Douglas Emmett Inc (DEI) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Douglas Emmett's fourth-quarter 2013 earnings call. Today's call is being recorded.

(Operator Instructions)

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 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.

(Caller Instructions)

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 fundamentals continue to strengthen, with robust occupancy growth and higher net effective rents in our office portfolio. Job growth in West LA has been twice that of Los Angeles as a whole, with total payroll employment in West LA now 1.5% higher than 2007 peak levels.

We added 80,000 square feet of positive absorption last quarter, ending with our office portfolio at 92.2% leased. Excluding the impact of acquisitions, we increased occupancy in our office portfolio by 1% during 2013.

As our leased rate continues to grow, and vacancy decreases, spaces throughout our office portfolio that had been vacant for some time are now leasing up. Even with these strong fundamentals, and rising office rents, new office development in our targeted sub-markets continues to be severely constrained by restrictive zoning laws and well-organized community groups.

Aside from Warner Center, there was no significant Class A construction, even at the peak of the last cycle, and we do not expect any significant new deliveries in the next few years. These trends support the higher valuations we have seen in recent office building sales.

The performance of our multi-family portfolio remains excellent, with average asking rents 5.3% higher than a year ago. Our two multi-family development projects continue to progress nicely.

We expect to break ground mid-year on an additional 452 units at our Moanalua Hillside apartments in Honolulu. Construction should take about 18 months and cost between $90 million and $110 million, which includes the cost of upgrading the existing 696 apartments, and building a few additional structures, including a new community center.

In Brentwood, we're making good progress through the challenging LA entitlement process with our new Landmark Apartments development. We expect 2014 to see continued property sales in our markets, as sellers and buyers seem to be agreeing more often on price.

I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everybody. I'll begin with our results, then address our office and multi-family fundamentals, and finish with 2014 guidance.

First, we're very pleased with the financial results for 2013. Our FFO per diluted share grew to a record $1.49, up 9.6% from 2012, and 27.4% from 2007, our first full year as a public company. We also increased our AFFO per diluted share to an all-time high of $1.18 in 2013, up 12.4% from 2012. Even with the recession, our AFFO has grown by 66% since 2007, an average of 11% per year.

Our business model continues to convert a significantly higher percentage of our NOI into free cash flow compared to other CBD office REITs. We continue to keep our G&A under 5% of revenues, compared to a benchmark of about 7%. By focusing on small tenants, and tightly controlling tenant improvement costs, our recurring CapEx during the fourth quarter was $10.7 million, or only 7.2% of revenue. In addition, our straight line and FAS141 revenues represented a lower percentage of our income than the average for comparable office REITs.

Comparing the results for our same properties in the fourth quarter of 2013 to the fourth quarter of 2012, our revenues increased by 1% on a GAAP basis, and 0.6% on a cash basis. Our expenses decreased by 0.2%. And our NOI increased by 1.5% on a GAAP basis and 1% on a cash basis. Comparing our same-property results for all of 2013 to 2012, our NOI rose by 1.7% on a cash basis and 1.2% on a GAAP basis.

Now turning to office fundamentals. During the fourth quarter, we increased the leased percentage for our total office portfolio by 50 basis points to 92.2%, and our occupied percentage by 80 basis points to 90.4%. We are pleased to see the improvements we made in some of our submarkets with greater vacancy. During the fourth quarter alone, our leased rate grew 140 basis points in Warner Center, 210 basis points in Honolulu, and 270 basis points in Brentwood. During the fourth quarter, we signed 169 office leases covering 588,000 square feet, including 268,000 square feet of new office leases.

On a mark-to-market basis, with continuing increases in rent, our average office asking rents at year end were about 160 basis points higher than our in-place cash rents. Reflecting the rent growth from our high contractual rent escalations, the beginning cash rent on new leases we signed last quarter was 9% less than the ending cash rent on expiring leases. Straight-line rent on current quarter leases showed a slight 0.5% decline, reflecting greater leasing in Honolulu and Warner Center, our two submarkets with the least amount of recent rent growth.

On the multi-family side, our 2,900 units were 99.5% leased at year end, with both our in-place and our asking rents at all-time highs. During the last 12 months, we raised our residential asking rates by an average of 5.3%. The current asking rents for our multi-family portfolio exceeded our in-place rents by an average of 22.6%.

About half of this embedded rent growth relates to our remaining pre-1999 units in Santa Monica. During 2013, we recovered 11 pre-1999 units, with an average rent increase of about $2,400 per unit per month. As of year end, we had 246 remaining pre-1999 units.

Recurring capital expenditures for our apartment communities averaged $133 per unit during the fourth quarter, and $354 per unit for the full year.

Now turning to our balance sheet. As of the end of December, we had $44 million in cash on our balance sheet, and $260 million of availability on our line of credit, with no material near-term debt maturities. Our net leverage was 44% of Enterprise value, well within our target range. We continue to have ample liquidity for potential acquisitions and other working capital uses.

As we announced last quarter, we increased our projected 2014 annualized dividend to $0.80 per share. Our cash flows continue to grow, providing us additional liquidity, as well as room for continued dividend growth. Using the midpoint of our guidance, our 2014 AFFO pay-out ratio of 64% remains among the best in our peer group.

Finally, turning to 2014 guidance. We expect to increase FFO per diluted share to between $1.57 and $1.63, and our AFFO per diluted share to between $1.18 and $1.24. For more information on the factors underlying our guidance, please refer to the schedule in our earnings package.

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

(Operator Instructions)

Our first question comes to the line of Jamie Feldman of Bank of America.

Great, thank you. I was hoping you could address, across your sub-markets, and in your guidance, where you think you'll see the most occupancy growth.

So two-part question, one is -- in which sub-markets do you think you'll have the best prospects for occupancy growth? And the second part is, what did you include in your guidance?

Well, I can answer in terms of the best prospects for occupancy growth, it has to be in Warner Center because it's where we have the most opportunity to do leasing. As we get tighter and tighter, and I know the whole Company, including that, has had about 92%, it gets harder to move the number up obviously, because there's fewer spaces that we have to entice people with.

Ted?

So what we told you this quarter was that what happened is it spread to those places with the most vacancy, and as Jordan said, that's where we probably see it. But in addition to that, something else Jordan said, is that we are seeing in the sub-markets that have had more strength, we are seeing spaces which we've not been able to lease for some period of time, now leasing up as people are sort of pushed into finding more space someplace.

All right, thank you.

Thanks.

Our next question comes from Joshua Attie with Citigroup.

Hi, Josh.

Hi, I just want to follow-up on the occupancy question. At the high end of the range, 2.5 percentage points is pretty strong occupancy growth.

What's your visibility into the tenant pipeline, particularly in Warner Center? And are there some larger tenants in the market, or are there some deals on the near term horizon that give you confidence in the upper end of that occupancy growth range?

Well, one thing to start off by realizing and remembering is when we -- although we had 1% growth in 2013, we told you at the beginning of 2013 that there was a lot of people who had hung over, and so that was about 60 basis points. So the reality is that the growth in 2013 on a normalized basis was 1.6%.

I think we are seeing strong demand from tenants. We always have the questions about what happens during a year, and where that's going to flow out to, but we are seeing throughout the portfolio really good demands at this point. And that's what that number reflects.

Okay, thanks and if you could talk a little bit about rent? You mentioned in the press release and in the prepared remarks that the mark-to-market on the portfolio is positive 1.6% today, and I think that's the first time that you gave that number. Can you give us a sense of what that number might have been during 2013, and maybe when it inflected positive?

We actually have been giving you that number now for I think two or three quarters because -- this is either second or third quarter in other words -- and partly it was in response to people asking us. We gave that number for a number of years, and then we took it off because people didn't seem to be focusing on it, and then people told us they were focused on it and we put it back. I think it inflected about two quarters.

It turned positive one or two quarters ago. Maybe that's why we added it back. (laughter)

And how should we think about that relative to the cash spreads and when those might improve? And I know that it's specific to what space happens to be rolling in any given quarter, but if the whole portfolio is a little bit above market, how should we think about when that could start translating into better spreads on leases executed?

Well, I think what you can say is, we're getting a lot closer to that happening. But I think that there are significantly enough different factors, and there's a lot -- as we talked to you guys before, there's a lot of moving parts in that that makes it not very good, unfortunately, in helping us predict exactly when that change will happen.

Okay, thank you.

Thanks, Josh.

And our next question comes from George Auerbach with ISI Group.

Hi George.

Hi, thanks, good morning, guys. Ted, on the same-store NOI guidance, can you break that out between multi-family and office? And then within office, can you help us understand the components a little bit better?

Just trying to think about how the occupancy is weighted throughout the year, and you just mentioned the rent rollovers or rent spreads. Any thoughts on where those might be in 2014?

So let's start with a question about what the breakout is. The breakout is going to continue to be about what it's been in the past, in terms of we're going to have probably comparable growth in the multi-family side, and the office will be better this year, which is what accounts for the increase from where we were this year.

Your second question was the timing of it. I think that we're looking at a little bit of headwinds in the first quarter or two. We have got -- we told you before we've got a AIG lease that's moving out of about 40,000 square feet in the first quarter.

And so in general, and we hate to do this but it's been true the last two years, we see a lot of that occupancy growth happening in the last part of the year, not in the early part of the year. So it will be back-end weighted just as it was this year and as it was in 2013 and 2012.

Great, that's helpful. And then just last for me, the TIs were up a little bit in the fourth quarter. Is that sort of one-time related? Or any color on that?

Yes, it's actually -- if you look at the TIs on renewal leases, which are pretty spread through the portfolio, those were consistent with prior quarters, maybe even on the lower side.

What happened in the new leases is as we move into places like Warner Center and Honolulu, which are generally higher TI markets, and as we lease up old space in the portfolio that hasn't been refreshed in awhile because it's been sitting vacant, we saw a little bit of a bounce up of that, and -- but the underlying low TIs in our markets is changing.

Great, that's helpful, thank you.

And our next question comes from Jordan Sadler with KeyBanc Capital.

Hi good morning. So looking to -- I guess digging a little bit more on the fundamentals, looking at the occupancy uplift, even though you said it's back-end loaded, it shows continued good momentum in your sub-markets, or at least the expectation of that.

So my question is -- has anything changed in terms of your posture on leasing, right? So you're not as aggressive perhaps as you were before, are you starting to hold off on early renewals as opposed to trying to force them earlier?

I know you have a bigger chunk of the portfolio rolling in the next couple of years. So I'm trying to understand what your cadence is like, given the tightening of occupancy in the portfolio and in your markets.

Well we're always aggressive about leasing, so we would always prefer to lease than not lease. So we're not that strategic to say rents are going up, so we'll hold space off the market, or something like that.

We are certainly not operating out of fear. So a good example would be, going into the recession as we saw things moving a little bit, we reached out very early to our largest tenants and worked to lock them in long-term, probably leading the market in that aspect a little bit. Now, certainly we're not doing anything like that.

In terms of what we're doing with the leases, is we're taking this opportunity as kind of the economics are just roundly improving, to find areas in the lease to improve for us. And you guys know, we've been saying to you for awhile, for me at least, one of the greatest indicators of things improving is the fact that we've moved off the 3% bumps in a huge amount of instances. So I want to say something like a third of our deals are now getting better than the 3%, let's call it 4%.

And for those of you that were with us before we went public, and as we were going into that zone, will remember that we were kind of regularly saying to people -- wow, these bumps are moving up 3.5%, 4%, and they actually moved up to 5% at one point. That's better than a great sign. That's a fantastic sign.

Aside from the fact that overall rates are just going up, it's stuff like that we're able to just keep driving and improving on that gives you good long-term cash flow and economic growth. And that's where we're focusing our time and energy in terms of the market coming our way now.

That's helpful, thank you. The other one -- we haven't talked about investment opportunity at all, but a couple quarters back or so, you'd quantified or talked about, a handful I think of $50 million to $100 million opportunities out there. What is it you're seeing today? Are those opportunities still out there?

Well, we did a few, right? We bought a couple of buildings that were in that range, and I'm hopeful that this year we will be able to continue that. I mean, we are seeing buyers and sellers coming together a little more often now on price.

The visibility on rental growth and underlying economics is pretty good for anybody in this market. And frankly, it's pretty good for a seller and a buyer, so deals are being made, as you saw, and we're making a lot. We are making them. I'm hopeful that we'll buy stuff this year as we did last year, or hopefully even do better than that.

Okay, thank you.

Thanks.

Our next question comes from John Guinee with Stifel Nicolaus.

Hi, John.

Hi, guys. Help us understand FAS141 accounting here. It looks like 2012 was about $18.1 million associated with above- and below-market leases. 2013, $16 million -- $15.7 million.

But you're going -- and that would imply that 2014 would be about $13.5 million, but your guidance has $22 million to $23 million. To help people understand how much of that is one-time, probably the best thing to do would be to provide FFO or FAS141 guidance for 2015 and 2016 after this ground lease is acquired.

Well, I think the problem is, projecting out FAS141 is not that straightforward, because it is also very impacted by acquisitions, and it is impacted by some other factors, as we're finding out this year.

What I can tell you, that may help you do that, is that the ground lease we're locking to acquire in Hawaii, that we have the model -- have the option on, that's actually a great thing for us in terms of being able to control that ground and being able to get rid of the ground lease payments. And it will somewhat slightly impact NOI.

It's going to have, depending on when we exercise it, and right now we would be telling you we're probably going to exercise it in the third quarter, but it sort of depends, depending on exactly when we exercise it, that will have an impact this year of between $8 million and $9 million, and not much of a decrease in impact for FAS141 for next year.

Okay, great; so $0.045 to $0.05 a share. And then next there seems to be some reoccurring or non-reoccurring one-time items.

Can you walk through the other income of $2.2 million and the other expenses of $1.4 million, what's in there? Is that a good run rate for both?

That is probably a good run rate for both. As you'll recall, what we told you all was that when we took over the club in -- took it back from the bankrupt tenant in Honolulu, that the way the accounting works is that what used to be up in rental income, because it's now being operated by an affiliate of ours, that gets pulled down.

And so the revenue from the club is in other income, and the expenses from the club is in other expenses, and that made those numbers much bigger. There's always a few other little things in there, but that's the bulk of what's in there, and that will continue so long as we're operating the club through an affiliate.

Great. Wonderful quarter, thank you.

Thanks.

Our next question comes from Orlando, Sandler O'Neill.

Good morning, it's Alexander Goldfarb. How are you?

Good, Alex, how are you?

Doing well. You guys are missing out on the good winter.

We deeply regret that.

We will come out and visit with our skis. (laughter)

Perfect. Going back to the guidance, and just doing quick math, it looks like, Ted -- is each occupancy point basically a penny per quarter? Is my math right?

That's probably not too far off, although remember that again, we've told you it's back-end loaded, so you've got to not annualize it that way.

No, I understand, but if you say that it's a penny a quarter for each 100 basis points of occupancy improvement, so that would sort of imply that there's a pretty good ramp up, like probably a $0.04 or $0.05 type difference between the first quarter or two and the third and fourth quarter, like if you did first to fourth quarter, it's probably like a $0.04 or $0.05 difference, is that right? And that's all driven by NOI and improved occupancy? Or is it G&A or something else that's driving that delta?

First of all, you rounded up. It's actually a little less than a penny, so it's actually more like $0.03 to $0.04, and it's actually probably $0.03.

And it also depends when in the quarter -- you've got to also do when in the quarter it happens. So for example, in 2013 we had a huge increase in the fourth quarter, but it wasn't hitting at the first part of the fourth quarter.

Okay, but my point is that in order for you guys to do the ramp-up to get to your guidance from where you closed out the fourth quarter until the fourth quarter, it's a pretty big increase in per-quarter FFO. So I am just trying to figure out if in your numbers this is all purely occupancy NOI-driven versus it's G&A or something else in the model that's driving that pretty big ramp-up in quarterly FFO?

Well, G&A, we already gave you guidance, so you know exactly what we think is happening with G&A. But maybe it would be easier to sort of go through, because what's happening is you're rounding numbers, I think you're rounding them in ways that may make it hard. But it will be easier maybe if you and I talk about it offline.

Okay. Then the follow-up to that is, of the 246 pre-1999 apartment units, how many more of those do you think you can get at, like how many of these are people who show up in Santa Monica once a year and claim they're a permanent resident, versus people who actually genuinely live there?

Well, I think that we think we do a pretty good job, although not perfect, of finding the people that don't live there. So as these things turn, there -- somewhat we find people, somewhat people unfortunately die, and somewhat they change their lifestyle and they decide they are going to go do something else.

But it's not just that there are 50 of them sitting there for us to catch. There are probably a few who are doing it at any given point in time and we try and find that.

There's more than one way to get units back. That's only one way that we happen to push through -- the city and get them to agree to, but you get them back other ways, too.

Okay, so it's not just through natural attrition. There are other ways to get at these units?

Yes, that's correct, and also the natural attrition has to start picking up unless these people are planning to live to be 120. We're certainly planning to outlive them.

Rent control is the fountain of youth, as you well know. (laughter)

Apparently.

Thank you.

Our next question comes from Brendan Maiorana with Wells Fargo.

Hi, guys. Good morning. I wanted to ask a little bit more just about the rent spread question, not because I think it has that big of an impact on 2014, but just kind of wanted to get your sense of where you think those numbers might trend as we move throughout the year, given that it sounds like you are pushing rents up, and your expiring rents probably get a little bit more favorable as we go throughout the year. So do you think that's a number that can get close to flat as you get later in the year and combine with the occupancy ramp, it could set up well for 2015?

Yes, the occupancy, by the way, doesn't help us that much, but the answer is -- you correctly stated that all the trends in that regard are good. There's a lot of quarterly fluctuations.

Well, he's saying the ramp-up in occupancy helps even push further on rent. I see. And you're right.

When the Market's improving, everything is going your way, and when it's going down it feels like everything is going against you. And there's a lot of numbers --and you just named a few of them -- that are going our way. And I mentioned another earlier, which was -- also the terms in the leases are getting better, so terms in the leases are getting better, as occupancy rises that puts pressure on rents, and where obviously, the roll-off and the comparative roll-off has to be going our way eventually too, so that's all really good directionally. I mean, we don't want to sound overly optimistic, but I am feeling very good about the near-term quarters coming up.

The only trend that's against us -- but it's really for us -- is that we're getting to let rent up a lot of spaces that were harder to rent up and in areas that are not.

So one of the reasons why the straight line was off this quarter, as we told you, is because we were renting in Honolulu and Warner Center, and that's slightly bad news in one sense, but in the other sense, for the overall health of the Company and our long term thing, that's great news.

It's not bad. It's just an aberration in the stats when they show up as overweighted.

Okay, so you guys feel like the rent spreads are still moving in the right direction with -- we know, with the caveat that things bounce around quarter to quarter?

Exactly.

On the occupancy outlook, I think someone else asked this question earlier. I did feel like it was a nice move up, and Ted, I appreciate the comments that you guys had, a lot of the short-term leases early last year, which kind of hurt you a little bit in 2013.

Would you say that your confidence level in hitting the midpoint of the occupancy target by the end of the year is about the same as what your occupancy guidance was for 2013? Or do you feel better or worse? Just because it does seem like it's a pretty big ramp-up, so just kind of a little color there would be helpful.

When we set up our guidance, we try and have it be the same confidence level every year when we do it, so I would say we've given you what we think is our best estimate, just like we did last year.

I think if you look at our history, we rarely if ever miss, so take it for what it's worth. Take our history for what it's worth.

Sure, okay, thank you.

Our next question comes from Michael Knott with Green Street Advisors.

Hi, how are you?

Good.

Question for you on your occupancy forecast for the end of 2014. I think if you're close to, but not quite at 91 now in the same store, and if you add, say, 200 basis points to that, let's just call it 93, I think you'd still be a couple hundred basis points below your Q4 2007 peak of 95.

So just curious if you can comment on your thoughts on getting back to that? And then also if you can contrast that gap that I just cited, 93 versus 95, compared to your earlier comment about West LA jobs being above the prior peak.

Well, yes, if you look at the -- when you do that comparison, that gap at the end of the year is likely not to be very much in West LA. If you look at the market, we're still going to be working to have Warner Center recover.

But I think we feel pretty good about ending the year at that point in the process on an average basis across the portfolio.

I will tell you it was actually even higher than 95. It was like 95.7 or 95.8, and I feel like we could go back into those numbers. I don't feel like we're artificial or awfully capped now at 93, or any number down in that range, because things are leasing up and recovering the same way they did last time.

And then just to that point, somewhat related, I don't think we've talked much on these calls, but have you guys seen, or are you continuing to see, much impact at all from tenants restacking their floors or becoming more efficient? Has that not been as much of an issue in your markets with smaller tenants?

Not with smaller tenants, no. But it has been an issue and it's acted as a drag, in general in larger buildings, like a market like Century City, certainly it's impactful there. Hasn't been as impactful in a bunch of our markets -- impactful in Warner Center, and it's being worked through.

I mean the great news is it's being worked through, and we're increasing occupancy, and the markets are improving all at the same time. So certainly it was much more painful to work through that process in the depths of the recession and was just one more thing going the wrong way, and now it's turning into being a little bit of noise and we seem to be driving beyond it.

And then on the investment and sales side, what's driving this decline in the bid ask spread that's been prevalent for awhile? Is it the big Century City trade, is it some other trades that maybe are under the radar? What's your sense of that?

I think that it's that, as I said earlier, just the raw fundamentals, the visibility of the raw fundamentals are good enough that people are more confident in terms of, I would say, the buyers are kind of coming up and meeting the sellers more than the sellers coming down.

But where pricing is relative to people's expectations, just much closer now. And there's not as much -- if you think about it, a few years ago, you had to decide where rents were going to bottom out, then how long they were going to be at the bottom, and how they were going to rise. Today, you're just trying to decide on the rate of rise. That's kind of an easier project.

It gives capital more confidence and investors more confidence, and if people are selling, if their buildings are leased up, they have more confidence about what the value of their building is, and they're getting closer to a number, let's call it, that makes them feel better about selling. So that's why the deals are coming together.

Any thoughts on what the takeaway from Century City trade might be for overall asset values in your market, assuming that you may no longer be involved in that?

Well, it's accurate that we're no longer involved in it. The trade, I'm sad for us and happy for the people that made that deal. I think that it's a great project and rents are recovering strongly, and I'm sure they will do well.

Okay, thanks.

And our next question comes from Rich Anderson with BMO Capital Markets.

Hi how you doing?

Hi, Rich.

Good.

So first question, what do you think, if you were to be a betting man, multi-family is a bigger or smaller percentage of the portfolio a couple years from now?

Well, considering we have on the books almost a 1,000 units that we're building, I would expect it to be bigger. That's pretty easy, so do you want to take the other side of that bet? (laughter)

Well, I was thinking more about what you got going on right now.

I know, I'm kidding. You're saying beyond that.

Yes.

Boy, I have every year hoped to find and buy and increase our multi-family portfolio, but it's been very hard to do, so it's hard to say. Our proclivity, our inclination would be to really stretch, find and buy multi-family, but I'll say the other side of the coin is, there has been some multi-family trades that we felt like we couldn't get there on price, and they traded. So they weren't for us, so --

Maybe that's telling you that it should be getting smaller, then, if you can't make it get bigger? I don't know. Pretty good logic or --

Yes, if you consider multi-family, it's not making me think that I want to sell multi-family. That's only the kind of theoretical trading stock world. It doesn't hold as true in the actual assets transfer world.

Okay, and then bigger picture -- so you talked earlier about property values, trades showing up well in terms of valuations. And then you kind of look at your seven-year public history peaked out at $28, trading close to that now. I imagine there's some fatigue factor, having gotten through a recession.

Is there any thought at all about, boy, if I get the bid, we could be a seller at this point? Or is it just like, we've muscled through the recession at this point, there's no -- it will be very hard for someone to make the right offer at this stage for the Company?

Well, what do you want me to tell you right now, we're offering the Company for sale? Is that what you're asking me? (laughter) I will say this, let me say this.

If you did say that, that would be a great answer from my perspective. (laughter)

I say the way you characterize it is nothing in the range. I don't feel fatigued. That is like our third recession or fourth recession that we've gone through, so I don't feel like, wow, we suffered through it with our tongue hanging out.

Through the recession, and as you know, we felt pretty good about our assets and the long term prospects of the market, and we didn't issue stock, and we did all the stuff right and thankfully we were right on that, and the market is now improving well. So I wouldn't use the fatigue or surviving through the recession or anything in what we're doing.

We still feel like we want to build this Company to be the absolute best and dominant player here, and we feel great about our prospects for doing that going forward. It's always tough to build a super Class A portfolio in a major poor market, and we've been doing that, and staying at it, and I expect just to continue staying at it.

Okay, that's good enough. We're happy to have you around.

Thank you.

Our next question comes from Jamie Feldman with Bank of America.

Thanks guys. Just a quick follow-up. So I guess, Ted, did you say what you're assuming for leasing spreads next year in the guidance?

No.

Do you care to?

No, I don't think -- it's a problem, is that number, is that it just is so dependent on the data in the individual quarter. So we start -- earlier I was asked if I could predict which markets the leasing would be in, and if I can't do that with any great degree of certainty, I certainly won't be able to predict what the spreads will be.

Okay, and then just thinking through the capital plan -- well, first question or first on that topic is, can you talk a little bit more about the land acquisition under the ground lease acquisition, and how you think about the yield? And then are there other opportunities like that in the portfolio? And along the same lines your capital plan for 2014?

Well, the purchased land, which is an option we've had forever, going back before the IPO, is -- the purchase price is $27.5 million. And it's been something that actually we've been disclosing in our K, because it affects the accounting that we've been intending to exercise all along, and now it's time to exercise it. Jordan--

It's in the mid 5s.

The yield is just over 5.

Okay, so do you have other opportunities like that across the portfolio?

Not really.

You mean in the form of ground leases that we can buy?

Places you can generate a little more yield than we're thinking about.

Well, if you go beyond ground leases, we're building units in two of our sites where we're going to generate a lot more yield out of existing properties. That's a good question and it's something that we're working on all the time, but I feel like it is going on in a lot of places. But maybe that's not --

I guess I was like, for other land buyouts. You're saying that's the only one at this point?

I'm trying to think what other ground leases --

We have -- we ordinarily do not buy --

Yes, we own the ground under a building in Warner Center, and we tried very hard to buy the building, which would have been a great play, but we were unsuccessful. But you know, we had a bunch of ground lease deals, that before we went public, because we just didn't feel like they were good long-term, that we sold in 2005 and 2006, maybe even 2004, 2005, and 2006.

Right. We kept the one in Hawaii, primarily because since we had the option on the ground we knew we could buy it.

Okay, and then what are your thoughts on financing needs this year with the development ramp picking up and then this acquisition?

We don't have a lot of financing here this year. The one spot which you're right to ask it that way, where we're doing development, which is over in the Moanalua project, that loan comes up next year.

And we're going to play through for a little while with cash, and then we'll make some kind of decision about how we want to finance that, if we want to do it kind of strict construction loan style or just put a new loan on it, since it's a project that already generates a lot of cash flow, and that probably would be an option, too.

In addition, for those types of uses, we actually have good enough cash flow to cover most of those uses.

Okay, great, thank you.

And our next question comes from Jordan Sadler with KeyBanc Capital Markets.

How are you? I just wanted to run through the breakdown on the same-store.

I might have missed this, but what's the revenue and expense breakout on the same-store NOI guidance? And if you could maybe give us what the full year revenue expense were for last year? I have sort of the individual quarterly numbers, but not the full year numbers for last year.

Well, on that one, I got them, because everybody -- we'll call you and give you that, and I don't think that we've ever broken it down between operating expenses and revenues.

I will say that what we told you guys in the past, which is that we generally expect in this part of the cycle, although we seem to keep doing better than it, that we would expect operating expenses to be up by 2% or 3% generally in a year in this part of the cycle.

But we can go through it now together and give you a call and give it to you.

Okay, but for this coming year, you kind of are embedding a bigger operating expense number like you said? Like a 2% or 3% or maybe even a 4%? I know you were thinking about that originally for this, 2013, but I don't know if that ever materialized?

Yes, the answer is yes, that's good. If I were modeling it, when we model it, we would model up 2% or 3%.

Okay, thank you.

Sure.

Thanks.

Our next question comes from Joshua Attie with Citigroup.

Hi it's Bilerman on the phone.

Hi, Michael.

I'm surprised you said you're sad about Century City. Doesn't that provide -- I know you're sad because you didn't buy it, but at the price that it sold for, both on price per pound and the cap rate, doesn't that give you an unbelievable mark for where your portfolio is trading in the public markets?

Well, it is a mark, so we already knew where our values were, but if for the public buying the stock, they look at that and they go -- we're getting a better feel for what underlying NAVs look like in your markets and I'm going to be happy that happens and hopefully it improves the stock price.

You talked about sort of the raw fundamentals and buyers and sellers coming closer together, more so the buyers getting more confident. What sort of rise in rents are you seeing buyers put in over the next, call it five years, into their models to make the math work?

Well this Century Park deal is not the only deal for what you're talking about -- just to go back to that -- you're saying people could take the Century Park deal and deconstruct it and say wow, look at this spread between the value and where the stock's trading.

There's other deals that have been happening like that. So I wouldn't pop the champagne corks, like that one deal's going to cause everyone to realize it, because I've seen other deals happening over the last 12 months, all of which you could have looked at and said the same thing.

In terms of buyers, I don't know, I don't get very much opportunity to see what other people are doing, but I suspect by looking at the way people are bidding, that at least over the first, the next five years, they're putting some double digit increases in, and holding those for a few years going forward, and then tapering it off, like everybody always does, out three or four years.

And then how much, obviously, every building's different, right? Depending on where it was leased up. You think about your portfolio today being 2% under market.

Obviously that's going to play into what initial cap rates are. How should we think about if you're going to be active in the acquisition game, assuming that there's probably some opportunity, that there's some mark-to-market initially, that they're below-market rents and then two, this rent rise in the market, how should we think about current cap rate versus sort of an IRR in that instance?

Well, yes. I know it's counterintuitive, but in a weird way, when we're buying something, the lower the cap rate the better. Because when the cap rate's lower, I'm not buying a bunch of above-market other guys' leases.

I'd rather have a very low cap rate, a good IRR, and we'll do the leasing and get in at a better dollars-per-foot on the project. And if you look today, more than probably ever, cap rates, the spread between a low cap rate relating to a higher IRR is bigger today than it has been in quite a while, but the number moves very quickly in a position.

Just for case studies of the last few buildings we've bought, we've been buying buildings at pretty low cap rates with pretty big going-in vacancy, I want to say like 50% -60% occupied, and turning those within a quarter. One of them we did while we were still in escrow back to the 1990s.

So if we could keep picking those off, keep getting those that are like 70% leased and using our platform, they move up very quickly as we're buying those in our market, and we're getting them for good dollars per foot at the same time, crazily low cap rates, like ridiculously low cap rates, but they're great deals.

And how do you think, if raw fundamentals is playing a big part in transactions happening, how much of it's the financing market? And are you seeing lenders being more aggressive on the West Coast in terms of total leverage and sort of all-in rate?

I think lenders want to be more aggressive and are targeting LA, but I really don't see anybody using debt to finance their way into making deals work. Now there's two -- there's an interplay of debt with Real Estate that cuts two ways. One, if you could finance cheaply, in theory you can pay more, and the other is, debt's an alternative investment. Someone could invest in real estate; they could invest in debt instruments.

Obviously, debt being very cheap probably is causing capital to look a little more at real estate, where I think the returns are better. But I do not see buyers, particularly of the types of assets that we're buying, really anything we would buy, or most institutional buyers would buy, I do not see people leveraging their way into making those deals work.

Frankly, a lot of times it's all cash. We have been buying effectively all cash, and you see a lot of other people 50%, are the kind of numbers we're seeing, and sometimes 40s. That deal in Century City was, I think, 40%, I'm not talking about Century Park, I'm talking about the 1888 deal.

So people are not, frankly people are more anxious to put their equity to work at these returns.

And then just lastly on the Honolulu development, the $100 million, how should we think about what that initial yield is? Because obviously some of it's infrastructure work, some of it's new units.

So how do we think about the going-in yield, eventually when it comes online, effectively almost two years from now, and then the increase in that yield over time as we start thinking about the value creation from that capital?

So there's two components there. One is if you just sort of separate the project and just say we're just building the whatever, the 450 units, I think the direct yield on that, 7% to 8%. Now we're also spending some money on the rest of the units, and I actually think that money has a real possibility of having an even higher yield, because we're making great changes to the project to reposition it in a market that around us has already repositioned itself, just as an aside.

So there's pretty nice stuff above us and right across the highway from us, and frankly, below us, so as we position it up, the money we spent on other units, it's hard to say cap rate on that, if you will. But I think the stuff that we're doing and redoing the way the parking works, redoing some of the roads in there, putting the new clubhouse and moving the leasing office out, I think it's going to substantially improve things in that project. And we've organized what we're doing in a way that we play through these first 450 plus units and then we have the other pads that we can look at after we've done this kind of overall redo of that, of the entire project, because at that point we'll have over 1,000 units that will look a little newer vintage.

So sounds like it's mostly all revenue-enhancing, revenue-generating, rather than any sort of dead capital, so it actually should be a pretty good yield overall on $100 million spend?

I think it will be a good yield, yes.

Thanks for the time.

And our next question comes from Brendan Maiorana with Wells Fargo.

Thanks. Ted, just wanted to follow-up on the balance sheet.

If I look at it now, your leverage I think is around 44%, you've got about $44 million, $45 million of cash, but $27.5 million of that is slated to take out the ground in NY, and you've got the development project that's there, so it seems like you've got -- and then you've got about $70 million of AFFO cash flow above the dividend.

So it seems like you're in good shape to do all the day-to-day things that you need to do, but we're talking about acquisitions that seem like they are maybe more available now than they had been over the past few years.

So, if more acquisition opportunities come up, how do you think about financing that? Would that be taking leverage up a little bit? Would you be comfortable issuing on the ATM? Or can you -- think you can satisfy it with the free cash flow?

I think you correctly stated everything about that piece, I think that we have good cash flow, we have enough to be able to deal with what we've got on our plate, including the acquisition of the land and the development, and then some for some additional acquisitions under the credit line. We could increase debt -- and by the way, the 44% was at December 31. Fortunately, we've recovered very nicely from that trough, and it's actually down from there. So we probably have some room for debt.

In the end, we're not big issuers of equity because of the concern about buying at one price and selling, effectively, buildings at a lower price. But we would have to play all that out if we were fortunate enough to have the ability to do acquisitions. We could certainly get the cash, and then we'll figure out the best balance of what we do when we do it.

That's helpful. So I guess, implicit in that statement is, even though your stock has had a nice rebound in the early part of the year, you still feel like the value of your existing portfolio isn't fully reflected in the share price relative to what -- the acquisitions that you may do, which is why you'd be reluctant to issue on the issue shares?

Well, yes.

Think about the question, two questions ago, right? We're talking about kind of, are people starting to zero in on the underlying value of the properties from the Century Park deal. My feeling is they could have zeroed in on the three deals prior to figuring out what's going on. I don't know if they will or won't, where that will end up, because you guys are buying and selling stock and not buying and selling real estate, but in terms of from my perspective, issuing stock would be like selling at the low price, not what we're out there trying to buy buildings at.

Okay, thanks.

Our next question comes from Michael Knott with Green Street Advisors.

Jordan, a quick follow-up on the Honolulu development yield question. I think we had heard you, perhaps preliminarily on prior calls, say that you thought it might be a 5% to 6% yield on that spend. Should we infer from your conversation with Michael a second ago that maybe that's a little better now, as plans have come along and evolved?

Yes, we were probably overly conservative on that prediction. Yes, you should infer that now, I think it's going to be 7% to 8%.

Okay.

And I think that. And the numbers -- we're getting better visibility on this whole thing. The whole thing's tightening up and I feel very comfortable with that prediction.

And is that just because there's more of a redevelopment component than there was initially?

No, it's the costs associated, the rents we think we can get. I'm actually separating out the redevelopment component and saying I think we might even get a better yield on that money. But if I was to just cut off the portion that I said that we were building the units, and I try to do some kind of fair allocation, I think it's very reasonable to say we would be building those for 7% to 8% cap.

Okay, is there any quick comment worth making just on how the Flint Building that you acquired is coming versus your projections?

Well, it was the example, one of the examples that was in my mind, I don't know if I actually had mentioned it but you're mentioning it, which is that we bought that building thinking that we were going in it -- I want to say it was in the 60s? Do you remember --? Well before we got [Larry] renewed it was about 50 and that brought it up to about 80.

And then we leased like the toughest space that's been vacant, I want to say 20 years. This ground floor, when it was originally the Great Western Bank space, while we were in escrow, and it allowed us to put forth a real good complete plan on the redo of that building, that we had planned, knowing that tenant and the whole thing. That building now is kind of -- I don't want to call it done, because it's not done from [Ken's] perspective or from my perspective, leased rehab plan in place, we're being done, I'm saying good to go, let's move on to the next one.

That's pretty good. Usually you don't buy a building, and even I'll feel like I'm wearing it for awhile, and I already can't even remember the address. It is good.

Okay, thanks and then just -- last one, and this was sort of a variation on Brendan's question a second ago, but with the reduced bid ask spread more activity you're more optimistic about your own activity. Just speaking hypothetically, if there was hypothetically a very large portfolio that came out to market, that you hypothetically had always wanted to buy, how would you think about financing that in terms of going with a partner given your fund business history? Or maybe OP units? Or just curious how you would think about that.

Well, I'll tell you, we had been saying to you for quite a while that we were working on good joint venture relationships and trying to get those really nailed down for large deals. Because you know we have, we are not [cultural] -- comfortable issuing very much stock, and where that came out just the best was on that Century Park deal.

We went out, we made a deal with those partners, we had a fully-funded equity and debt and everything bid for that deal. I thought that it was all the way around, other than we didn't get the deal, it was a great process for us, and I would expect to follow exactly the same process on the next one and next one.

On anything that was larger where -- as you know, we don't like issuing stock, but anything that was larger where I just felt like, hey, that's -- I might think 9 out of 10 times I'm going to be right, but it might be too much money just for the Company to risk on something, and we want to have partners in it. That was a perfect structure for us for getting something done.

Okay thanks for that.

And our final question comes from Rich Anderson.

My question was answered, thanks.

Okay. Thanks Rich. Great question.

Thank you, everybody. Are we done?

Yes.

Thank you, everybody. It was a pleasure speaking with you, and we look forward to speaking with you again next quarter.

And this does conclude today's conference call. Thanks for your participation. You may now disconnect.