Douglas Emmett Inc (DEI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's earnings call for its 2012 third-quarter results. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question and answer session. I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO, and Ted Guth, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us.

Our actual results 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 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 found in the Investor Relations section of our website. 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?

Thanks. Good morning everyone. Thank you for joining us. Our markets continue to recover with strong support from many of the United States most competitive industries. Contributions from entertainment and technology have been well-publicized, but healthcare, education, foreign trade and tourism have also been very strong. While the nation saw 1.4% job growth over the past year, Los Angeles County saw 2% growth, adding 74,000 non-farm jobs, the best in a decade.

The increase in employment has been broad based. With the largest job growth coming in professional and business services, education and health services. I am pleased to announce that our same property cash NOI in the third quarter grew by 2.7% fueled by increased revenue from our office and multifamily portfolios, as well as good expense controls. During the third quarter, our leasing fundamentals were strong. For the seventh consecutive quarter, we had positive net absorption in our Office portfolio, increasing our total office leased rate to 90.4%. Over the last year, we have seen office rental rates turn up across all of our West Side and Encino, Sherman Oaks submarkets.

Our Multifamily portfolio remains fully leased with rents moving up at a very strong pace, exceeding 7% annually. We have begun planning two multifamily projects on sites we already own in Los Angeles and Hawaii. The zoning of these sites currently supports a significant number of additional units; however, as you know, development in our markets is a long and difficult process. On the acquisition side, we are still not seeing many quality for sale assets in our markets. Nevertheless, we continue to work on acquisitions and still hope to use our ample liquidity for external growth during this part of the cycle. I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everybody. After beginning with our third-quarter results, I will address our Office and Multifamily fundamentals, comment briefly on our balance sheet and finish with an update on our guidance. Compared to the same period in 2011, our third-quarter 2012 FFO increased 4.9% to $57.3 million, or $0.33 per diluted share, treating debt interest rate swaps as fully terminated in the quarter of termination.

We increased revenues in both our Office and Multifamily portfolios, controlled our expenses and enjoyed the benefits of lower interest from our refinancing program last year. Compared to the same period in 2011, our third-quarter AFFO increased 13% to $44.7 million, or $0.26 per diluted share, as we continue to improve cash revenue and replace non-cash items. For the third quarter of 2012, our G&A totaled $6.6 million, or 4.5% of total revenues. We continue to run one of the most efficient operating platforms in our peer group, with our G&A expense among the lowest as a percentage of revenue.

Comparing the results for our combined office and multifamily same properties in the third quarter of 2012 to the third quarter of 2011, revenues increased 1.3% on a GAAP basis and 1.9% on a cash basis, largely from increased occupancy in our Office portfolio and increased rents in our Multifamily portfolio. Expenses increased by 0.3% both on a GAAP basis and on a cash basis as a result of modest increases in employee and insurance costs, largely offset by expense reductions in other areas. As a result, net operating income increased 1.9% on a GAAP basis and 2.7% on a cash basis.

Now, turning to office fundamentals. During the third quarter, we increased the lease percentage for total Office portfolio by 30 basis points to 90.4%, while our occupancy rate remained unchanged at 88.2%. We signed 191 office leases, covering 654,000 square feet, including 207,000 square feet of new office leases. As Jordan mentioned, we have been increasing office rents throughout the West Side and our Sherman Oaks, Encino submarkets compared to a year ago, although rental rates still have a ways to go before returning to peak of 2007.

As expected given our five-year average lease term, we continued to show rental rolldown from leases signed at the 2007 peak. During the third quarter, on a straight-line basis, our average rent on executed office leases was 5.2% lower than the average expiring rent for the same space. On a cash basis, our beginning cash rent on executed office leases was 13% lower than the average expiring rent for the same space, largely reflecting the impact of our annual rent bumps. As we've mentioned before, the negative effect of rent rolldowns on our cash office revenues, which affect approximately 11% to 14% of our office portfolio each year, is effectively offset by the positive impact on the annual rent bumps in our remaining leases.

On the Multifamily side, our 2,900 units were 99.8% leased at September 30, 2012. Our markets continue to support strong increases in residential rents with average asking rents in the third quarter 7.4% higher than in 2011. Recurring capital expenditures for our apartment communities during the third quarter of 2012 averaged $96 per unit. Turning now to our balance sheet. As we disclosed during last quarter's earnings call, in July we closed a seven-year $285 million term loan with fixed interest at 3.85% per annum. We have no material consolidated debt maturities until 2015 with over $360 million in cash on our balance sheet at quarter end. Overall, our net leverage is now 43% of enterprise value, and we have ample liquidity for potential acquisitions, for development, and for other working capital uses.

During the third quarter, we replenished our ATM program but did not sell any shares. We believe that the ATM provides another tool in our bag to raise capital, if needed. However, as we previously announced, we don't expect to issue more equity for deleveraging. We are comfortable with our current leverage levels, which we expect to continue to decline organically as a result of our improving fundamentals and strong retained operating cash flow.

Finally, turning to guidance. We are updating our full-year 2012 FFO guidance to between $1.35 and $1.37. In providing that guidance, we are updating our estimate for the 2012 growth in our same property cash NOI to approximately 2.5%. We continue to estimate that our office occupancy at the end of 2012 will be approximately 1.5% higher than at the end of 2011. We still expect that our Multifamily portfolio will remain essentially fully leased.

We are narrowing our estimate of interest expense after adjusting for terminated swaps to between $137.5 million and $138 million. We continue to estimate that our G&A will range between $27.5 million and $28.5 million. We continue to estimate that our FAS 141 income will range between $17.5 million and $18.5 million. We are narrowing our estimate of our straight-line income to between $5 million and $6 million.

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. As a result of our higher stock price, we are narrowing our estimate of our weighted average diluted share count to between 173 million shares and 173.5 million shares. With that, I'll now turn the call over to the operator, so we can take your questions.

(Operator Instructions)

Jordan Sadler, KeyBanc Capital Markets.

Thank you. Good morning, out there. I wanted to get any incremental color or insight you may have to offer on the development opportunities you discussed.

Well, we have sites where we can still build some residential, and of course it's never really easy ones in the Brentwood area and LA, and the other is in Honolulu. And so we are now pursuing that because the economics look like they make sense to us.

Just as a follow up, so what's the type of scale? How many units in each project or dollars? And when you say economics [pencil] what type of yields should we expect?

The one in Brentwood is in the 300-unit range. Honolulu, that site is literally could take almost a couple thousand units, although some of them would be phased in over time, so we're doing the community plan right now. We're still working through some construction numbers, so I don't want to come out -- I don't want to put a pin on the wall yet, but I would say that as you would typically be looking for on a development project, we are going to be hundreds of basis points above let's say a cap rate that the [stuff] would trade at. And then in some cases, even maybe even a little even beyond that.

Okay, that is helpful. Thank you.

Michael Bilerman, Citigroup.

Thanks. Good morning, it is Josh Attie. On the Office side, how do the lease economics today compare to what you were able to achieve historically, both with respect to rent escalations, are you still able to get 3% to 5% bumps, and also with respect to free rent?

Well, let's see, I think both of those I would describe as stable. So, running through them quickly on the straight-line side, there was a brief period at the very end of last -- of the top of the cycle where we were seeing in a few of our markets things beyond the 3% rent bumps. And those went away right at the beginning of the recession. Since the time, the rent bumps have been consistent throughout the portfolio.

They [still] in LA are -- the overwhelming majority of them are at 3%. And then on the concessions, we have not seen significant changes in concessions either over this entire period and that includes the current quarter. I did notice, your note, which was a little concerned about why some of these things happen, and I think that you might want to focus on the fact that the spread between GAAP and cash rolldown is more related to the shorter-term this quarter of the leases.

Okay.

If you look at it, you will see it -- you can explain it pretty well by doing that.

Okay.

Here, let me explain that very quickly, which is that when you have a shorter term, its the annual rent bumps they affect each year. If you go almost a year shorter, which just happens to be what happened this quarter, you end up with one less rent bump over the course of the lease, and that on a straight-line basis, makes a bigger gap between cash and straight-line.

Right, I guess it's even after adjusting for the shorter duration, it seemed a little bit tight versus what you used to be able to get.

If you want to we can talk about it off-line, but the concessions and so forth are fine.

Okay. If I could just ask a follow up. Can you give us an update on the AIG lease? Where you are in discussions with them, and also can you remind us exactly when next year that expires and what market it is in, and maybe when the original lease was signed, just so we can get a sense for what the mark to market might be?

Some of that's easy to give you. The lease is in Warner Center. It expires in August of 2013, and I believe it is a 10-year lease, but I'm not sure of that offhand. We are not in a position to give any further color on that pending deal.

Okay. Thank you.

Rob Stevenson, Macquarie Research Equities.

Good afternoon, guys. It has been a while since you guys have acquired much on the Office side. Just curious, as you're sitting there today, is it pricing or quality of products that's been on the market that has been keeping you on the sidelines and how is the book of deals that are coming across your desk these days?

Well, it's been pricing. It is not perfectly accurate to say stuff hasn't come to market. Some stuff has come to market, which I think we might have been the high bidder on, but the seller didn't end up selling it. So, certainly, they are not getting their price, but let's say the price we would have to pay to be the high bidder, we were willing to pay that, but the seller wasn't willing to sell at that. And there hasn't been -- but the other thing you said is probably right. There hasn't been a ton of deals that have come to market even that haven't traded that were ones that we really pursued hard, but they have been out there.

I think that what we've been seeing is that sellers over the last couple, three years have been rewarded for hanging onto the properties, and I think that with the leasing and fundamental seeming to be improving in the markets, I think that there's not been a lot of pressure on them to sell. So, there has been relatively, as Jordan said, there has been relatively few transactions that have come to market, and those that have the sellers have had expectations nobody including us has been prepared to meet.

Okay, and then as a follow-up on the Apartments side, especially the Brentwood site. Is that a situation where once it's fully entitled, you guys are going to evaluate whether or not the return or greater to sell it off or are you guys committed to having that developed and in the Douglas Emmett portfolio longer term?

Well, typically we build stuff to hold it. But, I can't tell you -- I mean if some incredible opportunity came, I guess we would -- I don't want to say we're never willing to sell anything. But I think you should take it that -- it actually right now is zoned for what we want. It is just that it is hard to get stuff through the city, there is always something extra you've got to go through and do, and therefore, it just takes some time.

Okay, thanks, guys.

Alexander Goldfarb, Sandler O'Neill.

Good morning out there.

Good morning, Alex.

Hey, Alex.

Hey. First, going to the leasing, when we look at whatever schedule this is, it is page 20 on the 8K, it looks like rents peak in second and third quarter of next year, and obviously, as you guys work through the lease roll, these rents change depending on what activity you've done. But just sort of curious, the elevated rents in Q2 and Q3 versus the lower rents in Q4 and Q1, is that a reflection of being the absolute peak of the market legacy deals or is that more a building or a type of tenant mix type issue?

I don't think we've really gone into that granularity to be able to tell you which it is. There is data on the page that gives you which markets they are in, so I guess you could see from the submarket piece, we've given you data on that, but I don't think we've gone through and done that sort of analysis. For us, it is more of a working through each lease as it comes up, and in addition, from our leasing people's perspective, they are not looking -- the leases come up when they come up, so some people are renewing a year early some people six months early some are people waiting last minute, so I don't think we've done the analysis.

It's not going to be a building thing. It is not as though five years ago we bought a building and leased it all up right at that time, and now those leases are all rolling off.

It could be in a sense of -- if you had a big lease in one quarter in one of the -- in like 100 Wilshire, that would make it difference, but it is probably not that.

Okay, and then my follow-up question is just out of yesterday's election, Jordan, curious your take on Prop 30 and Prop 39. Do you think that changes the economic outlook for California or it's typical that California will suck it up and continue marching on?

Well, we spent, obviously, watching it -- I went to bed last night thinking Prop 30 lost and then woke up this morning and found out that I was just having like a good dream and it actually won. California was facing maybe not a fiscal cliff, but we had a lot of debt, and we certainly had a pretty tricky base jump we are getting to do to do with this next year. I think those I think those problems are solved, which probably take some heat off a whole discussion of property taxes, although I never thought, that was that serious.

You've heard me say a lot of times in the past that at its core, I think one of the economic engine -- the economic engine of California, the greatest one, is the education system, and the universities, they are getting a ton of money out of it. Am I thrilled that this is happening? No. Do I think people are going to leave from it. No.

We will probably suck it up and pay our taxes and move on. We are taking the pain in solving our problems. Other states have these problems; I don't see them taking their pain and see how they're dealing with it. I hope that on the balance, it ends up quieting things down here and getting our state government back to business, because they were certainly running a fire drill over the deficit.

Okay, thank you.

Brendan Maiorana, Wells Fargo Securities.

Thanks, good morning. Hey guys a question, I think a few years ago when we had talked about stabilized occupancy numbers, you had suggested 93% to 94%, maybe 92% to 94% was where you thought the portfolio could run. And if I strip out Warner Center, Woodland Hills, you are at that 93% level across the other submarkets. Do you think there is much occupancy upside in your portfolio outside of Warner Center, Woodland Hills?

I actually think that we should be able to stabilize the portfolio around 95%.

If you recall at the height of the market before, we were at 96%, we think that is achievable but hard. At 95% is I think where we would say we are running the buildings at --

It is what we are aiming for, but I think that as -- you have to go back, and you've been following this for a long time, but if you go back and think about when we ran into the recession, and we started saying to people, hey, we have negative absorption don't talk to us about rent. Then, we started having some positive absorption, and we said, hey, the good news is positive absorption, but you want to talk about rent let's wait until we get up into a leased percent that will create some price tension.

I do think now, and we've thought about this a little bit in the script, we like announcing seven quarter of net positive absorption, which is a great stat and it is great that that is going on, but the real key now is, now it's almost like we are there, and we're not getting the fireworks, which is we are really seeing across our markets rents are turning up. So finally, I would be able to answer the question of when do you think rents are turning up, I go like right now, but no one's asked that. The rents are moving up now across our markets, and that is going to be -- that combined with some additional, hopeful positive absorption going forward, which I think we feel good about seeing, that should -- I think our folks is going a little less -- we're going to have quarters, as you get up into this range, you are going to have some positives and some negatives in terms of absorption, but the key now is can we now see rent start pushing?

Can we start rents start moving now? We are seeing them moving, and I thought was a very meaningful thing that we put in the script this time, maybe I said it too fast or slow or in Spanish or I don't know, but we're now seeing rents rise across all the Westside markets and Encino/Sherman Oaks that is a great day, and that's just getting going.

Jordan, I think it was last year at the investor day we are talking, and you said -- I was asking you about rents and when they start moving up, are they going to move up a nickel or is it going to move up a quarter, and you said it was probably likely that they move up a quarter or move up pretty significantly when you start pushing. Are you start pushing of them up that significant or is it the more modest increases?

if it was a nickel, I wouldn't be announcing it starting. We see in that, let's say that quarter range, it is still spotty where you can point exactly to it, but I still hold by the statement that as it gets going, I think the moves will be more pronounced than let's say we live with working our way through the absorption of the 90s. And we got to a the point in the 90s where we were hitting pretty well leased, but people were still moving in like small numbers. But then, we saw in the 2000 recovery that went from 2003, '04, '05, '06, all the sudden rents did start to let's say the quarters.

And we're seeing that same attitude is here today. So, when a tenant feels like they could or could not get their rent, you're seeing even numbers not like a couple of pennies here and there. They are going from -- you're saying, They're $2.60, you are going to $2.75 or you're going to $2.85. I mean it's not to $2.60, $2.63, $2.65, that is not the kind of negotiations that are happening, and that is obviously supports what we expected.

Okay. Thanks.

Michael Knott, Green Street Advisors.

-- suggested that Farmers Plaza and Warner Center was under contract, can you comment on that?

Who suggested that?

That was on Real Capital.

Well, he doesn't come and ask me what is going on, or I don't talk to him, so I can't really -- I'm not going to talk about an individual deal.

So, we should assume that you are not going to be closing that deal when you report next quarter?

You mean you want me to change my mind and talk about it? I'm not -- I mean, look, any deal whether -- and I'm not going to say this is about farmers, I'm saying this about anything were working on. Everything goes through ups and downs and a deal's made and a deal's broken, a deal's made and a deal is broken. That is anything you work on, and that is why we have been very careful to only to say, look, we don't want to end up leading on something and then a person goes, hey, what happened to it? We try to announce our deals when they are done. Whether it be Farmers or anything else that we've been working on, that is when we would announce it.

If I can ask two quick follow-up questions, one would be the fund is now past the investment period, if I understand that right. So curious how you proceed from here just on your own balance sheet? Do you go raise another fund, and then, the last question would be have you developed Multifamily before? My understanding is that you have acquired your portfolio?

Actually, let me do it in reverse. Limited in reverse. It is funny to be asked that because the roots of the Company we developed Multifamily. That is what we did. And then in the 90s when we wanted to get into managing Office, and we were trying to get investors for our funds, investors were saying what you talking about, you guys are just Multifamily guys.

Now, I guess, obviously, and reasonably so, people have forgotten that that is what we did was develop Multifamily, which we developed thousands of multifamily units in and around the Westside. So, we are pretty comfortable going back and doing that, and it's been one of the reasons why in the past, we have got a lot of criticism for having our Multifamily portfolio mix in with the Office, and we would say to people -- well that is the skill sets we have. It is Multifamily and Office. So, that is why that is what we do.

In terms of your first question, what was your -- oh, the fund. In terms of the fund, we are past the acquisition period in the fund. There is still stuff that the fund has -- can have a right to do if it was a deal that we were working on or something like that or something could still close in the fund. It is not our intention to start another fund, though, if that was the core of your question. It is our intention to move forward using our own capital or for very large deals, to do joint ventures style or something else, but not to raise a blind fund the way we did in the recession when it would have been very expensive for us to issue equity or do one of the other techniques.

Yes, at this point we've got -- the capital markets are wide open for us, so we don't have any issues with raising capital directly ourselves, and as Jordan said, the reason we did the funds back when the stock price was in single digits was that we did not feel that was an appropriate way to raise capital, and I think it worked out well for us, but now it would be just as easy to do it on balance sheet.

Thanks for that, and thanks for correcting my historical knowledge pre- on that.

You probably needed about 20 years older, too, to have been around when we were doing that, so that is unfortunate for me. I'm old. Alright.

David Harris, Imperial Capital.

Hello, Jordan it seems like I've never been away.

It does David, welcome back to analyst calls.

And Ted, good morning, afternoon to you. Here's a question for you, next year we've got no Olympics and we have no election. Would that normally mean that we have a little less vibrancy in terms of space demand from the media and entertainment crew? That's an interesting question.

I don't ask plain vanilla questions, guys.

Yes, the media -- I don't think the media guys here in LA got that much of a bump because of the election because all that would happen was be both the Presidential candidates came here to collect money, but they were spending it in the other -- in the states where they were -- the battleground states was who got the $2 billion that went into media. So I don't know that much of that came here.

I don't think there was any impact on the Olympics out here really though either.

Yes I don't think we got any Olympics impact -- maybe if you look little farther forward, we'll have a football team, and then they will all be championed by football season, and we'll get more out of that.

Okay, and here's another election-related question. Obviously, there is now a distinct possibility we are all facing higher taxes, in particular, capital gains taxes. Do you think there will be any greater sense of urgency amongst the potential sellers of assets in the light of last night's events?

I'm going to tell you something, I spent the last for however long, Romney and Obama have been going at it, I have been warning sellers that their taxes were about to go up next year and they ought to sell us a building. Now, let me just say I didn't get much traction out of that. I don't believe most of the people I've been focused on trying to get to move or do something, I don't believe they are going to do anything as a result of Obama winning the election, if that's what you're insinuating. I don't see that having much of an impact at this point, and if respect to property in California, if you were that California taxes were going up, it's already happened and it's over. So you're going to pay that higher rate today if you wanted to sell a building.

What about the use of OP units?

You know, in a weird way, those two go against each other because if you're trying to say to somebody -- I've tried them both to say, you know -- but if you say to somebody your taxes are about to go up, you should treat your taxes, then say take OP, and it's a [opposite] because that is like saying wait and pay your taxes in a future period when maybe they could be higher, but I have tried them both, and neither seems to have gotten tracks. I'll tell you the thing that is dominating in terms of value and seller expectations here is that the fundamentals recovery that we are seeing. And you just can't overwhelm that in terms of someone's thinking by pointing out higher tax rates or other any of the other things.

So people don't feel that Cap rates may have peaked out here?

Well, cap rates are very low, but rents are moving, and so you don't -- rents could move up and justify those Cap rates, and then you could look back and go hey regardless of what the Cap rate was, I'm glad I didn't sell because that would've been a very low dollars per square foot sale. And that is kind of what is going on.

Okay. Alright. Thank you, guys.

Steve Sakwa, ISI Group.

Good afternoon or good morning.

Hey, Steve.

Hey, Jordan. I was wondering if you could give us a little more color on the leasing between the smaller tenants that you're dealing with and some of the Westside markets and then maybe some of the larger tenants in some of the larger blocks of space that you have farther north, and what are those discussions like today? What are the tenants telling you? How much longer are deals taking to get done?

I don't think deals are taking longer to get done. I think that the tenants, many of them are also perceiving that there is rent increases on the way, and so I think compared certainly to a couple of years ago, I think they are moving faster. I also think that our operations group has done a phenomenal job in terms of increasing our ability to just move leases and so forth through the pipeline.

I think that is applicable to large and small tenants.

I think that is right, too. I think that, first of all, you want to be careful because an awful lot of our leases, even in Warner Center, are the smaller leases. It is just that there are almost no larger leases, large for us, 20,000 square foot and bigger, in the Westside in Sherman Oaks side. But there are also are a lot, most of the leases out in Warner Center, are actually fairly small. There is a different dynamic with big -- we've talked about this before. There is a different dynamic with bigger tenants. There's a lot more negotiation.

There's a lot more just dealing with them, and there is a lot more TIs and build outs, which is one of the reasons why we've always said we like to have the smaller tenants in place. I think the dynamics haven't changed in that way. I do think that we're seeing less of the -- we're starting to see some of the larger tenants who are now taking more space and that expansion stuff is coming in more than it was a couple years ago.

Okay, and then, and if I could follow-up on the development comment, Jordan, on the two apartments. I guess I wasn't really aware that you guys either had a land banking or had bought parcels. Can you walk us through how you got control of these parcels? Where these things that came with other assets that you bought or were these land parcels you went out and discreetly purchased?

In the past, we had bought a couple blocks. It is funny because we haven't talked about it in a long time. When we went public, one of the big things was, what you had external growth, it could be development and new acquisitions, and people kept asking what is the development, and we'd say well, we have some development sites, but it's unlikely that much would happen on them today. Those sites came along with buildings that we bought where we had some special zoning or opportunity that was -- or owned or control the whole block, and we had some excess, let's say, capacity.

As things have changed and markets have shifted and you need politics and economics and the city and everybody to be lined up going the right way, some of these sites where we had an opportunity to build some additional FAR, a few hundreds of thousands of square feet of FAR, also came about some rules that allow you to do that where your are also allowed to do residential, and we thought, you know what, residential seems so strong here in the Westside, let's go and think about doing these as residential. And we looked at it, and looked at the trade you had to make, it was -- when I say compelling, it was very compelling. So, we are pursuing that, we are pursuing that road, now. That is with respect to the deal at Brentwood.

The deal in Honolulu, it was just a matter of waiting as the rents there are recovering and as rents are increasing and as we look at what's happening, you are starting to see buildings being built, and we have the two very in close, let's say the central point where you'd want to be is right around downtown for traffic and everything just down from there, or just near [triple outflow], we have a very good site with a great amount of capacity that we originally bought it as 700 units on it, but we knew when we bought it, it had a huge amount of capacity, and so we have been going there trying to evaluate what is the most cost-effective way to do that. And it seems to clearly have crossed that threshold for us now, and we're now spending money in that direction, too. It is just that these two sites now very clearly make economic sense, so we're working on them. Is that it?

John Guinee, Stifel Nicolaus.

Hi, John.

Over the last couple of years, you have artfully and discreetly raised your dividend often. Can you talk about your dividend policy?

Sure

And when it is coming next?

You and I could agree on it on the phone right now, but we have to get it the Board in on it somehow. Maybe we could conference them in.

I will wait.

Okay. So, generally, one rule that we want to follow is we never want the dividend to act as a drag on the stock price. We want to be within a reasonable range, and we also don't want to pay dividends that uses cash that we could otherwise put to work more effectively let's say in development and stuff like that. We also recognize that of late, the dividend plays a larger role in let's say incremental return for people and current cash dividend is meaningful.

I have also said, aside from the fact that we went through that recession where the dividend dropped off, and I guess it did for everybody, and we're building back up, it is our goal to be in a situation where we have fairly reliable annual dividend increases, which are patterned after what we expect to be the increase in the income of the Company. So, we take all those into account. We discuss with the board, and I'm hopeful that we will be able to have a fairly reliable dividend increase schedule going forward on an annual basis, but beyond that, you've got to go over it with the Board.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill & Partners.

Hi, thank you. Just two quick follow-ups on the development. It sounds like you guys, if you go ahead with this, it would be 100% on balance sheet, you wouldn't be JVing these, is that correct?

Well, certainly as we sit here at this moment, yes, that is correct. Depending on what the other cache of opportunities are that come up, you never know how in the end you're going to want to finance on an equity and debt basis these things. But as we sit here right now, we are 100% doing it ourselves.

Okay. And just so we can play along at home, for land, should we think of the land basis essentially being zero, if so we want to run some quick numbers, we just have to think about cost of construction? I'm assuming this is going to either be podium or garden, something like that. Is that the way to think about it or is there some sort of land value we should be thinking about?

For what you are doing, I think the land value would essentially be zero because both of these sites already have good operating projects on them that are making a lot of money and I know -- an you don't have them more separately segregated as here is the separate land cost of this, we have to make something out of. It is going full blast right now. So, this is 100% additive without us buying any land, and there is -- and maybe even a little better than that. So, it's one of the reasons why the economics work so well.

Okay and just confirming, they are both podium or one or Brentwood is podium and Honolulu is garden?

Honolulu is garden and Brentwood is a tower.

Oh, a tower? Fun.

Yes.

Okay, thank you.

Michael Knott, Green Street Advisors.

Hey, Jordan I would figured I would give you one more chance to talk about your rent growth comment. First question would be, it sounds like, if I'm doing them math right, it sound sounds like maybe you're talking about rents are moving 8% to 10%, something like that? And is that better than you would've thought, say, 90 days ago?

First of all, it obviously varies from the submarket to submarket even from building to building as we trying to get things done. S, I think that you are probably -- I probably end up with a wider range just to cover things, so I would've said in those markets 5% to 10% over last year, maybe. And I think the answer is, yes, it is better than where we were last quarter in a sense that last quarter we were getting there, we are adding one quarter at a time, but at this point, we are prepared to call it across all of those submarkets.

So if that pace continues, is there any reason to think that the pace might improve to 10% to 15%, or do you feel like the overall economic backdrop is not good enough for that?

Well, we think that there is a possibility that at some point there's going to be an inflection point where, when we go back to the prior period of times, that space really starts to get tight and tenants are really worried about losing their space. There is actually, if you compare, for example, our rents to rents in other submarkets -- other global markets, if you compare our rents to what comparable businesses are paying in New York or San Francisco, there is actually a fair amount of economic room for the tenants to afford more, and we saw that in the last, their last peak when rents could be moving up close to 20% a year.

Let me say this. There is plenty of reason to think that it could speed up, and there's plenty of reason to think there is a backup. Our comment was they could move in these chunks. I would say that if we've lost 30% off of our peak from before, we've regained back 5% to 10% of that.

Okay and if I look at your lease expiration schedule in the supplemental and you are in the high $30s for '13 and '14 and that is obviously lower than where you are signing leases today. It seems like '13 is probably -- the expiring rent is high enough above where you're at today that you are not going to threaten breaking even on that, but maybe if the rent growth pace continues, maybe '14 has a chance of being only a slight rolldown potentially? Is that a fair way to think about it?

Yes, it is difficult to make any precise prediction but that certainly sounds reasonable.

Alright.

I think we have a chance at '13, you could see the thing reverse itself.

You could.

But it's hard to tell when it's going to happen if you are just taking about rent rollup and rolldown. I think more important, I'm hopeful and honestly there is just so much national stuff going on that could impact us, I'm hopeful that in '13, it is not us telling you were see rents turn up, it's everybody's talking about the fact that rents are moving up. Which is what really matters, here.

Just a follow-up on that comment, Jordan, I think you guys are signing leases in the $33 range, maybe a little bit below that, and that is below next year's average expirations, it's like 13% below, so when you say that, that there is a chance that it could break even or flip itself here, you are saying that rents would have to go up another 10%-plus from here?

It is hard to say that, because you have to look at when those deals get renewed. You have two lines that are working each against each other. And as I said, tenants don't renew or a new deal goes the day when that lease ended. So everything that you look out, you can go back and look at our roll schedule from years ago, and you look forward and go, wow, to we have 14% coming up next year, but as the year approaches, it goes down 13%, 12%, so you're are always entering years with some smaller percent rolls. That's because people do their deals earlier.

So you don't know how '13 is going to end up. Of course, rents going up is going make a difference, which leases end up being on here make a difference. People coming in and do early renewals that maybe are worried rents are moving, and they might even have lower leases that they did in 2009 could make a difference. That is why we are having trouble telling you guys which quarter, but I'm saying, I think you have a reasonable chance at '13 as the year one of the quarters in the '13-year when you see this change.

More important than that, you're looking at this change, you are trying to predict the model, or you are trying to predict FFO or something like that, but I buy think is more important in terms of predicting long-term value growth whatever you want, income of the Company, is trying to see how rents are moving, and I think these numbers are sometimes a little bit mistakenly used to do some rental direction calculations. But you are doing a comparison that typically, let's say at five years ago, whereas when we look at the year to year looking back, when we look at how the leases were signing and leases that we signed a year ago and on average what we're doing now, are we getting higher rents or lower rents or the same rents across the 200 deals we do a quarter or the 800 deals we do a year, whatever it is, we are saying hey, we are telling you guys, now, rents are moving up.

And I think that if you see overtly rents moving up next quarter, it's real obvious to everybody, it starts coming through in terms of the brokerage reports, etcetera, I think you will see some focus go off of that number and onto the pace at which rents are moving up because they will obviously be moving up.

Let me spent a couple of seconds on this because I think it is important to a lot of you. The first thing that we would say about this is that, and Jordan touched on this, is that in many ways the rent rolldowns is more about the peak of the market than it says what is happening now. And the big change is not going to come likely just because we are increasing rents. It is actually going to come because you are suddenly going to go from comparing against the very peak of the market to comparing what is going to be a trough of the market.

The second thing though is that when you're doing the comparisons, because you talked about 13%s and so forth, remember that in even a flat market, because of the 3% annual rent bumps, you're actually looking at the cash rent, the cash rent is going to roll down by 12% or thereabouts. So, that is a second thing to take into account in doing this. And as Jordan said, we really think the more important thing is for our economics right now is what is happening compared to last year and the year before more than what is coming from the prior years, because, again as we've said, on a cash basis, these rolldowns are pretty much offset by the rent bumps going up.

The straight line comparisons, what is it, 5% or something?

5.7%, yes.

5% straight-line comparison, little movements in which lease you do, and little ones like we already said we think rents are already moving up by 10%, will cause it to eclipse that number next year, which if you care about comparing it to five years ago, it would be a little bit more of a fair comparison than sort of a peak number for the old lease to a trough number for the new lease. But I'm still going to say, in terms of trying to calculate rents going up, we are looking at those numbers not from five years ago, but from in the last year, deals we have done as we follow the quarters, and we're we are telling, you rents are moving up 5% to 10% off of what you might have called the floor from years in the past.

Right, thanks guys. That is really helpful. Appreciate it. Just one quick one on development. It sound like you're still working on some of this, so it doesn't sound like it's eminent. What is a basic timeframe, should we expect groundbreaking next year, is it more like a 2014 event?

I think it's -- I mean we are honestly updating [Nani] and the amount of work in time that being spent on this, and we just wanted to notify you that this is going on, but I believe you're talking about 2014 event. Things will presumably be able to move a little quicker in Honolulu than here, even though here we have really like -- you would think you would be able to just walk down there and go here's our situation, they go, good you're approved and sign it. But that just doesn't seem to be the way LA works, so I don't know how that will be stretched out, and we have to go through that process.

Okay and then, just last one on that. When you talked about a perspective yield, hundreds of basis point above a Cap rate, is that based on -- is that math based on a market value for the land or a zero historical cost basis in that analysis?

It's based on the yield we would get on our cost not rebuying are allocating a portion of land. Remember this land is already 100% allocated to other buildings that are there. You could move the allocation over, but we own it, so it's no cost to us. So, what I'm talking about is our incremental returns on the debt and equity investments that we make.

Got it, thank you.

Jordan Sadler, KeyBanc Capital Markets.

I just wanted to circle up on the commentary surrounding the rent roll, but just maybe framed in a little bit of a different way. Just incorporating occupancy, perhaps, this year you are expecting by year-end to pick up 150 basis points, now. As we look forward to 2013, will we also continue to see an uplift in the overall portfolio occupancy, and ultimately, will that translate the combination of the rent roll and the bumps and the occupancy translate into an acceleration in same-store NOI growth?

Well, first of all, we are not providing 2013 guidance at this point. So, we are going to frame that within the context of this. I --

How about in theory?

That's what I said, and I was going to go on and do that, but in theory I would say that again, we would regard our portfolio as fully occupied at 95%, and so, we have significant room for additional occupancy growth, as well as rent growth going forward. So the answer is I think that assuming that there is nothing that pushes the market sideways on us, we would anticipate that 2013 would have growth potential in both areas.

That was a real long way of saying, in theory, yes.

Thank you, and then lastly, when you talk about small versus large tenants it almost sounded like you're seeing some large tenants emerge from the depths and that there is some large tenants kicking around that could land. Is that the right read there, and if so what is the nature of these tenants, what types of industries?

Yes, the industries are the industries that we told you about. Small and large renewing and expanding, all going in the right direction. Now, when you say some large, there was a time when there was no one to talk to. We were throwing a party, nobody was coming. Now, we are getting that on both the small and the large tenants side and to the extent that we have space for large tenants, usually that is more concentrated in Warner Center, we don't have a whole lot of large tenant opportunities on the Westside or in Encino, Sherman Oaks, but they are all seem to be out making deals again.

Perfect. Thanks, guys.

Alright, thank you. That looks like it. So, thank you everybody. It was a pleasure speaking with you, and we look forward to our call next quarter. Goodbye.

Thank you for your participation. This does conclude today's conference call. You may now disconnect.