Douglas Emmett Inc (DEI) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's fourth quarter 2012 earnings call. 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 would now like to turn the call 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 over 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, Stuart. Good morning, everyone, and thank you for joining us.

We are very pleased with our strong fourth-quarter gains in both occupancy and leasing. We had our best quarterly occupancy gains ever, and we exceeded our annual guidance of 150 basis points of positive absorption, pushing our full 2012 increase to 210 basis points.

We also grew the leased percentage of our total Office portfolio by 70 basis points. The 102,000 square feet of net absorption was our second-best quarter ever. We are particularly pleased with the robust leasing activity in Warner Center, where we increased our leased percentage by over 200 basis points during the quarter.

In addition, after the end of the fourth quarter, we entered into a new 10-year lease with AIG, our largest tenant in Warner Center, which will commence when its current lease expires in August. As we expected, their new lease covers approximately 138,000 square feet, down from their current 182,000 square feet. This renewal removes a potential impediment to the ongoing recovery in our Warner Center portfolio.

Our Multifamily portfolio continues to perform exceptionally well with our average asking rents 5.7% higher than in the fourth quarter of 2011. Our performance benefited from both our integrated operating platform and improving fundamentals in our portfolio and in the Los Angeles economy. Los Angeles County added an estimated 74,000 private sector jobs in 2012. Entertainment, tourism and foreign trade all set records during 2012, while healthcare and technology continue to thrive as strong demand drivers. These industries not only directly benefit us, but they also support the success of our legal, accounting and financial service tenants.

Honolulu had a record year for tourism and we are seeing significant growth in military and construction sectors. Unemployment is now approaching 4% and the workforce size is already at pre-recession levels.

Our same property cash NOI grew by 1.9% in the fourth quarter and almost 2.5% for the full year, fueled by higher revenue from our Office and Multifamily portfolios, as well as good expense control.

Acquisitions have remained slow in our markets. As Ted will describe later, earlier this week, we used approximately $8 million of our cash on hand to purchase additional interest in our funds. I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everybody. I would like to begin with our results, after which I will address our Office and Multifamily fundamentals and then finish with some color on 2013 guidance.

Compared to 2011, our 2012 FFO increased 6.4% to $235.4 million or $1.36 per diluted share, treating debt interest rate swaps as fully terminated in the quarter of termination. Our AFFO increased 13.5% to $181.8 million, or $1.05 per diluted share. Our fourth-quarter 2012 Office rental revenues decreased 2% compared to the same period in 2011 because of lower straight-line rent. This primarily reflects a single tenant with a large straight-line balance that went bankrupt in the face of regulatory investigations and other legal challenges.

Our 2012 G&A totaled approximately $27.9 million, or 4.8% of total revenues. For the fourth quarter of 2012, our G&A totaled $7.9 million, or 5.5% of total revenues, reflecting our typical seasonality. We continue to run one of the most efficient operating platforms in our peer group with our G&A and CapEx among the lowest as a percentage of revenue.

Comparing the results of our combined Office and Multifamily same properties in the fourth quarter of 2012 to the fourth quarter of 2011, revenues decreased 0.1% on a GAAP basis but increased 2.2% on a cash basis. Expenses increased by 2.9% both on a GAAP basis and on a cash basis, and net operating income decreased 1.5% on a GAAP basis and increased 1.9% on a cash basis against a tough 2011 comparison.

Now turning to Office fundamentals, as Jordan mentioned, during the fourth quarter we increased the leased percentage for our total office portfolio by 70 basis points to 91.1%. Our occupancy rate increased to 89.6%.

While we told you last quarter that we expected to increase occupancy in the fourth quarter alone by a robust 80 basis points, we actually had occupancy growth of 140 basis points last quarter. However, roughly 60 basis points of our occupancy gains reflect expected tenant departures, which were delayed until the first quarter. Adjusting our occupancy to record these departures in the fourth quarter as expected would still make our 2012 occupancy growth slightly greater than our 1.5% guidance. It would also raise our guidance for 2013 occupancy growth, which I will mention in a minute, to about 1.5%.

During the fourth quarter, we signed 153 office leases covering 581,000 square feet, including 282,000 square feet of new office leases. This was our third best quarter ever for new leasing.

Our annualized TI's and leasing commissions in the fourth quarter were consistent with recent quarters for both new and renewal leases, although the blended rate increased because of the large percentage of new leases during the quarter.

As announced on last quarter's earnings call, we have been increasing net effective office rents in all of our markets except Honolulu and Warner Center compared to a year ago. Given our average five-year lease term, we continue to show rent roll-down from leases signed at higher face rates as well as with higher annual bumps of 4% and 5%. During the fourth quarter, on a straight-line basis our average rent on executed office leases was 5.8% lower than the average expiring rent for the same space.

On a cash basis, our beginning cash rent on executed office leases was 13.7% lower than the average expiring rent for the same space, largely reflecting the impact of our annual increases.

On the Multifamily side, our 2900 units were 99.7% leased at December 31, 2012. During the fourth quarter of 2012, we continued to see strong rent increases. Our average asking rent on new leases to residential tenants was 5.7% higher than in the fourth quarter of 2011.

During 2012, we turned seven pre-1999 units and raised the rent on these units by an average of $2100 per month. As we have mentioned before, units in Santa Monica that have not been vacant since 1999 still reflect with modest adjustments rents from 1979, because from 1979 to 1999 the Santa Monica rent control laws did not permit raising rents to market on vacancy. At the end of 2012, we had 257 pre-1999 units remaining.

Per-unit recurring capital expenditures for our apartment communities averaged $143 during the fourth quarter of 2012 and $438 during the full year.

Turning now to our balance sheet, we have no material consolidated debt maturities until 2015. At the end of 2012, we had over $373 million in cash on our balance sheet. Our net leverage remains at 43% of enterprise value, well within our target range. We have ample liquidity for potential acquisitions, for development and for other working capital uses.

As Jordan mentioned, after the quarter we purchased a 3.25% interest in Douglas Emmett Fund 10 and an 0.9% interest in Douglas Emmett Partnership 10 from an investor who sold due to new banking regulations. The aggregate purchase price was approximately $8 million. These funds collectively own eight properties totaling over 1.8 million square feet of space in our core sub-markets. Our weighted average ownership percentage in these properties is now just under 60%.

Finally, turning to 2013 guidance, we expect to increase FFO per diluted share to between $1.39 and $1.45. In providing that guidance, we estimate that our same property cash NOI will increase by approximately 0.5% in 2013. We estimate that our Office occupancy at the end of 2013 will be approximately 1% higher than at the end of 2012. As I noted earlier, this figure is depressed by roughly 60 basis points of tenant departures deferred from the fourth quarter of 2012, which will adversely affect our occupancy gains in the first quarter of 2013.

We expect that our Multifamily portfolio will continue to be fully leased during 2013. We estimate that our total interest expense will range between $130 million and $133 million. We estimate that our G&A will range between $28 million and $29.5 million. We estimate that our FAS-141 income will range between $14.5 million and $15.5 million.

We estimate that our straight-line income will range between $4 million and $6 million. We estimate that our recurring capital expenditures for our Office portfolio will again be approximately $0.25 per square foot and that our recurring Multifamily capital expenditures will again range between $400 and $450 per unit.

We estimate that our weighted average diluted share count will range between 174 million shares and 175 million shares. The range depends mostly on our stock price and does not reflect an issuance of additional equity under our ATM.

As we have previously noted, we do not expect to issue additional equity for deleveraging.

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

(Operator instructions) Brendan Maiorana.

So, Ted, I wanted to follow up on the same-store guidance. I think you said plus 0.5% cash for the year. I think we had talked earlier last year that, as you guys looked at rent spreads, they would be offset by in-place bumps, and then you would get occupancy gains which would drive the remainder or drive the increase overall. And if I look at, I guess, where your average occupancy was in 2012, I think it was around 88.3% or 88.4%. And, even if you back off the 60 basis points of tenants moving out at the beginning of the year it puts you at 89% and it looks like you are going to move up 100 basis points from there. I would think that same-store would be a little higher. Is there something else going on?

Well, we did have an awful lot of move-ins in the fourth quarter, and so we have got some concessions that kick in during 2013. So we don't get the full impact of that rental growth until towards the end of the year.

Brendan, I have got to tell you, we looked at that number ourselves and said we are not in love with that number, let me just say. If you will remember from last year, we started out saying our same-store NOI was 1%. It ended up being 2.5%. I am not putting any badges on us for predicting our same-store NOI, and I am waiting to watch that number play out a little more. I hope that it's an extremely conservative number.

Yes, is the same -- did you arrive at that same guidance level the same way you arrived at the plus-1% initially for 2012?

Yes. It's kind of ground-up modeling, and I guess when you start at the ground, you are so tired by the time you get to the top you don't exactly hit it perfectly. So we need to play through a little bit and watch the numbers roll out, and I think we will have a better directional feel on that.

Okay, thanks. And then just the follow-up for Ted on the interest expense -- is it fair to assume that you are going to -- that the swaps burn off, you are going to let that float, and there's no paydown of the debt with the cash that sits on your balance sheet today?

I think that it's fair to say that we will let the swaps stay off, as we typically do, while we think about when and how to refinance it. I think that we are looking at some -- I think that our modeling assumes that we use $100 million of our cash for something, whether it's debt paydown or acquisitions. And so I think that there is some change there.

Okay, great, thank you.

Alex Goldfarb.

I'll ask my follow-up question first, and then I will ask my first question.

Okay, I'm going to consider your follow-up question to be your first question. Go ahead.

Okay, well, I'm just following up on Brendan's question. So I will tag onto that. As far as modeling goes, what should we be expecting for the down time of you guys having the swaps out there? Is that like a first quarter/second quarter that we should have -- expect lower interest expense and then have it go higher in the back half of the year? How should we be thinking about that?

I don't think that we have made a final -- they will float until we decide to refinance that debt. I think it will be, at the earliest, will be much later in the year.

Yes, see, the only flexible debt we have left is that debt. So we are not anxious to lock it up because it gives us a place to do paydowns if we want to do that because we're sitting on a lot of cash. It gives us a place to be flexible to pull cash out. If we start executing swaps, then that makes that debt a lot more rigid. And we want to have some play in the system. We don't want to have 3-point-whatever -- $3 billion of totally rigid debt. So that is why we are letting that portion float.

Okay. And then as my follow-up question to the first follow-up, you guys are obviously -- news article on the Hustler building out there. If you guys, given that there doesn't seem to be that many deals out there, at least the ones that we read about, what are your thoughts on taking a mezz approach like slug does here in New York, where you get involved in doing financing on buildings that you would love to own but you are not necessarily the winning bidder on?

You know, I have never been a big fan of that. I've always felt like mezz lenders had the worst of both worlds. They don't really control the building and their upside is capped.

Now, with that said, I don't know that there's a ton of opportunity out there to put mezz loans on the buildings that we want to own. I don't think that they are out looking necessarily for that kind of debt. More commonly, there's a debt structure that can be used sometimes in order to get control of the building because the guy has something going on with taxes or who knows what, or a timing issue. And we do do that.

Yes, I think you can think that with Jordan's anxiety over the last few years to try and up the number of acquisitions, we have considered most everything that we can do. But I agree with Jordan, that unfortunately, the mezz thing is not likely to be one that is going to work in our markets very much.

Okay, thank you.

Michael Knott.

Can you just maybe talk about the Brentwood sub-market? It looked like that was one area of a little bit of weakness. And I know there's the construction going on there. Can you just talk about that sub-market in particular?

Yes. Brentwood has traditionally and, we think, will be again a really great sub-market. It's actually one of the best of the sub-markets. Right now, if there is something below a sub-market, a sub-sub-market, the San Vicente properties are actually doing as well or better than average properties on the West side. And as you said, with the 405 widening project, there's been a lot of traffic problems down on Wilshire.

And that, compared to what's just probably quarterly fluctuations has made that market fall off a little bit. Hopefully, they will finally finish that this year, and we believe that long-term it remains one of the better markets.

Yes; it's kind of packed in, as you know, because you know this area. It's packed in between a bunch of good markets. There's no reason why it shouldn't be performing as well as it has historically. There's nothing special going on, other than that traffic issue with the 405.

And Westwood, also, was down a little. I think, again, that could just be quarterly fluctuations because it happens. But that's also -- that's the market right on the other side of the 405 from Brentwood. So you've got a little bit of weakness in there.

Okay, and then my follow-up would be on Warner Center. The market seems to have sold off a little bit since the call started, but the Warner Center news seemed like a positive, both with respect to AIG and sequential leasing gains. Can you just talk about whether some of those gains were expected, and maybe how AIG played out relative to what you feared might have happened?

Well, it played out how we thought it would. From the beginning, they didn't need all the space. And from the beginning, we had the idea that they wanted to renew. And it was tough -- it was obviously a tough negotiated deal. But it played out the way it always does with a he large tenant. It's never super-fun to negotiate those deals, but we are glad we got it done and we will move onto the next thing.

Has Warner Center bottomed now with that 200-basis-point leasing gain sequentially?

I hope so. We feel -- and we have been saying this on the last few calls -- we feel like there's some good -- we are going to get good absorption out there, we are getting good activity out there. But for things to really feel good, we just need to get the absorption all the way up to 90%, and then we will start having the positive feelings that we have been having about the West side and these other markets that we have been telling you guys.

As we have said all along, we really still like all of the long-term demographic trends at Warner Center, the investment in new housing out there, the investment by Westfield in expanding and integrating that large mall out there. We think all of those trends are really good. We certainly hope that we are now moving into the phase where we are going to be adding occupancy. But this is the first quarter where we have seen a pickup off of that, and we are hoping that continues.

Thanks.

Rob Stevenson.

When you take a look at where your escalated rents are for the 2013 and 2014 lease expirations versus market rents, what does it start looking on a cash rent spread to get back closer to positive, versus the down 10% to 15% that you have been running over the last few quarters?

Well, it's just a real hard thing to do that, because the 10% or 15% only marginally relates to the leases that expired in that quarter. So you have leases -- it's not -- it's measured on a different statistic, which is part of what makes it very difficult that these people renew later, and then space that goes vacant actually relates to a lease that expired beforehand.

So if you just look at the expirations, which I think we give you, looking out towards the number, those numbers go down in the latter half of 2014 and 2015. But, they don't really all that well to the numbers that we report in terms of roll-down.

Okay, and then where was the renewal of the AIG lease versus the expiring?

It was off -- the new lease on a net effective basis was off like in the high 13% from the first lease.

Okay, and what is the term on that?

10 years.

Okay, thanks, guys.

Jamie Feldman.

Sticking with AIG, what about the TI package, or concessions?

Overall, the whole net effective is off about 13%, including TI's, including everything.

Okay. Okay, and then back to the same-store question -- I guess can you break it out for next year on your guidance, your Office versus Multifamily? And then, if you were to back out AIG, what would your growth rate look like?

Okay, that's two questions. Number one, I don't know. We could look at doing that, so we will talk about that. And then, number two, what would our growth rate in what look like without AIG?

Well, guess I'm just trying to figure out. I think -- when you look at how the stock has acted since the call started, I think since you announced your same-store outlook for 0.5%, is the biggest drag the leasing spreads? Or is it big AIG lease renewal? And so, if we were going to (multiple speakers) --

I've got to tell you, I'm going to say again -- I don't have a lot of confidence in the 0.5%. That's the reality, but that's what the model gave, and so that is what we are giving. As it tightens up, we will try and get better about predicting it. I don't think AIG is playing much of a role in that.

Remember, it will only impact the back half of the year, after August.

The last four months or so. Yes.

Okay. So then I guess I'll ask another question, which is what is your leasing spread assumption for 2013, in the guidance?

I don't think we have a leasing spread assumption.

Yes. Again, part of the problem with that question -- I don't know what the averages. It's literally done on every space in the portfolio, and there is an assumption made on each one based on where we are in the process of negotiation or where we are in that building. So I don't know what the average is because we don't think of it that way, which is part of the problem why, when the model spits out this number, we all looked at it and went, that doesn't feel right to us. But it's what the model says.

Okay, all right, thanks.

Josh Attie.

Michael Bilerman with Josh. I had one question. As you think about what you have put in the model versus what you took out, I guess as you went lease by lease, you put in differing assumptions than you have done in the past -- maybe more down time, maybe more TI's? I guess the inputs in developing that on a space-by-space basis -- were you more conservative in that and, hence, and you roll it all up, you got a conservative number?

Yes. Obviously, there is some conservatism in doing the model. I've got to say, I know now everyone is focused on the same-store NOI because they think that's someone selling because they didn't like the 50 basis points. That is -- as I said, we probably shouldn't even have reported the number. We have been asked to report it, so we have been reporting it. We are not in love with that number.

As you remember last year, we said 1%; we ended up at 2.5%. When we saw this number, I was like, I don't really like that number, and it doesn't feel at all right compared to what we see going on in leasing. But it takes a while from when they build up all these leases for us to start fixing that whole ground-up thing and giving it a proper direction and making adjustments so our predictions are better. And I don't have enough information now, other than gut instinct, to tinker with it, and I wasn't comfortable coming up with a number that I was more -- coming up with a more comfortable number without a basis that I could like see what my adjustments to the model were. So we decided to go with it.

This is Josh. Can you talk a little more about Warner Center? Embedded in your occupancy growth assumption, is there significant lease-up in that market, and do you think the occupancy gains you saw in the fourth quarter are sustainable?

I don't -- occupancy in the fourth quarter for a quarterly gain is -- it was pretty stunning. So I think it would be very hard to sustain that on a quarterly basis. I think we think that Warner Center will continue to do well. But I think, as we have said in the past, it's going to take Warner Center a few years, probably, to get to a point where it's really in the raising rent category like the other markets are.

In the 100 basis points of occupancy guidance you have, is continued lease-up of that market incorporated?

Yes.

Yes, I believe that's right.

Okay, thank you.

David Harris.

I wonder if the taxes weighed on anybody's decision on space. Should we call it the Mickelson effect? Did it suppress any tenant demand, do you think?

I'm sorry? What?

Did taxes weigh on space demand at all? Are you experiencing a reservation on behalf of any tenants' willingness to sign up?

I don't think so.

I haven't heard that.

Right. I don't think that I've -- first of all, it would be early for that to be happening. But I don't think, even anecdotally, that we are hearing a lot of things that people are moving out.

Related to the tax question, a lot of other companies that have California exposure have expressed a view around Prop 13. Have you got any additional thoughts on that? I know it's a subject we've discussed frequently in the past.

I think that our expectation -- Prop 13, the split-roll, which would be to take commercial and move off there, has not really gotten a lot of political traction in prior years. I think that -- we actually think that Prop 30, by effectively, at least according to the politicians, fixing all of the issues with the economics, will take the pressure off of that.

Okay, and then a question on the acquisition of the interest in the funds -- I don't know if you're willing to discuss this, but could you discuss the pricing? Is it of NAV? Is it at discount to cost, or how would you characterize the pricing around the acquisition of those interests?

It's just fair pricing, the way they want to be treated. When you want me to characterize the pricing, it's the price that the two of us agreed to. But it was fair pricing. It's not that I think we got an extraordinary deal. They are an investor that had to sell for unfortunate reasons, because of the way regulations are impacting them they are not allowed to hold an investment like that anymore. And I think they are happy with it and we are happy with it.

Well, there is no secondary market, so the fair market reference would be in respect to NAV?

I think it's fair with respect to NAV (multiple speakers) it's fair with respect to the value of the interest, to them and to us.

Yes, I don't think Jordan said fair market; I think he said fair. I don't know that there is a market -- in fact, I can tell you, there isn't a market for these things. So it's really -- it's an agreed-upon pricing.

It's a limited partnership interest. It traded for --

Right. Yes, there's no -- well, there's limited secondary market activity in these things. We know that.

Okay, and there's nothing in the guidance to assume that you are going to acquire any more interests as we go forward? These are all going to be opportunistic, if they occur at all?

Yes.

That's probably right.

That's correct. We would only -- we only expect that people will sell if they have a reason. The two acquisitions we made have both been driven by external events that we have no control over, and indeed, no knowledge of until we get a call from somebody saying I've got to sell for whichever reason it is.

Okay. And without wishing to drag this out, though, there's nothing in the agreements with the other investors that necessitate you to make the same bid at the same level to these other parties?

No.

No? Okay. All right, thanks, guys.

Jordan Sadler.

Just wanted to circle back to rents. I think last quarter, we talked about having the ability to push rents in your markets 5% to 10%. I am curious where you feel you are overall in those markets where you are having greater success versus less and how receptive, essentially, the market has been to the rent bumps.

Well, when we say to you we feel like rents are up 5% to 10%, we're talking about deals we have already done, not that our plan is to try and push them up 5% to 10%. It's that it has happened.

That's a comparison of net effective, and it's a very complex and very noisy comparison between net effective rents on the leases we have executed.

Right, comparing them to the low point from coming out of the recession, we are saying things have turned around, depending on the market you are looking at, between 5% and 10%. We've spent a lot of time with rents -- well, rents went down and then they remained down and flat for a while. And as we are now looking at it, we can see that we are well off that floor. And that's what we were saying to you.

And while the markets have -- well, it's across all the sub-markets, other than Warner Center and Honolulu, if you are asking sort of clearly the places where the lease statistics are the highest for the sub-market, like downtown Santa Monica and downtown Beverly Hills, those are going to lead the way in terms of rent growth.

Okay, I am trying to bridge the gap between your commentary -- I hear loud and clear -- you are not comfortable with the 0.5%, so I'm off of that. I'm trying to bridge the gap between what you told us last quarter in terms of your confidence in the ability to push rents, which it sounded like you had some enthusiasm, relative to what you are seeing today or what you saw late in the fourth quarter and into today that is making you feel so uncomfortable with the 0.5%.

Well, part of it is that enthusiasm about the rents. When I see what is going on with rents and I see what is going on in the leasing pipeline, I look at it and go, I don't believe that 0.5%. Because what we are experiencing seems better than that, but we gave the number.

And that is -- would you say, if you had to handicap it, is it more a function of continuing to see more net absorption? There is more people through the door, more tours, you are going to have better net absorption? Or, you just -- that 5% to 10% number is a non-issue; you can continue to press it?

I think we're going to be able to continue to press on rents. I also think that they got caught up in this transfer over between last year and this year and leases that rolled over and how they rolled over and what their expectations for them were. And so we ended up with what seems like an aberrant number. But we are not going to solve it here on the phone. We have already been looking at it, trying to figure out why the thing is coming out wrong. And we got to the point of the call and I said, well, we will report the number that the model gave us.

Is that cash, by the way, or GAAP?

Cash.

That was cash, plus 0.5%. Okay. Ted, you had the $100 million of cash and the model being put to use, or $100 million of your cash being put to use. What is the convention? Is it a midyear assumption at a 5% unlevered yield, or what are you plugging in (multiple speakers)?

I don't know that -- we actually have a number of different -- we ran a number of different scenarios because it could be acquisitions, it could be paydown, it could be different dates. It doesn't actually have a huge impact on the model one way or the other.

Okay, thank you.

John Guinee.

Are you tired of being public yet?

(Laughs).

A quick question -- one of the things we have always liked about you and I think everybody has always liked about you is sort of the small tenant, local focus, and therefore your TI's and leasing commissions -- you are not creating fire-rated corridors and moving around demising walls and all that sort of thing. 65% of your income comes -- of your Office income comes from tenants less than 20,000 square feet.

Having said that, you are stuck in the $4, plus or minus, square foot per lease year for TI's and leasing commissions, which seems sort of high relative to the small nature of your tenancy, which makes them mostly paint and carpet type renovations. What am I getting wrong there? Why is the TI's and leasing commissions continuing to be in the $4 per square foot per lease year?

Well, first of all, leasing commissions don't really change if it's a small tenant. So, unfortunately, we can't squeeze that down very much. And you have an average between, as you said -- everything you say about small tenants is right. It's why we feel really good about it. But we also have larger tenants, and larger tenants have much more than the $4 a square foot to build that out. So it winds up being about $4. We actually feel pretty good about that number. We think it's a really nice number.

And how much of the breakdown is TI's and how much is leasing commission, roughly?

Well, let's see. It depends on the size of the lease. But overall, probably -- boy, I don't have that number right here.

Don't worry about it.

Anyway --

All right, thank you.

Rich Anderson.

So this model -- if it told you to jump off a bridge, would you jump off a bridge, too? Why are you listening to the model if it's not doing its job? And if you look at what it predicted last year, and it underestimated it then, why -- isn't there lessons learned from last year that you can actually produce a same-store guidance number that you are comfortable with?

Yes. Well, I'll tell you, the lesson learned last year was we weren't good at predicting it, which is why I'm willing to say this year, I'm not in love with the number.

Okay.

If it was last year I would be saying, hey, I expect this to be the number. I don't know why we are questioning it.

Yes.

After living through last year, I am questioning it, and I did question.

Okay, that's fair. But do you think you need a better model?

Well, we need to get better at -- as people have focused so much on that number, we need to be better -- get better at predicting that number. You are correct. And last year, as we went through the year, we were -- obviously, we were off by over 100%. So that would not be an A-plus year. Right? I hope we are going to be off by that much this year.

When the number came out, I said that doesn't look right. But I can't recreate a model with thousands of leases and redo every -- all that in time for a call and say, okay, now I like this new number. There's a lot that goes into it.

So we are going to play through the quarter and we are going to see how it goes and then you will get another prediction at the beginning -- on the next call.

Okay, so is there anything in your experience in these markets over the however many years -- I don't mean to date you -- you have been in the business -- is there anything unique? And I know the answer is yes, but I mean significantly unique that could alter the way things would normally progress in Southern California, and that is why you can't quite get a handle on it in the last year or two?

No. I'm going to tell you, the way things are progressing or how I thought they would progress in terms of the fundamentals, in terms of the growth of our income and AFFO and the way cash flow is working for the Company, it's progressing exactly like I thought. We have gotten great absorption out of the last year or so. Our cash flow has gone way up. We got through all of our refinancings. We are leasing now at higher rates than we were 12, 18 months ago.

So rental rates are moving the way you would think they would be moving as the occupancy goes up. And there's just some other accounting going on, on that NOI number. I don't know what to tell you. The rest of the numbers are looking good.

Okay.

Those are very small movements in that. It's very sensitive to very small assumptions in the model, because it's not a lot of dollars.

Okay. So my next question won't be on the model. You mentioned you got through AIG; it was about what you had hoped for in terms of lesser space and getting that issue resolved. But then, you also said at some point in this call, you know, move onto the next thing. What is the next thing in terms of tenants? Is there one or two out there that you can identify that are going to require that kind of high level of activity for a single tenant that has not been resolved yet?

No. Matter of fact, when I say move onto the next things, we had to get through this AIG thing in order to really get on a good path towards positive absorption in that market because that would back us up a lot if we had lost them.

So, now that we have that done, we are in good shape to just do our normal thing, knock out little leases and build occupancy and get ourselves to the point where we can start pushing rents. The AIG lease, while for a long time it seemed like we were going to make a deal with them, things can go wrong and we wanted to get it done and signed. And it did get done and signed, so we are glad to have that behind us.

Great, thanks very much.

George Auerbach.

Thanks. Jordan, you mentioned that rents in your markets are up 5.7% year on year. If you had to make a guess on what market rents do in 2013, do you think it's along those lines, better or worse?

You are on apartments?

(inaudible), yes.

On the residential?

No, I'm sorry; that was residential rents?

Yes.

Okay, sorry about that, never mind. And then just going back to the NOI just briefly, on the rent spreads for 2013, I know you don't have one number in front of you. But it was down 15% last year. Will the trend be about the same, or will it be a bit more positive?

Well, that's a cash number that you are talking about. It's hard to tell as we do these. A lease like AIG, whatever quarters it falls in, that impacts the numbers, even if a bunch of other leases (inaudible). When we look at the list of leases, let's say there's 200 leases that go into calculating that for a particular quarter that we've signed, right? There's a huge amount of them where there's a positive spread. Right? Maybe there's 80 of them where you are like up, up, up, and then there's 120 down. And then, depending on the size of them and other characteristics, it tells you where the net number is going to be up and down, which is why we keep missing this. We can't predict which leases are going to land in the quarters.

So I looked at the list yesterday, trying to think what is next quarter going to look like because I see the pipeline and I see the deals, where they are headed. And I'm reading down and I'm like, oh, that could be a real good quarter, it could be positive. Then I get down near the bottom and I'm like, well, it looks like there's more that are rolling down than rolling up. So maybe it's going to be negative.

But until they are signed, you could be -- like you could have a guy move out; he could have moved out in second quarter of 2012. And we sign that lease in the second quarter of -- you know, next quarter, 2013.

Alright, so all of a sudden that comparison just got accelerated to happening in this quarter, not the quarter maybe that you guys are thinking that it should have been four quarters ago. So when we do new deals, you are dragging something from the past forward to create that comparison. And at the same time, when we renew, we could be renewing a lease that's still not set to expire for nine months. Okay? So all of a sudden, the quarter that when we just looked at the numbers we thought it was going to come in, it now shows up three quarters earlier.

So the number could literally just bounce up and down and all of a sudden we could have a quarter when it turns or we could have a quarter where it turns back.

Okay, and Ted, I missed it. How many units on the Multifamily have not yet turned?

Are you talking about the pre-1999?

Yes.

257.

Great, thank you.

Jamie Feldman.

So if you look at your year-over-year same-store NOI expenses, it looks like you are up about 2.9%. What is your expectation for 2013? Is there anything on the expense line that is creating some of the drag?

I think that -- we -- actually, for the year, we were up -- I thought it was 1.1% for the year in terms of expenses. I think that --

Yes, I was looking at the fourth quarter.

Yes, the fourth quarter has a (multiple speakers) -- the fourth quarter has a bad comparison. I think that the multi- -- the expenses, I think that's another area where we are going to be looking into it because I think that we did a really good job of controlling the expenses last year. We have not projected that we are going to control it nearly as well this year, but I have more faith in our operating group than that.

So the answer is yes.

Expenses and revenue are both places, and expenses is one of the places that we were questioning when we saw the increase that you just focused on.

So you are saying right now, you have them modeled as flat, or you actually have them rising?

No, we have them rising next year.

We have them rising, yes.

The model shows them rising more than they rose last year.

We were questioning that.

Where are the key areas you could cut? Is it (multiple speakers --

That may not even require cutting. It may be that in the budgeting process people just got --

It's not a question of cutting. It's a question of making sure that the increases don't -- that the additional increases don't go through. And I think that there was -- a lot of that is just projecting what is going to happen in the outside world. And I think we can do better projecting there. That's my guess.

Okay. And then you briefly touched on Honolulu. The unemployment rate is looking pretty good, but that's one of the markets you are not really seeing rent growth. What do you think it's going to take to see fundamentals really tighten up there?

I think we are very close, actually. The fundamentals are looking like they are getting tighter. I actually would have thought even -- although it didn't show, I would have thought near the end of last year we would have been able to say rents are going up. But it didn't come out in the numbers, so we didn't say it. And I'm hopeful that we will be saying it this year.

Okay, and then acquisition opportunities there -- anything interesting?

Yes, we are working on a couple of things there, and we are working on a couple things here in LA.

All right, thanks.

David Harris.

Did you give any update as to the status of these two Multifamily developments that you referenced on the last call?

No, there's not any -- we are going through a process with them to go through and get the city approvals in both cities. So that's the update, effectively. It's not a lot of real activity to report. I don't think you'll see us breaking ground for maybe a year in Honolulu, and maybe even more than that, a year plus, in L.A.

Okay, any time frame on getting the approvals in place?

Well, as soon as they get in place, we will be going forward (multiple speakers) and breaking ground.

And starting? Okay, it's really going to take that long to get through the municipalities?

Yes.

Alright, thanks so much.

And I am showing no further questions in the queue at this time.

All right. Well, thank you, everybody, for joining us, and we look forward to speaking with you again next quarter.

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