties in a way -- with loans against them in a way -- where we feel like we will be able to maintain maximal liquidity and flexibility and still have pay down our debt. And we are in the process of doing that now. And that is what we keep talking about taking maybe 1 property and go longer term and then do a credit line and what properties are on the credit line. That's what we're working through right now.

But I think the key takeaway is this is a product of more opportunity than we had 3 months ago because of the fact that interest rates are more favorable now than they were even 3 months ago.

Rich Anderson, BMO Capital.

Quick question. You mentioned CapEx no change to your view for 2011, but it trickled down second quarter to third quarter, I think you said 16.84% in the third quarter. Is that representative of any trend or is that the sort of timing stuff?

I think it is just timing.

Okay. I figured, just asking. In a bigger picture question, you said $160 million of available equity in the fund. For me that doesn't sound like a lot. I know you can lever that and get more buying power.

But do you feel like when you were going through the process of building up the fund, it didn't quite get as big as maybe you thought it would be? Do you have any other longer term plans about the fund structure, which is kind of in your DNA and to build that back up, now, in the next couple of years?

Let me just mention, the first piece of what you said, which we -- I mentioned that the investor day. Which is with the fund capital is available, that is about $400 million of buying power. Which we think for over the next 12 months is in terms of the type of deal, safe and accept for larger portfolios, which we have always said we would finance differently. That handles anything that would come along, you can talk about the rest.

Is that $400 million then, in your mind -- are you comfortable with that? Or would you like to have a little bit more available to you at this point?

I think that as Bill said in the call, we have a variety of sources of funds. And this is just trying to address the larger issue that you asked about or thinking about funds. We do have the cash flow that is coming in from operations, which is not anything substantial. We have the ATM that is available to us if we do need to -- if we do decide to make more acquisitions than that. Then we can do other types of public market financing as well.

And there are some unencumbered assets within the funds, so there is even a little bit more room than that says to be, to be precise. But the fund structure was something that is 1 of the arrows in our quiver.

It is particularly useful when we did do it at the time that we did it in the cycle, where our stock prices were relatively low. And when we were down in the single digits and stock price, we did not think it made sense to put together equity for deals from our stock. And so we went out and raised this capital.

At different points in the capital cycle, it is much less likely that we would use the fund structure, but again, that is where it gets evaluated on from time to time. But I think we're comfortable with the size of the funds we raised. And we're comfortable that we have a fair amount of firepower from that, and that we have lots of other sources when we get through that acquisition pipeline.

John Geinee, Stifel.

Jordon, John here. Guess what my question is?

Guess what your question is?

(Multiple Speakers) (laughter) used to be in the apartment business (Multiple Speakers) about 4 or 5 years. And I'm wondering if you're still in the apartment business and what you think of it these days in Southern California?

We are still in the apartment business. I mean, if I believe -- believe me, if there's something I would like to have our next acquisition be, it would be an apartment building. And we are working on deals. We work on deals.

It's hard to expand the apartment portfolio. In terms of the stuff that we own right now, I love it. You heard on -- you heard earlier on the call, that we are seeing real rent increases. Real increases of ca -- that are hitting the bottom line, great increases in cash flow. So they're performing extremely well.

I know that a lot of times the market doesn't give us that much credit because they look at us as an office Company and they don't give us a credit for that. A portion of our portfolio is apartments, and people say to me you just hanging onto something that you're kind of living in your past. But we are really aren't. And we really are looking to expand the apartment portfolio, it is 1 of our goals. But not -- we're not willing to expand it at any cost. And so, we're wait -- we look for good deals to come up, we work hard on them.

We've had, and I said on some past calls, I told you guys about some of the misses we've had, and some of the markets that we looked into, and then we backed away from in terms of apartments out in the Living Hills area. We got very close on a couple of deals out here, some didn't trade. Some of the ones we really wanted didn't trade. So there are probably still out there as deals that could happen.

We will eventually add to the residential portfolio, I promise you. And then you will be back saying, we're apartment guys.

Ross Nussbaum, UBS.

Most of my questions have been answered. But I'm curious, do you guys have any acquisitions in the works that you either have LOIs out, offers out? What should we be expecting on that front in the next quarter or 2?

Well, we have your e-mail, should I send you our acquisition pipelines so you can just run through it and that would shorten things up? ( laughter)

That would be great. Thanks.

We're 100% working on deals. I feel good about our pipeline. As I said during the investor day. I'm still, though time is running out, I'm still hoping to get some stuff done even this year. We're working on deals.

Michael Knott, Green Street Advisors.

Just curious, do you think your Century City fundamentals feel as good as the 96% lease rate that you have there? And then also just curious and comment on why Westwood and Brentwood are not faring any better than they are?

Okay, so you're asking whether we like the fundamentals in Century City as well as we like the actual lease rate in the buildings that we have? ( laughter ) Clearly we don't.

Century City is seeing a little more vacancy right now. We're outperforming that market by something like 900-basis points, is that right? 800-basis points or 900-basis points. The market has got a couple of things going on with the buildings that -- the newer buildings that are there and some of the variety owners and some of what is driving them. I would still say that long term, Century City is 1 of my favorite markets on the west side.

It is a fantastic market, and the opening up of Santa Monica Blvd, and the changing of traffic patterns, Bill was laughing when you asked the question because we're just talking about it before, this morning before the call. I still love Century City. I mean if I had to choose a couple of markets where I would want to build into comfort sales that we get, I probably say Century City in Santa Monica. It is a great market.

But you're right, there is real vacancy there now. Maybe they had too many finance companies or something that shrank back on them. But I'm very confident that as the world improves, Century City will show its colors and they will be very good.

And then another thing with Century City, I mean we really, you're very, very strong on it, in terms of this long-term situation. And in terms of 2012, we have very, very low role in our portfolio there. It's -- we feel good about it, throughout that window as well as long term.

In terms of Westwood and Brentwood. Westwood, let's do Brentwood first. Brentwood is another very strong market, and I wouldn't judge it quarter-to-quarter, I would expect it to stay relatively full. The type of tenants that are in Brentwood are exactly the type of tenants that we are doing the best with right now. Those small entrepreneurial guys that want to be right there near where they live. So I don't have a -- I feel like give Brentwood even a tiny amount of time and it'll be fine.

And Westwood, is suffering. We only own 2 buildings in Westwood. Most of Westwood is owned by EOP. And there is a lot of vacancy in that portfolio, and that vacancy is hard to wrestle with, quite frankly. It also is a good market. There's time past, if I look back 10 years Westwood got higher rents than Century City.

Century City has got a couple new buildings, and even the old ones have been rehabbed. And I know this is odd to say, what I said 2 minutes ago, but Century City has been drawing off of Westwood. You used to see a lot of the big law firms and some of the investment houses would be in Westwood, now they are all more looking center in Century City.

But Westwood still is another, what I would call very good market that there is a move now to do a bunch of work in the village there. And that's the amenities that you see attached to that, that have fallen off quite a bit in the last couple of years. But the buildings in Westwood are very good buildings and it's well located, vis-a-vis the freeway. They're doing some traffic clean up along the freeway and the over -- the underpass there, and any other connectors across the 405 freeway. While I realize that, that market is doing, surprisingly worse than I would have even expected right now, I still have a great hopes for it and expectations that it will do extremely well in the long run.

That's helpful. Then the second question, I also have a question on multifamily, but I don't have to have you guess my weight or anything first to have that? (laughter)

Well, let's be fair. We were talking about that before, so I should have come up with that because he was talking to me about it in the investor day.

Okay. My question is it looked like there was a recent trade in Oahu from multifamily property that looked like similar location to where, for example, the Royal Kunia is. I'm just curious, if you have been on that, how you thought about it?

The pricing actually looked a little less full than I might have guessed. I think what we saw was the 6 cap and may be $200,000 a unit. Just curious if you looked at that? Or maybe if that has any implication for the value of your multifamily holdings there?

We took a very hard look at it. We almost took everybody in this room right now listening to this call and chartered them off to Hawaii and trotted around in golf carts and looked at the property and discussed it for, I can't tell you how long, before it even came on the market.

It's -- I don't want to -- we have reasons why we decided that wasn't a good property for us. I could tell you in terms if you're just trying to use it as a comp, it is on -- it's got a couple of things going on that it probably isn't the best comp to the other stuff that we have. I don't want to -- I'm not going to beat up the property. But it is on, as I'm sure you know, it is on a ground mixed with the military that maybe is not the most favorable ground lease that you could be on.

And there are some other issues around that area in the military bases there. And development in that area and the way the zoning does or, frankly, didn't apply to those buildings when they were being built, that made us feel like that was not going to be -- while it -- when you are there, that place is right on the water. That is extremely nice, it's probably overall was in a project that was going to be the long-term quality that we wanted to own out there. So it did not work for us.

Very helpful.

Michael Bilerman, Citi.

Just wanted to follow up a little bit on deal pipeline a little bit. And as much as I love the sheet, I know you're probably not going to send that. (laughter )

Can you talk a little bit about the types of deals you're looking at, the size of them, how much are more stabilized versus sort of the redevelopment plays or lease up plays? Are they in your core markets? Are they outside your core markets? Just to give a flavor of what you're looking at?

A couple of residential deals, but beyond that, mostly office stuff. 1 of them is pretty fully leased at the moment, but has some stuff coming out. The other stuff has vacancy. And it is all in our core markets and there isn't -- were not -- there's not much in Hawaii, so it's all in the LA markets.

What percentage is being sort of shopped by brokers and sellers versus stuff that you are -- sort of gotten in from your relationships that you are just sort of doing off market?

Well, we are working off market on tons of stuff so I don't even -- I would say it's maybe it's -- when you say off market and on market, it's starting to have a little bit of a mixed meaning now days, because there's deals that the people might even be working with the broker and they might come to us with a broker that is good to have them in the process, but they did put out into a huge bid in the whole process. So there are deals we are working on where there is a broker in the deal, but it is not being openly marketed. There's deals that are being openly marketed. And there's deals that we know the owner on, we're talking to them.

So all 3 of those are going on. In terms of openly marketed deals, 1 or 2.

Are you interested at all in selling assets to fund some of this growth? I mean are you getting unsolicited advances on some of your assets that you have shown hesitation to sell equity, right? But you can always sell assets to narrow that gap to NAV?

To narrow the gap to NAV sell assets, you mean there are some assets where we are not getting as much credit for it?

Right. If you think your stock is trading at a discount to NAV and not wanting to sell equity, new equity to --

I understand. Ways to raise money. I don't feel like I'm under pressure to raise money, and I don't think it is a good time to sell. I think it is a good time to buy.

So, I would be equally as reticent to sell, probably more reticent to sell assets than I would be to issue some equity because once you sell the assets, getting them back isn't easy. And I think that the whole portfolio is under valued, the real estate part, not talking about NAVs and stock prices. I think the real estate is not at any sort of value apex right now. I would want -- we have the best properties in LA. And I have a good feel for where this market is going. I would not want to lose that and sell any of them.

Just maybe a little bit more color. You talked a lot about the financing market, but what is happening on the transaction side in competing for buildings? Who are you bidding up against? And who are you losing out, in terms of the competitiveness of the marketplace?

Generally, we're not -- I'm not seeing other REITs if you're asking that. I'm seeing more pools of capital that are -- have an advisor or manager that is spending that money. In terms of individuals, there are some cases of individuals, and I'm not counting the billionaires, but just individuals that put together deals, but they are extremely rare. And I think what you might be alluding to is that -- I don't know if they can get that right now in deals.

So, it's actually a pretty good time competitively for us to be buying buildings because I think we are in a very strong position competitively in terms of an acquirer. But we need them --to say what I think about where values are today and that is a good time to buy them, that is not a secret to the other people who own buildings here. So it is very hard to get them to sell the buildings.

Right.

We are working on them.

And do they go into the fund or do they go on balance sheet, you think? Or for the pipeline that you're looking at, we should be penciling out that, that $400 million gets filled up first, or that more assets go on the balance sheets?

Generally, we try to aim everything into the fund. There are some deals that for 1 reason or another, the fund is not right for it, and then sometimes they don't go into the fund. But, generally, we're aiming for the fund for everything, our job and our obligation to the fund people is to get their money spend. And, obviously, we want to do all the good deals that come up, and I'm always hopeful that they fit in the funds so that we can get that money placed.

All right. Okay everybody. Thank you very much. And we look forward to speaking with you again next quarter.

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