Douglas Emmett Inc (DEI) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's earnings call for its 2012 first-quarter 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.

Thank you, operator. Joining us today on the call are Jordan Kaplan, our Vice President and Chief Executive Officer, and Ted Guth, our Chief Financial Officer. Please note that this call is being webcast live on our website and will be available for replay for the next 90 days and by phone for the next 7 days. Our earnings package has been filed with the SEC on Form 8-K and posted to our website at www.douglasemmett.com. During the course of this call, we will make forward-looking statements. Any forward-looking statements are based on the beliefs of, assumptions made by, and information that's 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 some potential risks, please refer to our SEC filings which can be accessed in the Investor Relations section of our website. We may reference data in this call from some of the following sources. CB Richard Ellis for the Honolulu and Los Angeles office markets, [Reese] for the Los Angeles office market, M/PF Research for the Los Angeles multifamily market, and Property and Portfolio research for the Honolulu multifamily market. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up.

I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thank you, Mary. Good morning, everyone, and thank you for joining us. We continued to see steady improvements in the first quarter. In our multifamily portfolio, rental rates are increasing in all sub-markets, while our apartments remain fully leased. On the office side, we saw our fifth consecutive quarter of positive absorption. The almost 69,000 square feet of positive absorption we achieved in the first quarter was our best since the first quarter of 2007. Our total office leased rate now stands at 89.8%, and we have begun to increase office rents in three of our sub-markets; Santa Monica, Beverly Hills, and Encino/Sherman Oaks.

I am also pleased to announce that our same property cash NOI in the first quarter of 2012 was 2.4% higher than in the first quarter of 2011. However, as we have cautioned in the past, please do not put too much emphasis on the results of any one quarter. In particular, as Ted will discuss further, the higher cash NOI from the second quarter of 2011, will provide a more difficult comparison next quarter. For all of 2012, we continue to estimate that our same property cash NOI will be between 1% and 1.5% greater than in 2011. We already discussed the steps we took early in the first quarter to strengthen our balance sheet. We have no near-term maturities, and we have locked in very low interest rates for many years into the future. In addition, we have ample liquidity for acquisitions from our funds, our cash on hand, our growing operating cash flow, and our unencumbered properties.

Given our significant liquidity, we hope that 2012 provides more acquisition opportunities than we saw in 2011. While we have been working on both apartment and office opportunities in Los Angeles and Honolulu, sellers have continued to be slow to come to market. In the first quarter, we did close the acquisition of an additional 16.3% interest in one of our institutional funds for approximately $33.4 million. We now own approximately 65% of that unconsolidated fund, which in turn owns six properties totaling 1.4 million square feet of office space in our core sub-markets, as well as an interest in our second unconsolidated fund that owns an additional two properties. We now own approximately 23% of that second fund. Before I turn this over to Ted, I want to make one final comment.

Mary Jensen has been a critical part of our relations with the Street and our investors since our IPO. She has introduced us to many of you and provided much of the structure for our Investor Relations program. Even more impressive, while working here full-time, she has been studying for her MBA. Last month, she completed that program and graduated. She has taken an opportunity for a broader finance role at a pre-IPO firm. Today is her last day with us. We will miss her, and we wish her all the best in the future.

I am pleased to announce the appointment of Stewart Mcelhinney as Mary's successor. Stewart has been with us for eight years, most recently as a manager in our Capital Markets Group, and he is a CPA and an MBA. I know he's looking forward to meeting and working with all of you as he develops his understanding of the public markets and his new position.

I will now turn the call over to Ted.

Good morning everybody, or afternoon, for those of you on the East Coast. After beginning with our first-quarter results, I will address our office and multifamily fundamentals, and then finish with an update on our 2012 guidance. Compared to the same period in 2011, our first quarter 2012 FFO decreased 6.9% to $59.9 million, or $0.35 per-diluted-share. As we have reported before, we make an adjustment in calculating FFO to treat debt-interest-rate swaps as fully terminated in the quarter of any termination. In contrast under GAAP, terminated swaps continue to impact net income over their original lives as if they were still outstanding. In the first quarter of 2012, previously terminated swaps increased our GAAP interest expense by $4.3 million. That amount was then offset in calculating our reported FFO, leaving a net zero impact.

Please note, there will be similar add-backs in the next two quarters. The reduction in our FFO was more than accounted for by increased interest expense. While we have less debt outstanding this year than last, and our refinance debt locked in historically low interest rates for the future, these rates were still higher than the floating rates we enjoyed in the first quarter of 2011 during our refinancing process. Compared to the same period in 2011, our AFFO decreased 14% to $41.1 million or $0.24 per-diluted-share. Our AFFO in the first quarter 2012 was impacted by higher tenant improvements and leasing commissions. This was not caused by increased concessions to tenants. Our average annualized tenant improvements, leasing commissions and other capitalized leasing costs remained within our normal range at $3.63 per square foot per year. Instead, the higher expenditures reflected, fluctuations in the timing of cash outlays, a few recent leases with longer terms, and some large improvements which were funded by tenants.

In accordance with GAAP we do not net tenant funding against the improvement cost. Overall, we expect to report greater AFFO per-share for 2012 than for 2011, even after dilution from the shares issued in January. During the first quarter of 2012, our G&A totaled $6.7 million, or 4.7% of total revenues. Comparing the results for our combined office and multifamily same properties in the first quarter of 2012 to the first quarter of 2011, revenues increased 0.6% on a GAAP basis, and 2.0% on a cash basis. Expenses increased by 1.2%, both on a GAAP basis and on a cash basis, and net operating income increased 0.3% on a GAAP basis, and 2.4% on a cash basis. As Jordan reminded you, quarterly same-property cash NOI is very sensitive to timing of items, such as repairs and maintenance and the results of our annual CAM reconciliation process. These factors will make the second quarter of 2011 a tougher comparison. We continue to estimate that our same-property cash NOI for all of 2012 will be greater than in 2011 by between 1% and 1.5%.

On a sequential quarter basis, the lease percentage for our total office portfolio at the end of the first quarter improved by 50 basis points, just 89.8%. Our occupancy rate increased to 87.9%, a gain of 40 basis points from the fourth quarter of 2011. During the first quarter, we signed 609,000 square feet of office leases. As you will recall, the 906,000 square feet of office leases we signed last quarter included the 170,000 square-foot WME renewal. During the first quarter, on a straight-line basis, our average rent on office leases, signed during the first quarter, was 6.9% lower than the average rent on the expiring lease for the same space. On a cash basis, our beginning cash rent on office leases signed during the first quarter was 15% lower than the ending rent on the expiring lease for the same space.

Rent on expiring leases includes the impact of our annual 3% to 5% rent bumps over the entire term of those leases. On a mark-to-market basis, our asking office rents were an average of 9.9% lower than our in-place cash rents. This differential reflects a number of factors, including our built-in annual 3% to 5% rent escalations. The negative effect of rent roll-downs on our office rental revenues, which affect approximately 11% to 14% of our office portfolio each year, are essentially offset by the positive impact of the annual 3% to 5% rent bumps coming from our continuing in-place leases. On the multifamily side, our 2,900 units were 99.8% leased at March 31, 2012. During the first quarter of 2012, we continue to see strong rent increases with average asking rent 7.2% higher than in the first quarter of 2011.

Recurring capital expenditures for our partner communities during the first quarter of 2012 averaged $110 per unit. As we discussed in our last conference call, we significantly reduced our leverage after the beginning of the first quarter. We completed our ATM stock sales program, which we expect to replenish shortly. However, as we said last quarter, we are not planning to issue additional equity for de-leveraging. We closed a 7-year secured nonrecourse $155 million term loan with fixed interest at 4% per-annum. We reduced outstanding consolidated debt by $367 million. Finally, we repaid all of our debt scheduled to mature in 2012. As a result, we reduced the ratio of our net consolidated debt to total capitalization to 44% as of March 31, 2012. We now have virtually no consolidated debt maturing until 2015.

Finally, turning to guidance. Including the adjustment for terminated swaps we discussed, we are maintaining our full year 2012 FFO guidance of between $1.33 and $1.39. We have not made any significant changes to the key estimates and assumptions in the guidance we provided last quarter. Specifically, we are assuming, no change to our same-property cash NOI growth, which we estimate will be positive by between 1% and 1.5%. No change to office occupancy. Given quarterly fluctuations and the time line between signing leases and commencing occupancy, we still estimate that our office occupancy at the end of 2012, will be about 1% higher than at the end of 2011, while our multifamily portfolio will remain essential fully leased. No change to our debt assumptions.

We continue to assume that our interest expense, after adjusting for terminated swaps, will range between $133 million and $135 million. No change to G&A, which we still estimate will range between $27.5 million and $28.5 million. No change to our FAS 141 income, which we still estimate will range between $17 million and $18.5 million. No change to straight-line income, which we still estimate will range between $4 million and $6 million. No change to recurring capital expenditures for either office or multifamily portfolios.

We continue to estimate that our recurring capital expenditures for our office portfolio will be approximately $0.25 per-square-foot, and that our recurring multifamily capital expenditures will range between $400 and $450 per unit. We are making a minor change to share count, given the impact of our higher stock price, we currently estimate that our weighted average diluted share count will range between 172.5 million shares and 173.5 million shares. Our guidance excludes any impact from future acquisitions, dispositions, equity issuances or repurchases, debt financings or repayments recapitalizations, or similar matters.

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

Again, in consideration of other participants, please limit your inquiries to one question and one follow-up. Thank you. (Operator Instructions) The first question comes from the line of Josh Attie.

Thanks, good afternoon. Can you spend some time talking about the Warner Center Woodland Hills market -- I know it's one of your weaker markets and occupancy declined a bit in the quarter. What's your outlook for those assets as the year progresses and do you still expect to get occupancy growth there in 2012?

Yes, and I'm might view a real small amount of history because I don't want to bore you with it, but we originally went into the Warner Center market for some very good long-term core reasons. Primarily, it's got a modern office market there that has good traffic patterns. It's got very good housing, good schools, good amenities, and we were finding ourselves that people even working on the west side, were making the choice to go out there and live. And we were also finding that many of our, let's say law firms, accounting firms, et cetera, were starting to do split offices. Now, that trend that we saw some time ago, we continue to see. When we went into the recession, of course, and as that market has converted over to being smaller tenants, where the people live close to where they work, which is part of a market maturing, it happened during the recession at a time when some larger tenants were exiting -- we believe they were going to exit, but they exited a little faster than we planned.

So it's hard to backfill that much, and it's created a problem for us out there, not that our long-term view isn't still extremely good and positive for that market. And, I have to say, I still believe that market for Douglas Emmett is probably going to provide some of our best income growth and absorption going forward, though I understand that we are going through these tough absorption times right now. We are, in fact, even still looking to purchase buildings out there.

One of the things that we're trying to do in the short-term is that, with the heating up of the Sherman Oaks/Encino Market, it's allowed us, as we've mentioned before to most of you, I know we've mentioned it to you, Josh, it's allowed us to start increasing those rents in that area. And that will drive a differential with Warner Center, so that right now, or go back 6 months or a year, those two markets were essentially on a par in terms of rent; they were a little less with Warner Center, but not enough of a differential to drive tenants out, so our short-term strategy before we wait for the longer-term demographic trends to take over, is to try and drive traffic out there. We're seeing traction with that currently in tenants that are -- who were in Encino and are now moving out to Warner Center.

I know it's difficult to predict, but based on the activity you are seeing, do you feel like 2012 is going to be a year where your assets in that market kind of turn the corner and see some sustainable occupancy growth?

I think we're going start seeing positive absorption out there, but I hate seeing it on a quarter where we didn't see it, but I do believe that. I mean, I frankly probably would have said that last quarter so that would have made me wrong this quarter. But I think in terms of a trend, we think we're going to start seeing real positive absorption out there.

The macro trends are good on a quarter-to-quarter basis. It's tough to do it. And again, as Jordan said, that's our most challenging market right now. It's also the market in that, in the long run, we think has the most potential for us.

Great. Thank you very much.

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

Jordan, I hope we can follow up on your prepared remarks on acquisitions. I think you said this time, that you are hopeful in closing some deals, but it sounded like maybe activity is still maybe a little bit slower than you would like. Is that a fair characterization, or are you busier now than you were 3 months ago on acquisitions?

I think it's a fair characterization to say that things are not moving very quickly. They are slowing. It's hard to get people's attention, and people aren't -- there's just discussion, but they're not coming out and listing the larger properties. Oh, the little deals that trade around, but they don't even, you know -- right now I'd say more than even during the last year, it's harder to get a feel even for where values are because there's so little even activity. At least there was some failed deals, where you could say, hey, here's where the bid/ask was. We don't even have that going on right now. And in terms of deals that sort of the off-market activity, people just don't feel hurried. I've been playing every card in the book and I think there's every expectation for income taxes to go up next year and I've been saying, hey, if you are going to do it, this is the year to do it. They just don't feel that urgency.

2011 was sort of the year where you saw a number of failed deals because of a standoff between sellers who thought that the prices were rising quickly, and buyers, including us, who couldn't get there on some of the more disciplined metric approach, and as we said, I think last quarter, we sort of keep hoping that that standoff will result in sellers being, what we would consider, more realistic, but as Jordan said, that change in psychology still hasn't happened. We'll have to wait and see when it happens, if the sellers break or the buyers break.

Thanks, Ted. And that kind of reminds me, as you look at either apartments or office, do you find the competitive dynamic in terms of other bidders at all different between the two? Are the underwriting assumptions more or less aggressive on either side?

Probably more aggressive on apartments. Apartments are getting, in comparison to the cash in place, the income in place, they're getting extremely aggressive values, more so than we're seeing in office, although small office is getting pretty aggressive values at the moment too.

I was going to say that I think that on the apartment side, the deal size in our markets has tended to be significantly smaller, and I think that has created a broader pool of buyers than in for the large office thing to come about.

Thank you.

Next question comes from the line of George Auerbach from ISI Group.

Great, thanks guys. Just wonder if you could take a minute on the JV assets. They're still in low 80% occupied range, and they're primarily in Beverly Hills and Sherman Oaks, some of your better markets. I guess, can you just talk about the leasing prospects for those assets this year and maybe just talk about why those assets haven't seen as good a traction as the rest of the portfolio has in the sub markets?

Yes, I think they're in the mid-80s, and I've got to tell you, Beverly Hills is leasing up extremely well. I mean, they might be being dragged down a little bit by one building in Warner Center, but it's actually had some very steep trajectory in terms of absorption. I mean it's moving as well or better than even we would have predicted through these last couple quarters and I think it's going to keep moving at that clip until essentially, particularly the Beverly Hills stuff' is just full. As a matter of fact, one of our buildings I think, is essentially full there.

Remember that these assets in Beverly Hills, in contrast to the assets that are in the REIT, those are primarily located in the golden triangle, where as the bulk of the ones for the funds have been out in the eastern side of Beverly Hills, and that area didn't start off leased up, but it's becoming much hotter. And so, truthfully, those assets are leasing up very well, as are the -- we're doing fine in Santa Monica, Sherman Oaks. Obviously Warner Center, as we talked about earlier, has not yet really turned that corner.

Okay. Just a quick follow-up. You mentioned that you were pushing asking rents or taking higher -- taking rents in three of the sub-markets. Can you maybe just quantify the kind of increase in rents over the last 12 months in Beverly Hills, Sherman Oaks, and Santa Monica?

Well, Santa Monica is actually the area -- has got the best -- that's a market which is, as we've said in the past, over full for us. It's actually hard to maintain in our sub-market -- it's hard to maintain occupancy above 95 or maybe 96, and Santa Monica's been above that. So that actually has been showing some significant increases in individual places where you get into some kind of bidding situations. On the other hand, there's not a lot of space available for us to lease there, unfortunately. Beverly Hills, the triangle is the same way, and as we've said, we're seeing the increases in occupancy outside of that. I think that in terms -- and Sherman Oaks/Encino is a little behind each of those things, but I would say that, if you're looking at it, they're probably, on average, someplace a little shy of a quarter increase in rent is probably about right for asking rents in those markets. Santa Monica, a little bit more than that, but it varies from place to place because that's a very hot market.

Thanks.

The next question comes from the line of Jamie Feldman, Bank of America Merrill Lynch.

Thank you. I was hoping we could focus on the apartments for a moment; you've had good luck raising rents and growing NOI there. How long do you think the runway is? How many more years or quarters do you think you can continue to push rents and what kind of push-back are you getting from tenants?

We have not seen any endpoint to that at this point. We continue to see opportunity to go forward. That's really going to depend, I suspect, on the macroeconomic terms in the long run, but at the current time, we're not seeing it becoming a problem. We still see ourselves in the early innings of this phase. That's where we are.

Okay. And then just a follow-up. You have the AIG lease coming due next year. Do you have any update on progress there or what their thoughts are?

We're in discussions with them. It's an individual -- it's a single lease, so we'll wait and let it play out, but we are in discussions with them.

Okay. Do you sense they want to stick around?

We hope they do.

Well, I don't think they'd be talking to us if they don't want to stick around at all.

Okay, you're in discussions for potential renewal.

Yes.

All right, thank you.

Next question comes from the line of Jordan Sadler from KeyBanc.

Thank you and good morning out there.

Good morning.

Wanted to follow up on the occupancy. You've made nice progress again the quarter, picking up 50 basis points of leased occupancy sequentially. You're maintaining the guidance for the full year on occupancy. I guess it's early, but is there -- which is plus 100 basis points for the full year. Anything behind that, or how should we think about rent roll or occupancy as we sort of roll throughout the rest of the year?

Well, in terms of occupancy, you know, as we've said in the past, and as we're seeing, we feel good about positive absorption for sure. Occupancy is a little slower. That's why we're mixing kind of occupancy and leasing here a little bit.

Sure.

When you sign the lease -- we could lease like crazy. It's still a little slower to get the people to roll into their space. So we're feeling very good about positive absorption, and you're seeing it. In terms of rent roll, in particular the rent roll metric that even stands out when we look at things, is the same lease to same lease straight-line rent comparison, right, which this quarter was down something like 6.8%.

6.7%.

6.7%; whereas last quarter, I think it was up 2.4% after -- even if you took out --

Down.

Down 2.4%, taking out the one large lease that we did. So we took a pretty hard look at that difference. And, what we can see happening is, when we do a lot of leasing, in a particular sub-market that was really impacted by the recession, where in this case it was Westwood, so Westwood we did a lot of leasing there last quarter. And Westwood, while our portfolio didn't necessarily drop dramatically, Westwood, as a market, got a lot of negative absorption to the recession and rents really dropped. I mean, it was sort of the poster child for extremely high rents in '07, dropping to some extremely low numbers through the recession.

So now, as we're doing leasing there, and I assume the same will happen as we lease up Warner Center, you are going to see sort of some odd results in terms of straight-line comparison because it is going to be overwhelmed by those sub-markets, whereas, if we were doing a lot of leasing in Santa Monica, that number would probably almost look like it was starting to shift over again. So, it's sort of sub-market-dependent, although the news that's good is that those markets are leasing up now so, not only do we have the good markets where we've told you rents are starting to move, but some of the other markets that were the most weakened during the recession, seem to be recovering. That's why we're feeling good about Warner Center, you're seeing it in Westwood, although you didn't see it in our particular portfolio, you saw it in other owners' portfolios in that market. So we don't take that 6.7% number as being sort of trend-indicative going the wrong way. You understand that?

Sure. That makes sense.

Jordan, to get back to the question about the guidance on occupancy itself, we actually build that from a very space-by-space model that's put together by our financial planning group, and it incorporates the feedback from the properties and sort of historical trends for us. Now that doesn't capture -- and I know some of you are concerned, that, how do you get there. It doesn't capture if there's an inflexion point, because we're not at that -- to be able to do that. But it is built up from a very detailed model to come to the approximately 1% for the year.

Of occupancy growth.

There aren't any known sizable move-outs 2Q, 3Q that sort of make the year a little bit lumpy from an occupancy standpoint?

There are always -- the year is always lumpy, particularly on occupancy, where you just have move-outs of people. So, the answer is, yes, there are known move-outs that will take us down, and there are -- it's a question of how that gets offset by the new leasing.

In terms of absorption. Everything we know is calculated into our numbers that we give you guys.

Literally, we've got 2300 spaces that we're monitoring and looking at each one of them and it is the sum of those two numbers of the influx and the out flux, and [that comes up], and that's why I say it makes it harder to calculate because you can very easily get, if somebody decides to stay or somebody decides to leave, and often for many of these tenants, one of the reasons we don't try and project on an individual tenant basis is because you just end up with people who are always telling you that they have another option that they're thinking about moving to and you're trying to gauge whether that's a negotiating ploy or if it's real.

That's helpful. Quick follow-up on the commentary surrounding Beverly Hills leasing up even better than you would have expected. I'm curious, are there any other sub-markets that are doing the same? Obviously Santa Monica, it sounds like there's strength there, and maybe Sherman Oaks, as well. But, what is the nature of the tenants who are sort of coming in and leasing a little bit more aggressively? What types of tenants?

It varies from quarter to quarter. I mean, market to market. So if you're looking at Beverly Hills, Beverly Hills is dominated by entertainment clients and entertainment-related clients. Santa Monica has a more diverse group, but obviously, as we've all talked about in prior quarters, you have a lot of tech or on a margin, tech is improving things. And Sherman Oaks/Encino is mixed, although there's a fair amount of entertainment that's been contributing to there. Overall, during the quarter, tech and entertainment were disproportionate shares of their leasing. Now, that's not to say, for example in the case of tech, that it's become a major piece of the portfolio as a whole, but it's been -- continued to be more than its proportional share, if you look at where we have in general. Legal, financial services and entertainment were the top industry groups this quarter, with accounting a little behind those.

Okay. Thank you.

Next question comes from the line of Brendan Maiorana from Wells Fargo.

Thanks, good morning out there. You talked a bit about Warner Center, Woodland Hills. I wanted to maybe go into Brentwood a little bit because that's the other market where you've got good opportunity, I guess I'd put it, in terms of lease-up within the portfolio. If I look at your portfolio relative to where Douglas Emmett has operated historically, I think it's about 700 basis points occupancy below average. And if I look at market statistics, it's about the same market today versus average over the past 5 or 6 years. Can you give us a sense of the dynamic that's going on in that market and the expectation of lease-up over the next couple of years?

Yes, we continue to see Brentwood as a market on a par with the other west side markets. There's been a little noise in that in the last few quarters. We've had a couple of larger tenants that moved out for reasons that didn't relate directly to a competitive bidding process. We already talked about one that moved because they wanted to have a full-floor place. There's another one that moved back into a space that they had, at one point, occupied and been their home turf before they split off from the firm that continued to occupy that. There's also probably a little noise in there for those have been to L.A. recently in the Wilshire properties. That area, Wilshire, has been very dramatically impacted by the 405 project so that you've got a lot of traffic there on Wilshire, and getting there from the far side of the freeway is very difficult. All of that being said, we actually have been having very good activity in that market, and we, in the same way that we felt -- we said something about Westwood last period and said, you know, it could lease up very fast, because of that, we feel actually the same way about Brentwood. So truth is --

It has a strong up-arrow.

So, truth is, we don't regard -- unlike Warner Center, where we see that as a longer-term development project, we think that you could be very surprised and see Brentwood move up very quickly, just with a few people coming in.

I mean is the tightness in Santa Monica pushing tenants to Brentwood? It would seem like that would be the next logical step geographically.

Yes, it depends on the type of tenants. Some are moving there, some are moving to other markets near. But I agree with you, that that's right. The 405 project should be finished some day soon, in the next 6 to 9 months. I think that will limit it. But again, we really are seeing a lot of traffic there right now, today. So that's not a market that we see as being problematic.

Leasing traffic, you mean. We're also seeing car traffic.

Exactly.

I understand. And then just a follow-up question. If I look at your kind of tenant mix, law firms, financial, professional services firms, insurance, they comprised about 60% of your tenant base, and the media entertainment and advertising firms are around 20% of your tenant base. Are you seeing, as we hear from a lot of other landlords, it's the media, entertainment and tech tenants that are really driving the expansion. Are you seeing the more professional service firms, the more traditional office firms? Are they contracting? Are they expanding? Can you give us a sense of that side of your tenant base?

Well, again, in terms of the new leases during the quarter, whether you look at new new leases or renewal leases, they are really still -- legal, financial services are right up there as being major tenants. One of the things I think you have to focus on, is that a lot of these financial services, accounting firms and legal firms, service entertainment, and tech things. So we have clients that we classify as legal, but the reality is, if you know the entertainment business at all, they are --

You couldn't hire them as your lawyer.

Unless you're an entertainer, they typically charge on a percentage basis, and all of that. So again, while tech and entertainment are a relatively, as you point out, relatively not the biggest pieces of the pie, if you also included in them the impacts that they have on the other types of service activities, it's actually a fair amount.

Okay. That's helpful. Thanks, guys.

Sure.

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

Hey, Jordan, a lot of the media reports, about the assessor and all that, seems like it's probably noise as it pertains to you and to the company, but can you just talk about -- maybe go back to the reassessment after the IPO and just help us understand that there's no links there to that time period to the current brouhaha?

Yes, I can do that and I promised I wouldn't spend the time answering this question, so I'm going let Ted do it, because I'm so long-winded on it, which you heard when you called me. So, I'll let Ted answer the question. But, yes we can do that.

Well, first of all, it probably makes sense for those of you, as Jordan said, we spent some time with Michael talking about this a couple of weeks ago, but for those of you who don't know the background, it probably makes sense for me to back up for a minute and just give you a little background on it. In the past few months, there have been stories in the press out here about improprieties in the office of John Noguez, who became the L.A. County Assessor in December of 2010. The heart of those stories concerns a property tax consultant who raised campaign contributions for Noguez, and a Staffer in the Assessor's Office, who went into the county computer systems and reduced the assessed values of literally hundreds of residential properties, including properties owned by the clients of the property tax consultant. When the Assessor's actions were discovered -- I mean when the Staffer's actions were discovered, he was fired, and the reassessments were reversed. They just went in and told people there had been an error and you're back up. When he was questioned, the Staffer claimed he had reduced the values because he felt pressure to raise campaign money for the Assessor.

According to the papers, some of the owners of the reassessed properties gave donations, and many did not. And then sort of the most recent development in the last week, the district attorney did subpoenas to search the house and the offices of the Assessor, the Staffer, and the property tax consultant. So that's sort of what we know from the papers. Sort of from our side, neither Douglas Emmett nor Jordan has ever dealt with either the Staffer or the tax consultant in any way. And in both cases, we've always dealt with the Assessor in compliance with the applicable procedures. They never requested special favors or made any pay-to-play contributions. So all of this relates to the time period, I mean, I think that the improper assessments were begun in 2010, and then continued for a little period after that. So none of this scandal relates to the periods before that time.

It's all on houses.

Yes. But since the question has been raised, let me just say a little bit about Jordan's house. Jordan applied for an appraisal on his house last year. At this point, we don't even have a set value for Jordan's house yet. The case load in the Assessor's office went up by about 10-fold after the decline in property values that happened in 2008. So that in fiscal 2011, they had a total of 97-- 96,000 cases that were pending, but they were only able to resolve less than half of those, so Jordan's house and another 50,000-some cases were in backlog at year-end. Jordan doesn't save any taxes from the delay, as any appraisal will be retroactive to the date in question. And so the only benefit that was cited by the L.A. Times story was that Jordan could retain interest he earned during the delay, which, at current interest rates, would probably be a few hundred dollars.

That was a long answer. Did that answer it for you?

Well, my question was really just -- I think the thing most of us probably worry about is that the current Assessor was hand-picked by the prior Assessor when you guys were negotiating the reassessment of the property taxes after the IPO, and I just have to ask the question, you know, that there's no relationship --

I can give you a simple answer. There's absolutely no connection here, talking about years and years ago, that, yes, there's no connection at all.

By the way, another thing is that Noguez was not in any district that -- when he was working in the Appraiser's office, he did not work on districts that contained any of our products -- our projects.

Okay. And then, Jordan, just to go back to your Warner Center comments, do you feel like when it reaches some equilibrium level that that market can trade at rents that are on par with, say, a Sherman Oaks, or do you think that it will always be kind of a price-sensitive market relative to Sherman Oaks or Encino?

No, it will be higher. I expect -- its history is that the rents in Warner Center were higher than Encino/Sherman Oaks. And, what happened was, they dropped out, due to the recession. Encino/Sherman Oaks held strong, and even maybe improved a little bit, and so now that Warner Center market has to recover all the way back up. But our history is that that market, because of the way -- it's a very good place to live. It's got good amenities. It historically was more expensive to rent there.

Remember that Warner Center was the only sub-market of all of our sub-markets that saw any new buildings come on-line in the last 5 years, and so a lot of the excess capacity in that market -- there was almost a million square feet, as I recall.

1.3 million.

1.3 million that came on-line in that period. If you back that 1.3 million out of it, it actually would be a pretty full market today. So part of the problem really is not having to do with the market just going down, it's important to recognize, and all that space is now on the market. So it's -- the vacancy is now all out there.

It absorbed a lot of space, but it couldn't absorb the whole add. So, I think once it gets back up to he speed, I guess if history's any indication, the rents will be higher there again.

You think a stabilized level is kind of a 90% or more, and you think that's going to be 14 --

At 90% out there, you will see rents going up, and in the past, there was good price tension out there. That's the reason why they built 1.3 million feet. It was sort of the last big development site that could be done under that kind of Warner Center-specific plan. And they built it -- and they actually impressively, until they hit the recession, were leasing it up like crazy.

Alright, okay, thanks. And Mary, good luck to you.

Thanks.

Next question comes from the line of Rob Stevenson from Macquarie.

Modeling question, in terms of the $133 million to $135 million guidance for interest expense, is that net of the add-backs for the swaps in the FFO line item?

Yes, that's after making the adjustments for the terminated swaps.

Okay. And then the other question is, where are you guys sort of trending now in terms of the FAS 141 income? It looks like it keeps burning off, but is that accelerating? At what point do we burn through that and you basically have no impact to FFO any more?

Well, we have -- the FAS 141 can come into play from two places. One is, there's a small amount that's coming in from any acquisition that we're doing, and it could be either positive or negative, depending on the acquisition. So that will burn off as those leases burn off. The bulk of the FAS 141 income has come from the IPO assets. And that burns off as the individual lease involved burns off. And so given -- and that, therefore, will -- that portion will continue to decline going forward, although at a gradually reducing rate. So that if you think about -- if you did a curve which has the length of a lease after the IPO, you had a lot that expired at first, and then you had fewer longer ones, and now we have a few -- we're going to get out pretty soon out to a thing where we're looking at only a few of the leases that were, say, a 10-year lease or even longer leases at the time of the IPO. So we are seeing that. That will continue to come down. But the rate of coming down, if you just take the rate of coming down over the last few years and you extrapolate out, it's asymptotically approaching a curve that will run out until another 8 to 10 years, because we still have some leases that were pretty long-term going back.

Okay. And is there anything of a nonrecurring nature that you guys are including in the 133 to 139 guidance that we need to be aware of in the last couple of quarters of the year?

There are some small amounts of noise, because we had -- we did have, for example, in this quarter, we had the -- some interest that was included, that we had some mark-to-markets on the last debt we were paying off, and we paid that off. We have some loan fees and so forth. But on the whole, it's not particularly lumpy.

Okay, thanks, guys.

Now, and one other thing that -- there is some amount of our debt, particularly as we get further into the year, is going to be floating, as you probably have noted. And, so depending on what happens with LIBOR, that would affect that issue.

Next question comes from the line of Mitch Germain from JMP Securities.

Good morning. Jordan, just curious, any material change in the size or composition of the acquisition pipeline?

I'd say it's weakened. I don't know material. Look, when you have a pipeline you're working on and you haven't made any deals, I guess anything is material since the deal you thought you were about to make. But I just felt like more was -- if you would have asked me 3 or 4 months ago, I felt like there was more coming than I feel like I see right now. I mean, I know some deals that are coming, but I just thought more would be coming this year. I hope I'm wrong, and you never know, and stuff can come out, and right when you don't expect its going to happen so, my predictions have just been horrible on this issue, going back a couple of years actually. But, if I look at what right now we're working on, it's actually probably a little bit less than what we were working on 3 or 4 months ago.

Great. I appreciate it. Thanks for everything, Mary.

I'm sorry, what?

I was just saying thank to you Mary. Go ahead, please. (laughter)

Thanks, Mitch.

Next question comes from the line of Alex Goldfarb from Sandler O'Neill.

Good afternoon. I guess I need to do the obligatory we'll miss you Mary. (laughter) Everyone else has done it so, what the hell. Two quick questions here. First off, and I jumped on late, so I apologize if you've already addressed this. Can you give us a sort of a mark for your 2013 with the rent sort of expiring around $39, $40? What would market be for where those leases are right now today?

2013, we don't know, but we can tell you what the number was.

No, I don't know, Alex that we've really gone through and done the analysis to look on a market-by-market basis as to what that is.

It's 9.9 now, the mark-to-market.

9.9?

Well, for the leases right now we have in place, if you were to mark them to just market asking rent, 9.9%.

Okay. And then the second question is, Century City, did you guys talk about that sub-market?

No.

Okay. Can you just give us some comments, just speaking to some brokers, sounded like it was a little soft that some landlords were trying to push the $4 mark but weren't having much luck. Sort of what you guys are seeing in that market.

Well, first, that's a market that, as you know, we have -- it's not a market in which we're the dominant position that we have in a lot of other markets, and it is also not a market you notice that's in the group that we've said that we're seeing pushing rents being something happening right now. That being said, the other sort of issue is that's a market where we have really good occupancy, especially compared to the market as a whole, and where we have relatively little rent-roll this year. It's a market that's had some noise in it also, because there's been some buildings being pulled off the market, so all of that has been going on. I'm not sure I have as much sort of intelligence on this $4 rent issue that you'd just mentioned that is happening, but that's sort of where we see the market.

Okay. Thank you.

And the last question comes from the line of Josh Attie from Citi.

Thank you. It's actually Michael Bilerman. Just a couple of follow-ups. Jordan, you talked about limited supply of new product in terms of acquisition activity in your core markets. I guess how much time are you then spending outside of west L.A. and Honolulu in terms of trying to look for deals and, arguably, I understand that there's an element of dumb tax that you would have to pay as you go into new markets, but I'm just curious. If you can't find the product in your current markets, are you getting -- is the itch there to go outside?

Well, I don't want to change the bias to give any indication I have anything but a bias to buy in our markets, which I know is not that exciting a statement, but I will also admit that I'm looking harder at deals just because of the amount of time I have in my day and I like looking at deals, that in some of the other markets, working their way up the coast all the way to Seattle. We have taken some better looks at those markets, but every time I do it, I say to myself, I just need to break some of these deals loose that are here in L.A. I'm looking.

But as you said, there is a huge advantage to us in this market and given that our proclivity to reestablish the platform, it is a huge investment to go into a new market.

Maybe we can go back to Michael Knott's question just in terms of -- as we go dial back to the IPO in '07, clearly the expenses in the real estate taxes was a big discussion that we had when you were going public, and in terms of what you had reserved and where you sort of thought the marks were, we're 5 years later now. I assume that some of this has sort of washed through the system, but can you just elaborate a little bit more about sort of when that deal was struck and how much of its current pay at this point?

I've got to tell you, I know that something -- it's kind of the last time you guys heard about property taxes from us, so you are going back to it, but it's so old and so washed that it's just -- I really don't -- there's not much there. There's nothing. All of the reserves and all of those old things that were done, I mean, I don't even -- I honestly don't know how to answer that question. It's like asking you, when you were in grammar school, can you get down to the classes you were in and tell me which one really -- where you didn't study hard enough could impact today what you're doing? I mean, it's too long ago.

Right. So there's no element -- I mean, look at the time, right, you said values, sort of in terms of the assessments and you tried to lower the tax bill as much as possible, right?

Well, what happens is, just so you understand but, maybe it's worth repeating the processes, the assessor, when you do the transaction, they go through and value all kinds -- everything, and you end up with values, okay. Now let's go forward; values went down. We go in essentially almost every year where we think we have an opportunity, and we apply for that value to be reduced. I mean, we do that on 10, 15 properties. We do it continuously any time we think, and we're aggressive about this, no doubt about it. We're aggressive about saying, hey, maybe our property taxes are a little high here, we want you to take a look at it. Now, they will come in a lot of times and revalue properties, and we've gotten that done over the last couple years, and gotten properties to lower values. That lower valuation is for one year, then they push it back up, and you can try and fight it back down.

Now, by the way, there's one of your things that Jordan's saying that don't actually have a huge impact on our financial results because the vast majority -- the benefit that comes from that actually gets passed through the tenants under the CAM provisions of their leases. So while we think it's good business to do it, it actually does not -- these are not issues that have a lot of FFO impact for us.

It lowers the cost of the tenants and hopefully at the end of the day that also increases the amount of rent we can get, but the day you get the value reduction there's not a great change for us.

Okay, And then just last one in terms of FFO. So, at $0.35 you're sort of trending towards $1.40 annualized. I understand that the share count is going to be a little bit higher as you move through the year, based on the ATM that was done, in obviously in the first quarter, as well as some of the stock comp and higher stock price, but what else may be happening that would put you down towards a $1.33, $1.39 range, especially when you have increasing occupancy throughout the year? I'm just trying to figure out why guidance is not higher.

Well, probably the biggest factor to sort of focus on is that, during the year, as we've talked about, we continue to see declines in straight-line and FAS 141, and some other non-cash issues that flow through, so the occupancy -- you're absolutely right, and we've said this before, that because there's an offset between the current rent-roll down and the rent-roll up between the bumps, that doesn't affect things, and so the cash sort of base rent mostly relates to that -- that's going to make it -- and another thing that I mentioned very briefly in my thing. Every year we go back and do a CAM reconciliation process, in terms of looking at what the CAMs actually were, which is a very complicated process on a lease-by-lease so we have to go through all 2,300 leases. That process last second quarter was particularly -- turned out particularly good for us, in the sense -- I don't know if it's good or not -- but anyway. The reconciliation turned out positive for us, but -- which means we collected too little during the year, which is why I said it's not. So that also impacted the comparison last year.

Okay. Thank you.

And there are no questions at this time.

Okay. Well, thank you, everybody. It was a pleasure talking to you, and we look forward to speaking with you again next quarter.

This concludes today's teleconference. Thank you for your participation. You may now disconnect.