Douglas Emmett Inc (DEI) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Douglas Emmett first 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. You may begin your conference.

Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; and Ted Guth, our CFO.

This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website.

During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences may be material.

For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. When we reach the question-and-answer portion, in consideration of others, please limit your questions 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, everybody. Thank you for joining us.

In the first quarter, we increased our AFFO to $0.30 per diluted share, 10% more than a year ago. It's worth noting that, despite the intervening recession, we have grown our AFFO per diluted share by an aggregate of 78% since our first full quarter as a public company in 2007.

In Q1, our leased rate declined for the first time in three years from 92.2% to 91.6%. Although we did 701,000 square-foot of leasing during the quarter, that was about 75,000 square feet lower than expected. As a result, we were not able to offset the unusually large amount of move-outs in the quarter, including the expected AIG downsizing.

Despite our lower closings, we still saw strong tenant demand across a diverse mix of industries. The leased rate in our markets moved up, and more importantly so did rental rates. The average straight-line value of office leases signed last quarter was almost 5% greater than the expiring leases.

Leasing tours and deals in negotiation during the first quarter were strong. In April, we signed over 400,000 square feet of leases, our biggest month ever as a public company.

The performance of our multifamily portfolio remains very strong, with average asking rents 5.9% higher than a year ago. Our two multifamily development projects continue to make good progress.

We have increased the number of expected units to be added in our Moanalua project in Honolulu, where we plan to break ground in the third quarter. In Brentwood, we are in the early stages of the entitlement process. Feedback remains positive, but we don't expect to break ground before late 2015. We have added a development page to our earnings package this quarter with details about both projects.

As for acquisitions, I am optimistic that we will see property sales in our markets this year, and that we can make more value-added purchases.

I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everyone.

I'll begin with our results, then address our office and multifamily fundamentals, and finish with 2014 guidance.

Compared to a year ago in the first quarter of 2014, our total office revenues increased by 2.1%, our FFO increased 8.4% to $69.5 million, or $0.40 per diluted share. Our AFFO increased 13.7% to $57 million, or $0.32 per diluted share. Our G&A decreased by 4% to $6.8 million, only about 4.6% of total revenue.

Comparing the cash basis results for our same properties in the first quarter of 2014 to the first quarter 2013. Revenues increased by 1.7%, reflecting increases in rental revenues, parking, and other income, and tenant recoveries. Expenses increased by 1.8% slightly below our expectations of 2% to 3%, and NOI increased by 1.7%.

The ongoing decline of non-cash FAS 141 and straight-line income reduced our GAAP NOI in Q1 by 0.3%, but also meant that our AFFO represents an even higher percentage of our FFO, significantly above the average of our peers.

Now, turning to office fundamentals for the quarter. As Jordan mentioned, we signed 194 office leases covering 701,000 square feet, including 179,000 square feet of new office leases. Rents continue to rise.

The straight line value of our leases in Q1 averaged 4.7% greater than the expiring leases for the same space. This improvement reflects higher rental rates, which continue to increase by an average of 5% to 10% annually across our entire portfolio, excluding Warner Center. In addition, about 40% of leases we signed in Los Angeles during the first quarter contained annual rent escalations in excess of 3%.

Some property owners in our markets have already moved to 4.5% annual bumps. The spread between ending cash rent on our expiring leases and the starting cash rent on the new leases for the same space improved, but remain negative at 7.3%. While we would like to see this number continue to improve each quarter, we know that leasing space in Warner Center and harder to lease spaces in our other markets can adversely affect this metric, especially when viewed on a quarterly basis.

Overall, our average annualized in-place office rent per square foot rose 1.1% during the quarter to $35.26, the first sequential quarterly increase in some time. On a mark-to-market basis, at March 31, our asking rents exceeded our in-place rents by 2.4%, up another 80 basis points in the quarter.

As Jordan mentioned, delays in closing leases and the headwinds from AIG and other move outs caused the lease percentage for our total office portfolio to decline by 60 basis points to 91.6% and the occupied percentage to decline by 50 basis points to 89.9%.

Based on April's excellent results and current activity, we anticipate that leasing in future quarters will return to our expected run rate. Because it will be hard to fully offset a slow first quarter, we have backed off the high end of our occupancy and same-store NOI guidance by 0.5%. On the multifamily side, our 2900 units were 99.5% leased at quarter end, with both our in-place and our asking rents again setting all-time highs.

During the last 12 months, we raised our residential asking rents by an average of 5.9%. The current asking rents for our multifamily portfolio exceeded our in-place rents by an average of 23.6%, about half of which relates to our remaining pre 1999 units in Santa Monica. Recurring capital expenditures for our apartment communities averaged $81 per unit during the first quarter.

Turning to our balance sheet. At the end of March, we had $12.4 million in cash on our balance sheet, and $280.5 million of availability on our line of credit. After refinancing a small $16.1 million loan in February, we have no remaining debt maturities in 2014.

Our net leverage was 40% of enterprise value at March 31, well within our target range. We still have ample liquidity for potential acquisitions and other working capital uses.

Finally, we are maintaining our full-year 2014 FFO guidance of between $1.57 and $1.63 per share. 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)

Michael Bilerman.

Good morning, there. So, I just wanted to dive in a little bit just on the leasing. Just maybe you can give us a little bit more color.

In the first quarter, you still did [776] of total leasing, and I thought this was leases signed in the quarter, so AIG should be out of that number, but correct me if I'm wrong, that was almost a -- 40,000 square feet higher than what the six quarter average had been? So it didn't seem like it from a velocity standpoint that came down much, and you had a much higher percentage of renewals this quarter, upwards of 75%.

So, I'm just curious sort of what -- maybe you can share a little bit more details. I know, Jordan, you talked about 75,000 square feet, and it sounded like that perhaps rolled into April? So, I'm just trying to put all these factors together.

So, we did 701,000 square feet of leasing in the first quarter, which is about on average for what we typically do, in fact. Now, we have rollouts that we knew were going to happen that quarter, but we also had a tremendously large pipeline going into the quarter, and when we looked at all that and even going into March, we said -- wow we are going to kind of overwhelm those move outs, which one of the move outs we knew was there, but we still thought we had the leasing overwhelm it, was the Warner Center deal.

I don't want to kind of blame cut-offs and stuff on this, but the cut-off's the end of March. Boom, that's what happened, and it does seem as though you would say -- wow, it's just roll a few weeks into April, which April was an extraordinary month, and it's an indication of course for sure of why we felt like, even in the February time zone, when we were giving guidance we were like -- wow this pipeline's gigantic and we're still comfortable with our numbers.

But, when things slow down a little bit in terms of closing and work their way into April, we said to ourselves -- you know these two ranges, certainly the leased range and then the way that, at the end of the day, impacts same-store NOI, the height of these ranges are starting feeling a little less like ranges and more like a hope, and we want to bring it down into a reasonable range. And so, we felt like it was prudent to lower them by 0.5%. Now with that, I will say, we are also having -- you might say -- well, did April make up for the first quarter or did it borrow from May? But that does not seem to be happening at all, and we're looking at a relatively strong May. Certainly not a borrow from May, too.

We feel very good about leasing and filling the portfolio. I will also mention that, when we look at the pipeline, a lot of the leasing that it looks like is coming down the line, where deals are going to get signed, seem to be -- or a good amount of square footage seems to be in Warner Center, and that's great news because there's vacancy there, but leasing in Warner Center is always a little bit hard on the roll-up, roll-down metric.

They're longer leases in that same end of cash, beginning cash. It's just harder to overwhelm that on a longer lease, which is what happens in Warner Center. But overall, just other than refining yourself to those small metrics, very, very good year that we're having. I know the first quarter doesn't make you say -- well, how can you say that? But, it is. We are having a very strong year, and our leasing pipeline is very strong, and April is great evidence of what we're seeing.

Right, and I guess just as a follow-up, Ted, you were talking about lowering the high-end by 50 bps, you also lowered the bottom end, so you brought the whole range down. So I just want --

It's tough with ranges. Getting precise down to half a percentage point, which is what would happen, just doesn't make us all that comfortable. So the answer is yes, we did bring down both, but the focus when we were doing that was on the high-end.

That's helpful. Thanks.

Jamie Feldman.

Hello, Jamie.

Hello, how are you doing? So, can you guys just talk about -- you mentioned a couple leases that fell out of bed in the first quarter that brought you to a lower occupancy number than you had expected. Can you talk, exactly, about those leases and what your prospects are to backfill?

It wasn't so much that leases fell out of bed, it was that we knew that there were a bunch of leases that were coming down the pike, and they're always other terminations that come in because of a tenant thing, but as Jordan said, the real thing that changed our minds about what was happening was that we had this great backlog going in, and we thought a bunch of the ones that ultimately closed in April were going to close in March. And so, we actually expected that to be the things, but there aren't -- the large lease was, of course, AIG, and then there are always a number of middle sized tenants that are moving out and/or are terminating one way or the other.

I'm not sure that was a huge problem. We just found a little slower pace to getting stuff closed, and as we saw that, not that it's not all great news and great numbers in terms of the pipeline and the deals we're getting done and the economics that we're getting, which is the real important stuff. We just said -- wow, it went a little slower than we expected and, therefore, let's make an adjustment.

That's really what it gets down to. I know that we could see from watching the market that there was a reaction to that change, which obviously we knew when we were doing it, that it could happen. But, I still thought it was a reasonable change, so we made it.

Okay, that seems reasonable. I guess I'm just trying to frame the magnitude. You had twice occupancy loss in Warner Center than you expected and you lost 100 basis points in Honolulu, which seem to be the biggest drivers?

How many leases is that? Is it a couple leases? Is it many more?

In Honolulu, there was a 17,000 square-foot lease that terminated. We got to backfill that. In Warner Center, it was one other -- again, there is a whole bunch of things that are happening, but there was one other 32,000 square-foot lease that happened there.

Again in Honolulu, in Brentwood, and other places where it went down, these numbers get pretty small when you get down to the submarket, and we'd be really careful about trying to draw longer-term conclusions. You look at Westwood last -- in the fourth quarter it was down 200 basis points and then we backfilled the space that went out and in last quarter was up 170 basis points. So, as you get down to these smaller ones, be careful about it, but the answer is yes. There was a default in Honolulu of a tenant that went bankrupt and there was a tenant that closed out in Warner Center.

Okay. All right. Thank you.

Brendan Maiorana.

Thanks, good morning. So, first question, just kind of a simple question. So, you brought down your same-store guidance by 50 basis points. I think that would be sort of $0.01 on the range, but you didn't change the FFO range. Was there anything that offset the same-store drop of 50 basis points on each end, relative to FFO?

Yes. Some of the offset, I think, will come from our income from our funds, which I think we now see as being a little better than we did at the guidance time, but I also would just caution everybody that when we're dealing with ranges to sort of translate them into exact dollars, exact midpoints then do the multiplication, there's a lot more sort of rounding that goes off in each range someplace. Not every range can be precisely in the middle of the range, so the balance of it is rounding, and in the end we're very comfortable with maintaining the FFO guidance per share.

Okay. And Ted, I think we had talked last quarter that the occupancy ramp you expected to be kind of back end weighted, because we knew there were some these move outs that were early in the year, and I think you even mentioned maybe Q2 wouldn't be a big pickup in terms of occupancy. You've got 200 basis points between kind of the meeting your year-end target and where your occupied number is right now. Given that it was weaker than expected in Q1, should we expect to see that number pick up sort of ratably growth remaining three quarters of the year?

No. For the same reasons as before, we think that occupancy will be backend loaded. We have more move-outs in both the first and second quarter, just sort of random fluctuations, than we do in the back half of the year, and in addition, since we had relatively slower leasing in the first quarter, even if we make that up in the second quarter, that will also push the occupancy a little later in the year as well.

So, I think that you should still anticipate that the gains in occupancy, as for whatever reason they have the last couple of years, will be in the last couple of quarters.

Okay, alright. So maybe kind of flattish in Q2, and then the ramp after that? Okay. All right. Thank you.

Jordan Sadler.

Thanks, good morning out there.

Hello, how are you?

Okay. Wanted to drill down a little bit on the markets, if you could. The move-outs, or at least the exposure, obviously showed up most in the Warner Center, which is a spot where you were previously having some pretty good momentum, and I'm just curious, it sounds like April, you had some maybe momentum in backfilling that. Just where do we stand there, and maybe a little bit of digging down into some of the other markets where you see some pockets of strength and weakness would be helpful? Thanks.

Well, on Warner Center, we're definitely -- as I said when I was answering Michael, we're definitely seeing some momentum in Warner Center, and I gave the warning that we could be -- we could have a lot -- if we have a lot of leasing there, then the one impact from it that's not good, because it's mostly good, is that Warner Center leasing is hard on that roll-up/roll-down metric, ending rent to beginning rent on the leases that people follow.

So, it could impact that next quarter, but in terms of Warner Center -- we have good, good pipeline in the Warner Center.

You see occupancy continuing to rise, is sort of what I'm kind of alluding to, as opposed to sort of renewals or replacement rents? You're going to be able to drive that occupancy significantly higher?

We do see good demand in Warner Center from new tenants, and we have to now continue to close those transactions and then move them in.

In terms of other markets, as I said earlier, I think that when you're talking about the West side and Sherman Oaks, we actually feel good about all of those markets and think that they all are showing good strength, and what happens when you get into those small markets, as I said, you get a -- for example in Brentwood, you get -- we had a 15,000 square-foot tenant move out, we backfilled half of that, but it will take a little while to backfill all of that.

So, any given quarter, you're going to see half point to one point back bouncing around. Westwood was a good example of that. As I said, it bounced back up this quarter. So, we're not really seeing any problems right now in any of those submarkets.

Let me say to folks, you're asking what the markets are trending, one thing that is interesting about these markets is the markets themselves, last quarter, moved up. Which, if you back up a little bit from the little bit more refined looks of whether we gained or lost off the 15,000-foot guide, because in general our Company is pretty well occupied. So, really what matters on the margin now is moving rents, and that plays a big role on what we're focused on.

The best way for us to be able to move rents is to have the market move up in general, not just us, in occupancy, and the market did some good moving last quarter, which was greatest news. I don't want to see the market move up and us move down, that's not good, but the move down I don't think will be highly impactful to us, and the move up in the market will be highly impactful to us in terms of rental rates. We're feeling it in the leasing that we're doing.

Okay, that's helpful. Just a follow-up on the development, the new disclosure's helpful. On that, would it be safe to, if we sort of implied or inferred that land costs were 20%, 25% of the overall, if we imputed that into the estimated total cost to get to a value creation number? Would that be a safe percentage? And then, are you still comfortable, I think last quarter we talked about, maybe 7% to 8% yield on incremental capital?

So, when you say just to get percentages right. So, let's say the number is 66%, and you say land is 25%, do you mean that the land is 33% and therefore is 25% of 100%, or do you mean land is 25% of 66%?

I would think you would have to gross it up.

Okay. So, I think if you do that, you're in probably in the territory. I mean it's different land for Brentwood or Hawaii, but I was just trying to think in my mind where I thought all in if we were doing it. You're in the right range, like 25% of the entire cost of doing the deal.

You might -- you could get a higher number out of Brentwood, although it would be hard to get a comp that probably was not higher number, though I don't know that you could do it anywhere else, but that's a probably reasonable number for Hawaii. And then, what was your second question?

The yields, the returns. I think we talked maybe 7%, 8% on incremental capital? I'm just trying to remember from last --

In Brentwood?

No, this is in Hawaii.

(multiple speakers)

Okay, sorry. In Hawaii?

Brentwood is going to be higher than that, right?

There you go. In Hawaii, it's a little -- I don't want to use the wrong word. I'll just say it's hard to do, because we're spending a certain amount of money to build the 488 units or whatever --

496 versus the existing 200, yes.

Yes. So, we're spending a certain amount on that, but what we really also committed our sales to is just raising the class of the entire project, which is almost 30 acres, and it's another huge amount of buildings and we're trying to change the exterior of those buildings, we're changing the parking ratio for everybody, and we're doing a big amenities change for everybody.

And so, the question you got to ask yourself is first, what's the return on just building the 496? Okay, that's a great return. But what return will we get on whatever is allocated to the rest, because no matter what we allocate to the rest, it's not a huge number, but, if it changes the nature of the project and therefore moves the rents up to be more consistent to what we think we can get on the newer stuff, that's a great day. So, that could even be a better return.

I'd be comfortable just knowing the total return on the capital you're trying -- that you're going to be deploying?

Well, I'm comfortable with the 7% to 8%.

Okay. Okay. It's a little high? No, you are comfortable, you're saying?

I'm saying I'm comfortable, and if you just want a comfortable number, 7% to 8% is a comfortable number. Can we do better? I don't know how this other money is going to play out through the rest of the project.

Okay, and Brentwood is still a work in progress?

Yes.

Brentwood is obviously a great deal if we can just get it through the city council and get it approved. I mean we already have not only the land, the parking, the whole kind of infrastructure. It's just building the tower and getting it leased in a market that is lease tight, and there's huge demand for the product.

Thank you.

Andrew [Trapper].

In regards to the landmark and the comments in the earnings release about the strict zoning and [tough market] now, California has historically been pretty tough to develop in, so will you just -- comments were par for the course, or are you experiencing greater resistance than expected?

I would say we're -- having been here our whole lives, we expected a lot of resistance, and if anything, we're expecting -- we're receiving a little less. I think the reason we're receiving a little less resistance, to be quite frank, is that we have one of the few projects, and I was actually told by one of our consultants, the only project they have worked on that does not increase the amount of trips in the area.

And, the communities are so aggravated with traffic that they're kind of against everything. When you come up with something that actually in growth reduces trips as a project, and all of a sudden they switch over to saying -- okay, wait a second, I'm not complaining on traffic. So, they look at what they complain about -- Well, the height, it's another high-rise, although it's surrounded by high-rises. You get a little less energy out of that then you do if we would have said -- all right, we have five intersections that are already F's and we're impacting them hugely and now they're like F minuses. That's when they come in there just screaming and their hair standing straight.

We don't have that situation. We're not activating a lot of people that would typically come out and really scream. Now, on the other side of the coin, what we do have is providing housing that's the exact type of housing that's needed for that area, that the type of people that would live there would be going to jobs right in that area.

And, I think the kind of city officials and some of the more sophisticated people around this project realize that. That if you're going to allow something like this to happen, in fact this is the kind of thing that needs to happen if we're going to ever in any fashion deal with traffic. Although nobody loves to have a high-rise, another high-rise built and so --

So far, so good.

Okay, then following up on that, can you remind me if you have a break fee in place with [supermarket] or does that still need to be negotiated?

A break fee with who?

The supermarket on the site?

Oh, the supermarket. Their lease is over at the end of this year. It's December this year, so that would be a great day if I had that problem. But we will not have that problem. They'll pay their lease out through the end of this year, and hopefully we're able to start construction the end of the next year.

All right, thanks.

Michael Knott.

Morning, guys. It's Jed Reagan here with Michael. Just a question back on the occupancy guidance. It sounds like you need about 200 basis points of occupancy gains to reach the midpoint of your full-year guidance.

I guess, can you maybe just talk about how confident you are at this point? Kind of given the ins and outs to be able that number, and then which submarkets we could expect the most gains to be taking place over the course of the year?

Well, I think to answer the second question first, you've got to have gains in Warner Center because that's where we have a lot of vacancy. I mean, we have some markets that are like 99%, 98%, so let's assume not much gains there.

So, to answer the other question, I would say going into the year, looking at the pipeline, extremely confident. I'd say my confidence was slightly shaken with putting that first quarter out, and then going into April I went back to extremely confident. Looking at the activity in May, I'm still at extremely confident.

Okay, does that sort of point you to thinking --

I definitely have that amount of information sitting here today, but we have, and I was talking to Ken about this, we have the strongest pipeline of deals going through our system right now that we have ever had, ever.

We both have been here for 30 years. So, I mean it's -- Ken has a saying of we're in an industry where you get one good year out of 20 and you got to live on it. We're having a pretty good year, here.

Sounds like maybe your kind of leaning towards the high end of guidance and for occupancy? Potentially, is that fair to say?

The guidance, and the range of the guidance is always something that we spend a lot of time on. I always want to be at the high end of guidance, so that is easy to say. Now is that always that I always hope it, or I always expect it? I don't know that answer, but nobody ever wants to set up a test and set it up where they're going to get the lowest score on the test, they always want to get the highest score.

And, as Ted said to you, we were focused on the high-end, and we said, okay, we should bring the high-end back half a point, and we did.

Okay, sounds good. And, related to Warner Center, I know there's a lot of expirations still coming up throughout the year. Is there any lumpier, larger known sort of expected move-outs that are part of that? That we should be thinking about?

I don't think at this point that we're anticipating any larger move-outs out of that -- in those things. I think that obviously there will be some move-out, but no, there are no large leases there that we expect to move out.

Okay, great, and then just one other one. Just curious if guys are seeing any evidence of cap rates and valuations changing in your key markets so far this year? I guess, how are you feeling generally about your ability to deploy capital in this environment today?

There's more stuff that's trading, and prices have moved up dramatically over the last 24 months, but we don't have to tell you that. You know that from everywhere that you're covering, and they've even maybe more dramatically moved up here in LA.

Now at the same time, reasonable pro formas of where rental rates are headed have also moved up, but values have moved up a lot. Now, one of the good pieces of news about that when you're a buyer is it means more sellers are selling. More guys are confident to sell, and they like the price they're getting. So, I'm very hopeful to get some good deals this year.

And do you think that spread's come in at even this year and sort of come closer?

It's come in a huge amount. Deals are getting made. Very little comes to market where -- anymore, where the trade is not getting consummated, and if you would have gone back two years, a huge amount was coming to market and just falling back out again.

Great. Thank you.

John [Kanyi].

Great, thank you.

Something a little more mundane and boring, can you kind of explain what's going on, on this health club? It looks to me as if it's maybe $2.7 million of annual rent, but then if I look at the other income and the other expense line for this quarter, I've got other income of $4.3 million and other expense of $1.45 million; which, if it's only the health club, is $2.8 million just this quarter?

So, first of all there's no rent from the health club that's in our rental revenue numbers, because when we took it over or the subsidiary took it over, it now gets eliminated in consolidation. So, all of the health club is down in the other income piece.

But other income as you also know, includes a lot of other stuff that gets put in there, and this quarter it includes some insurance proceeds. So, I think that, going forward, there may be a little more of that in Q2, but I think going forward, it's likely to be a run rate of about $2 million to $3 million in that.

So, what sort of, if I just -- what would the net income per quarter from the health club? Is that $600,000 or $700,000?

Yes, that's probably a little high right now. We're still in the process of redoing that health club, but that's our goal is to move it up to that and go on.

Okay, so maybe $400,000, $500,000 a quarter?

It's hard to say. The health club is moving up at a good clip. I mean as marginal members, which we're just in a process right now, if anyone has a chance to be out there, we'd be happy to give you a tour.

We're just getting the final leg of that finished with the food service and made a deal with a real good operator, and there's three pieces of the food service tour open, a third is opening, I think, this month. I think we're a little ahead of schedule in terms of our signing up of membership, but we're certainly up in a very healthy territory. Look, at the end of the day, we want to get the club up and running and going full blast profitable and turn it over to a guy that runs clubs and turn it back into rent, which is the business we're really supposed to be in. So, we're on or ahead of track for that process.

Okay, and then second, are you still expecting about $9 million of non-cash FAS 141 gains or income with the purchase of the ground lease in Hawaii in the third quarter?

Yes, it will be between $8 million and $9 million. I don't think it's $9 million, but it's between in $8 million and $9 million that, and we still do expect that in the third-quarter.

Okay, and then the last one is, I was just thumbing through your supplemental, very good supplemental by the way.

Thank you.

It looks like you have Time Warner is 625,000 square feet, one of the near-term expirations you've already subleased 100,000 of that. Of the 460,000 or 470,000 square feet that has lease expirations in 2019 and 2020, are they fully using that space, or is that sublet, or what's the status?

Thank you they're fully utilizing that space. In fact, if any of you go on the Warner Bros. tours, or frankly if you go on the Warner Bros. website you will see that the lobby of that building -- first of all that picture of that building is actually on their website as the splash page to be able to do it, and it's the start place for their -- the lobby is where they start their tour to the people, but the building is fully utilized.

All right, and the building you built, you purchased the oval building a while ago. Do you still have the John Wayne statue up front?

(Laughter)

What, are you reading the local papers? Yes we do, and nobody has taken it down to -- where did they want to take it?

Newport.

Yes, It's not going down to Newport.

Good, I was worried.

(laughter)

We are going to take our Christmas pictures sitting up there next to John Wayne this year.

Don't back off on that idea.

You got it. (laughter)

Send it out to everybody.

Thanks.

Thank you.

Thank you.

Michael Bilerman.

Yes, I just wanted to come back a little bit more of the leasing. So, if you look at the target for the end of the year, you want to be up [150 to 250] relative to where you are today, or into the third quarter. You know your role in the next three quarters, which is about just under $1.3 million, so to get the positive net absorption, you need about $1.5 million to, call it $1.65 million of total leasing, which is only like 500,000 square feet a quarter to get to this revised high-end.

You did 700,000 this quarter, your quarterly average has been 670,000 square feet. You did 400,000 just in April, I'm wondering why this high-end is even -- I guess, why did you bother changing it, because it would seem if you are on the same sort of trajectory that you have been on, you would have hit the old high-end?

Okay, you're just on leasing. One of the things that was more noticeable to us was that the -- especially it happened in the first quarter, it's hard to catch up on same-store NOI when you don't have the NOI from those deals through the year. So, I will admit to you that got early on -- a lot more folks said -- how could we -- that's a tough range that really needs to be down a little bit, because you can't go back in time for that first quarter.

And, we know we have a tough second quarter same-store NOI comparison, which doesn't have as much to do with the second quarter of this year, but has a lot to do with the second quarter of last year, which had a bunch of income in it from a few things that just were one-time things that aren't occurring this year. So, when we knew we were making that change, then we also looked and said -- well, what's really driving that change? It's the leasing that got done, so it seemed reasonable to make those two changes together.

But all you're saying is you sound optimistic about leasing in your pipeline and therefore I don't think you should have changed the leasing and everyone can have an opinion about that. We felt that to have a reasonable range around leasing for where we sit today, this is reasonable range. Yes, I'm super hopeful that we're going to go to even a higher number and that we're going to beat the range, but I feel that this is a reasonable range now considering that we missed the 75,000 feet first quarter.

The other thing, just in terms of the numbers. The last couple of quarters, actually, a lot of the space you're leasing is what's up that would have renewed in 2015, so you not only want to renew all the stuff that's expiring in 2014, but we're typically as I think we've told you guys, we lease space about on average about five or six months before it expires.

So, a lot of the last half of the year leasing will be out of 2014 things. That being said, what Jordan said is 100% right. It's not that we have low numbers of leasings this year, we think we're going to have good numbers of leasing, but it still takes a while to get back.

Do you expect the spread between leased and occupied to narrow, expand, or stay the same? So, you're sitting here today 170 bps between the two. As you think towards the end of the year, we're all talking leasing numbers and your guidance is occupied, so that probably plays a part also, so I'm just curious is there anything going on there?

You're right, and you would generally expect, if you start doing a lot, if you change the leasing velocity, and we had low leasing velocity in the first quarter, and if we now have higher leasing velocity for the rest of the year, you would expect that spread would widen out. And, in fact the 170 basis points, as you know, is a little on the low side for us in the last year or two.

It's low for us, and that's a very good point. That's an excellent point.

Right and just lastly, can you just -- the 522,000 square feet of renewals certainly was pretty high, at least in the mix as a percentage was very high of the total, and I understand you talked about 75,000 square feet slippage, but was there anything in there and was there any read of what's happening in terms of a bigger percentage of renewals? Because you guys are a leasing machine, doing 200 leases a quarter in very small size. Does that tell you anything about what's happening in the marketplace?

I think that there's a good chance it's just quarterly variation on that, but I also would not be surprised if I were a tenant in this market and I had a renewal I knew was coming up, I would be more aggressive about moving to renew today than I would have been a year or two ago, because I would be figuring they all know what's happening or their brokers all know what's happening in terms of rental rates. So, it could be that, but it could also just be quarterly fluctuations in what happened.

We're definitely -- we definitely have many buildings that are leased to the point where if a guy doesn't renew early enough, we could lease it to someone else and then we couldn't even accommodate them in the building. So, if you have space that you don't want to leave and you don't want to move, then you better get in and get your deal done, because you're taking a much bigger risk of been forced to move today than you did any time in the last six or seven years.

And, even if you don't move, you're likely to pay more.

Right. And then just lastly, do you feel you talked a lot about how other landlords are pushing the bumps. I think you talked about 4.5% in some cases. From your standpoint, are you try to push initial more than the bumps, or are you pushing bumps at the expense of initial starting rent?

We just push economics wherever we can get them. We actually go for the overall best economic package out of the lease, which if we pushed initially we could fix that beginning to ending rent issue, but the only people that ever talk about that is us on the calls with you guys. The leasing guys get rewarded, praised, paid, all that stuff based on the economics they get out of the lease, so they move seamlessly between higher bumps, less free rent, and longer leases, they just do all that, and it's just the economics that they get out of the lease.

Okay, thanks.

Ross Nussbaum.

Hello, it's Ross Nussbaum with UBS. So at Warner Center, let's assume you get the space backfilled over the next year or so. Is that an asset you guys would ever think about selling? As it just doesn't fit with the rest of the portfolio in terms of the chunkiness of the tenants and just, frankly, the sheer location on the other side of the hill?

Well, I don't think it doesn't fit at all, I think it fits. We went in to that market because we think that's -- I think that the only reason it stands out is that it happens to have gotten that LNR project developed and therefore it sort of underperformed on the recovery from this most recent recession, unlike the way it acted in past times.

I can tell you that if we would back up ten years or whatever years, you would ask the question reversed, because Warner Center was the more premium higher rent market, it was thought to be like the high-end area to be located in the Valley above Encino/Sherman Oaks. And, in fact, Warner Center does have a very good collection of amenities, travel to, housing, and actually the quality of the buildings. We own some of the newer buildings on Ventura Boulevard, but the Warner Center is all pretty good quality high-rise stuff.

So, it's a very good market, and in fact, that while you guys aren't seeing it in occupancy and you're not seeing in rental rates because we always say -- oh, our rental rates are going up, except Warner Center. So that's a horrible beating we're giving the place, but in every other way, everybody else in terms of the economy over there is investing big. Westfield is putting a huge amount of money into -- they have, like, three full square blocks. Two of them have malls, one has let's say nothing on it, they're rebuilding and connecting it all together, and redoing the entire mall and spending a tremendous amount of money there.

And then, in terms of new housing and apartment development, I mean when we went in to the last recession, we had overhang of 2,500, 3,000 apartment units, which I thought would take forever to absorb. Not only are they absorbed, done, leased, but they're building some more out there, and it's probably one of the primary places anywhere we look at where a lot of new apartment housing is being built, and that stuff is leasing up very fast. At the end of the day, you just want as much housing and population around your office buildings as possible.

You notice I haven't mentioned any office buildings being built. We have the best office buildings in a market where huge amount of housing, huge amount of retail amenities are being built all around us, great traffic, has the highest rents in the Valley at one point with the exception of maybe the media district in Burbank. It's a great market. It's just lagged recently, and I think, I hope, I hope and think, both of those, that over the next year or two you guys will see what we're talking about and what we saw in that market when we went into it in the late 1990s.

I agree with Jordan that I think, sometimes, we tend to do contrasting the rest of the portfolio with Warner Center, and I think it probably highlights that contrast too much. So, just to remind you, the median size of our tenant in Warner Center is still only a little over 5,000 square feet. So, while we do have some good sized tenants out there, the sort of population includes a lot of tenants which are very similar in size to our tenants here on the Westside, and it still is a -- compared to any of the other office markets you're looking around in the country, it's a very small tenant market.

Okay. And then my other question would be, if you look North to San Fran and what's going on in the SoMa District there in terms of -- I don't know if I want to call it next-generation space, but sort of funkier, open ceiling, polished concrete floors. As you look at your portfolio, do you see any redevelopment opportunities to take some call it 20-, 30-year-old assets and make them -- I don't know if I want to use the word tech friendly, but make them friendlier to the 20- and 30-something-year-olds that seem to be driving the economy on the West Coast now?

Obviously, that opportunity would come from us owning an office building that was very poorly leased, where you would say there's huge vacancy here so we got to reposition us. A lot of the stuff we own, even though we complain about Warner Center, most of what we own is pretty well leased. Now, we do have many opportunities to do larger tech deals in our buildings, which call for a larger TI and a lot of times get higher rent, and they wanted strip out all the TIs and they want to go to that concrete floor, drop ceiling out, and do that whole thing.

What we feel we've learned over time, at least with the buildings that we own and the way we run our product is, while on the day you're doing that deal, you go -- wow, that's a great deal; I'm getting bigger rent. Net net over time, we get less net cash flow out of those deals because of the big TI going in and the big TI going out than we do out of trying to standardize the TIs in our spaces, keep the TI and the transition cost down, and I've said to people in the past, we're trying to push our office portfolio to get closer to almost a resi model of, like, very standardized lease forms.

Huge amount of space a person feels like they can just move into, very few choices like -- all right, we're changing the carpet here's four types of carpet you could choose from, or paint colors. To have them kind of plug-and-play more and more ready to go space, every time you do one of those tech friendly spaces it's never what the next guy wants, and it's funky and strange and one guy wanted like a giant corner office with all glass, and the next guy wanted says -- no, my office had to be in the middle, in a circle.

So, you just spend a lot money going in and out with those guys. So, we have whatever force anybody has that's leasing has in terms of choosing their tenants, we have tried to make the deals that are the highest net through the entire term of the lease cash deals, and we look at a lot at transition and TIs. And, those spaces are expensive to do.

As Jordan said in the past, and I think we both said in the past, we really try and manage the Company to cash flow. And it's one of the reasons why our FFO is such a high percentage of our FFO. Our AFFO is a high percentage of our FFO, because we're trying, as Jordan said, to avoid a situation where you pay a lot in capital costs and capital cash in order to get better lease rates in the short term.

Thanks, helpful.

Brendan Maiorana.

Hello, guys. Just a follow-up. Ted, you mentioned the lease bumps 40% greater than 3% annual bumps in the deals that were done this quarter; what's your average bump in place today across the portfolio?

In place today, I would still say that it's -- I used to say it was just below 3%, it's probably just above, because while we're doing these and doing it the last year, that only affects the leases that roll this year. So, you're still probably in the, as I said, it's just slightly above 3% now in terms of the average.

So, let's call that 3%. If I look at your occupancy changes kind of year over year, it seems like probably on a full-year basis, if you're flat in Q2, and you go up a couple hundred basis points, maybe 100 basis points in Q3 and then Q4 to meet the midpoint of that occupancy guidance by year-end, that would be about an average of 100 basis points better in 2014 versus 2013.

In-place bumps are 3% on call it 80% of your portfolio, and you're still rolling rents down on a cash basis. I would think that same-store NOI would be higher on your office portfolio this year, based on that kind of topline revenue numbers than I think what's included in your guidance, which is about 1.5% for the office, and maybe kind of 4% to 5% for multifamily? Is there something else going on there?

There is. As Jordan mentioned, we've got a tough comparison quarter in the second quarter just because of some income that came in last year, we do also have some increases in expenses that you have to do in.

Beyond that, I can't say that listening on the phone, I could fully follow and analyze what the differences are. Maybe if we want to talk after the phone, I'd be happy to sort of see if we could work through what it is, but I think those two exceptions are the two things I would start by mentioning.

Okay, all right, great. Thank you.

Jamie Feldman.

Great, thank you. I know you guys had talked about rent growth in the submarkets, but can you talk a little bit more about the magnitude, unless I missed it? How much you're seeing rents move?

I'd say on average, across all the spaces other than Warner Center, we're seeing 5% to 10% up. Obviously, from individual buildings, submarkets, and spaces, you're going to see some more, but we still wouldn't call the overall inflection point having been reached.

You're saying 5% to 10%.

Per annum.

Year-to-date, or?

No, per annum.

Over this time last year?

Yes.

Okay. All right. Thank you.

Steve Sakwa.

Hello, Steve.

Hello. I guess it's good afternoon for you now.

Not quite, almost.

It is 12.00 o'clock.

So, I don't want to beat a dead horse on the 2014, so I'll let that go. If you had provided guidance for say 2015 and 2016 previously, given all the positive commentary that you're talking about today about leasing, would you be revising those numbers upward or downward just based on the momentum you're seeing in the market today?

I could tell you this, I'm always so optimistic about the future that number one, my optimism about the future would have been very high numbers, and probably any time you'd ask me that question I would go yes and I'd also revise it upward even more. But, if you're just asking about the tone of where we see things going, I mean I'll try every way to say it. We're having a fantastic leasing year, with a great pipeline and a huge amount of deal flow, and obviously, that's going to be very positively impactful to 2015 in terms of just -- we think our occupancy is going to be higher going into 2015 than it was going into 2014, if you just want to compare the two years.

I think where everybody is kind of getting hung up on is the leasing is good, and I think people can understand the slippage in the NOI growth as leasing kind of got delayed. I think where people are struggling is the year-end occupancy stat, which is just a point in time.

It's hard to understand why that number is down, versus I think people can understand why the NOI is down if leasing slipped, and I think that's where the confusion is, but it sounds like, given the pace of leasing that you've got and presumably market rents are moving higher and bumps are going up. Again, I know you haven't given guidance for the next two years, but it sounds like those numbers should be revised up, just give commentary?

There's a lot of different numbers that go in the guidance. If you want to go to just the core of when you've done more leasing and you have better occupied buildings, do you make more money? Yes.

So, the number of whatever the guidance number that goes to, will we have more cash coming into this place? Yes. That number we can happily revise up.

Now there's a lot of numbers that are driven by accounting calculations that move around because of comparison periods, and comparison leases, and FAS, and this, that and the other. And, frankly I don't even know at the end of the day. If you have a great year, sometimes it makes the next year look like a bad year because it's compared to the previous year.

But, in terms of making money, more cash flow? Yes, I would happily revise up 2015, because we're having a great leasing year.

And also, by the way, you did make a little bit of a move between leasing and occupied, and I think that Michael's point was correct, which is that delaying a leasing toward later in the year means there will be less percentage of those people who will have moved in and taken occupancy by the end of the year. So, it's another reason why we felt that the high-end of that guidance was going to be tight to achieve, although we're going to push --

To be fair to you, my guys, we hear -- and I'm not going to exactly help myself in this, always talk about occupancy, and I always talk about leasing. So, they're all trying to like figure out -- I'm not going to mention a word of the model, that they always like to try and figure out all of the accounting metrics and therefore occupancy is obviously what matters, and I'm always trying to look toward the future to see how things are going, and I'm always saying -- what's the leasing pipeline look like?

What our signed leases look like? Those two numbers are different from the perspective of giving in this instance giving that year end guidance.

Got it, thanks, guys.

Tony Paolone.

Thanks. I was just going to shift gears and ask if there's much in your investment pipeline or what you're seeing in the acquisition markets?

We have deals in our investment pipeline that we're working on, and it feels like if I look out onto a horizon, there's other stuff coming. So, I would say better looking than the last couple of years, and with a more reasonable hope that we will get a couple or more deals closed in this year.

Okay, and then just last thing. Just curious, I know it's not your tenant profile and not your submarket, but just any broad thoughts on Toyota's decision to move out of Southern California?

On?

Toyota.

Oh, Toyota's decision. Yes, I saw that. Yes, I felt bad, but I will say this: I was not surprised.

In California, Southern California and northern California, is -- we're a great incubator state, and we're great with new industries and developing new industries and new young tenants and all of that. But in terms of mature industries and mature businesses that in fact employ a lot of middle income people, which is what everyone says they want around here, we're very hard on them.

I mean, we're very business unfriendly to mature manufacturing industries or even larger, more mature aerospace or -- and so, as companies get to a point where their margins are thinner and they're able to hire a broader base of people and the education level doesn't need to be as high, and the people that they're hiring can't afford housing that as expensive as it is California, and then you add into that the fact that California just has some very tough employer laws, and I love the environment, but tough environmental laws on manufacturing companies. You just -- it just seems to be in our nature. I mean we built some of the greatest industries ever, but then as soon as they get great and they're up to running speed we seem to kick them out.

Put it another way, California is not a low-cost provider.

Yes, we're not.

So, if you're in a situation where a low-cost provider is really what you're looking for, people will tend to move. We're more into the -- we sort of are the high end service provider, and so that's why with new ideas and the tech and so forth, people are here because it takes advantage of the education and so when the costs are acceptable in that range, if you are in a lower margin business as Jordan said, you go with the lower cost provider.

I was sorry to lose Toyota. I'm sorry to hear [Elon Musk] is looking in all the different states to build his battery thing and he wouldn't do it in California where he got all his other stuff going. I mean -- but I understand it.

Great, thank you.

Jordan Sadler.

Thank you. One quick one, I'll let you off. I was curious on the capital front.

Where do you guys stand on ATM in terms of the availability? And then appetite, given the price of the stock here, I'm just looking at the chart and you guys are back in the realm of all-time highs, and just curious where you stand on the capital side?

I'll answer the question on the ATM and I'll let Jordan answer the appetite since it's really the capital side, but the ATM. We still have a $300 million ATM, which we haven't drawn down on at this point.

And then your question was whether we would want to issue equity in order to buy buildings? We have plenty of equity without issuing equity to buy buildings and sources and as I said -- I understand it flies in the face of saying we're at an all-time high in stock, but for like we're at an all-time low in terms of our stock's discount to our NAV, so I wouldn't want to, like, issue stock and go buy an expensive of building and now I'm selling my buildings at a price to buy an expensive building.

So that would be a particularly disturbing trade today, much more disturbing than let's say it might've been at some time in the past. I think it's even more out of whack than usual. And, we have plenty of equity.

Yes.

Okay. Thank you.

David Harris.

Hi. Just picking up on Tony Paolone's point on acquisitions. Is there any you could characterize what you're most interested in at the moment? Are we talking portfolios, big buildings, little buildings?

Well, I'm not going to go to my obsession, because we've almost made it through a call without that, but it's office buildings, reasonably sized office buildings. So, there's some smaller ones there, but for our market reasonably sized office buildings. Right now, if I think about it, I'd have I'd say there's one in the Valley and there's two, let's say, current, like on my desk, that are on the West side.

Okay, so you might not want to answer this either, but you did [150] with two deals here last year? Is it reasonable to think you could get over that this year? In terms of dollars expended?

Yes.

Yes.

Double?

Let me add it up for you. I'm just kidding.

I think, certainly, we have a reasonable chance of doing much better than that number.

Much better, double?

I don't know. Much better.

(Laughter)

All right I won't press you anymore. Thank you.

And there are no further questions in queue at this time.

Okay. Thank you, everybody. It was a pleasure speaking with you, and we look forward to our quarterly call in three months.

Thank you for participating in today's conference call. You may now disconnect.