Douglas Emmett Inc (DEI) 2014 Q3 法說會逐字稿

Welcome to Douglas Emmett's third-quarter 2014 earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After Management's prepared remarks, you will receive instructions for participating in the question-and-answer session.

I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; and Ted Guth, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website.

During the course of this call we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown, risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences may be material. For more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.

When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thank you, Stuart. Happy Veteran's Day, everybody.

Fundamentals in our markets continue to improve with higher rents in our office and multi-family portfolios. During the quarter, we signed more than 800,000 square feet of office leases. We increased our leased percentage by 60 basis points to 92.5%, our highest since 2008. The average straight line value of office leases we signed was 10.8% higher than our prior leases for the same space. The average spread between the ending rent on the old lease and the starting rent on the new lease was negative 0.8 of 1%. Our average multi-family asking rents were 4.8% higher than a year ago. Our office occupancy rose by 15 basis points this quarter but our average consolidated occupancy during the quarter was 75 basis points below Q3 last year.

During the quarter our lease-to-occupied spread rose another 45 basis points to 285 basis points -- the highest in the history of our Company. This spread is about 125 basis points, or 185,000 square feet, above our historical average. In providing our earlier annual guidance, we assume that this spread would normalize back to our historical averages. We are no longer making that assumption. As a result, although we still expect good occupancy gains in the fourth quarter, we now expect year-end occupancy to be approximately the same as the end of last year. As Ted will discuss, that negatively impacts our same-store NOI growth and, to a lesser degree, FFO.

On the acquisition front, after quarter-end we purchased Carthay Campus for $75.3 million in an off-market transaction. Carthay Campus is a 216,000 square foot office building adjacent to our properties in east Beverly Hills. We used cash from our credit line and a portion of the proceeds from our recent debt financing. As we recently did with 8484 Wilshire, we intend to invest approximately $4 million in capital over the next year to bring the property up to our standards. The acquisition pipeline looks good and we hope to announce additional acquisitions in the near future.

With that, 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 multi-family fundamentals and finish with guidance.

As Jordan mentioned, our financial results this quarter were adversely affected by lower occupancy than last year, reflecting slow [leasing] in the first quarter and longer times between leasing and occupancy. As a result, compared to a year ago, in the third quarter of 2014 our total revenues decreased by 1%. Our FFO decreased 2.1% to $62.7 million, or $0.36 per diluted share. And our AFFO decreased 6.6% to $46 million, or $0.26 per diluted share, largely as a result of additional TIs reflecting heavy leasing over the last two quarters, particularly in Warner Center.

Comparing the cash basis results for our same properties in the third quarter of 2014 to the third quarter of 2013, revenues decreased by 0.4% reflecting lower office occupancy, partly offset by higher parking -- office parking income and multi-family revenues. Expenses increased by 1.8%, well within our expectations despite higher utility rates and a record hot summer. And as a result, cash same-store NOI decreased by 1.5%. The ongoing decline of our non-cash straight line rent and FAS 141 income resulted in a reduction of our GAAP NOI in Q3 by 3.5%. Our G&A for the third quarter was $6.7 million, or 4.5% of total revenue, well below our benchmark group.

Now turning to office fundamentals for the quarter. We had our fourth best leasing quarter ever, signing 175 office leases covering 801,000 square feet, including 224,000 square feet of new office leases. Tenant demand in our submarkets is robust across our diverse mix of industries. We were pleased to see gains of 50 basis points in Warner Center and 70 basis points in Honolulu, two markets with our highest vacancy. With rising rents, the straight line value of our leases in Q3 averaged 10.8% greater than the expiring leases for the same space. The spread between the ending cash rent on our expiring leases and the starting cash rent on new leases for the same space was negative 0.8%.

While the overall trends with rising rents and better comparisons continue to be positive, these metrics remain volatile and can move significantly in future quarters, particularly as we lease space in Warner Center at harder lease spaces in our other markets. On a mark-to-market basis, at September 30 our office asking rents exceeded our in-place rents by 5.7%, up another 200 basis points in the quarter.

On the multi-family side, we had fully leased our 2,900 units at quarter-end with both our in-place and our asking rates again setting all-time highs. During the last 12 months we raised our residential asking rents by an average of 4.8%. The current asking rents for our multi-family portfolio exceeded our in place rents by an average of 25%, about half of which relates to our remaining pre-1999 units in Santa Monica.

Now turning to our balance sheet. At the end of September we had $12.5 million in cash on our balance sheet and $290 million of availability on our line of credit. At September 30, our net leverage was 42% of enterprise value, well within our target range. After the end of the quarter, we refinanced our only loan with a 2015 maturity. We closed a secured nonrecourse $145 million term loan, which bears interest at LIBOR plus 1.25% and matures on October 1, 2019. After repaying about $112 million outstanding on the refinance loans, the upside loans provided net proceeds of over $30 million. We have no remaining debt maturities in 2014 or 2015.

However, in 2015 we currently expect to refinance our $82 million loan due in 2016 and our $400 million loan due in 2017. Although doing so will increase 2015 interest expense, including accelerating about $1.5 million of non-cash unamortized loan fees, it would take advantage of current interest rates and provide additional dry powder for potential future acquisitions. As Jordan mentioned, in October we purchased a 216,000 square foot Class A multi-tenant office property for $75.3 million, or $348 per square foot. Factoring in a tenant scheduled to move out, the property was just under 83% leased at closing.

Now turning to guidance. We are revising our full-year 2014 FFO guidance to between $1.53 per share and $1.55 per share. As Jordan said, this reflects the fact that our leasing is not producing the immediate occupancy gains we would expect historically. We now expect occupancy at year end to be essentially the same as last year, which we expect will produce same store cash NOI growth this year of up to 1%.

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

(Operator Instructions)

Your first question comes from the line of Michael Bilerman of Citi.

Hi, guys, it's Manny here with Michael.

If we think about the lease and commencement spread, when will the leases begin to commence and sort of when we think about our models and one sort of increments -- so if we look at the amount of space that you now have in backlog, should we expect 50% of that's coming in 1Q or 50% in 2Q? Or sort of what's the water fall of leases actually commencing?

It's over -- it's primarily over the first two quarters, but there's some also in the third quarter as well.

Could you quantify it at all for us, just so we can get it into the models correctly?

Well I'd say that right now scheduled to move in in Q1 is about 100,000 square feet of that and then about 50,000 square feet in Q2. And we have about -- we still have a bunch of [adavees] that's moving in in the fourth quarter as well.

And then my other question was on the William Morris Agency, it appears in the supplemental that the rents actually rolled down about 3%, the annualized rent. Just wondering if you could explain to us what happened with that one?

You may recall that they had early renewed their lease about two years ago. The old lease had just expired in July and so the new lease, which we negotiated a couple years ago, came online in July and that had slightly lower rent than the last lease.

Got it. Thanks, guys.

Your next question comes from the line of Rich Anderson of Mizuho Securities.

Hi, good afternoon.

Hi, Rich.

So what is it that's causing this spread between leasing and occupancy? It's like a kind of a new thing that we're having to deal with with your company.

Is there something about the market that's behaving? Something about the size of the space that you're leasing? What is producing it and why are you now thinking it's not going to change?

Well I wouldn't say I'm thinking it's not going to change. I said we're not projecting through the end of this year that that's going to shrink back down. Which -- because I know people have been sensitive to that 12/31/14 occupancy number and we kept kind of making the assumption that, hey, this thing is stretched way out. It should start coming in. And instead of coming in, it's stretched further than we've ever seen it.

So I still think it's very reasonable to think that it's going to head back towards its norm at some point. We're just not going to make those assumptions until we see it happen.

So your question is, what's causing it? I think some of what's causing it is the larger leases we're doing at Warner Center.

Some of what's causing it is that as we fill our portfolio, some of the space that's being leased takes a little more TIs. And so we have to -- there's a little more time between the time that we do the deal with the person -- they're able to move in. We keep going back and looking at the economics that are causing this to happen and they're good economics.

So even though, believe me, I would like to have this number normalize as quickly as possible, I don't want to go to my leasing group and do worse cash deals just because we're trying to re-tighten this number up. So we're letting it ride out in exchange for what I think is improved economics.

Okay.

What do you think Warner Center will look like optically next year? So do you see it as -- assuming an incremental improvement from this year based on the leasing you're doing, but do you think -- how substantial do you think the rent roll-downs will be compared to what they have been this year?

Well this quarter, frankly, if you look at the trend, seems like a little bit of an aberration in the good direction in terms of rent roll-down. For ending rent to beginning rent are almost on top of each other, which is tighter than if I were predicting this quarter, I would have predicted before we got the number.

You're right to point out that Warner Center is the drag -- holding that number as a negative number as opposed to a positive number. We have a very good pipeline in Warner Center. So we're probably going to do more deals out there and it's going to continue that way for a couple of quarters.

So the vagaries of measuring that number on a quarter-by-quarter basis and the impact the Warner Center leases have on it is, I assume, going to hold at negative for another couple of quarters.

But you feel it's because of the activity, it's just the market's getting better. It's starting to firm, it's just taking some time.

Well rents in Warner Center, I think, are moving up now. We are getting positive and good pipeline and good deals are being made there.

It's just that Warner Center -- let's go back a ways, because they're larger leases so you've got to go more than five years back. They're 7, 10 years deal. At the time they were made, Warner Center was, frankly, one of the best markets in the valley. So it had higher rents than Encino, Sherman Oaks and more comparable rents to the Burbank media district.

Now we are kind of bumping up against those numbers -- again, now, as we renew and do the new deals in the vacant space that's here and we fill it up. So it is a bad comparison period, which I think will continue for a couple quarters until we finish the leasing.

Okay. I'll jump off. Thanks.

Thanks.

Your next question comes from the line of Brendan Maiorana of Wells Fargo.

Hi, Brendan.

Hi, guys.

So first question, Jordan, looking at the portfolio and where you guys are leased at some of those west side markets, you're 98.7% in Beverly Hills. You're -- it's 100% in Burbank -- up there in Century City, San Monica. Are you -- is it even sustainable to maintain these lease percentages that you have on the west side or do you feel like you're sort of over-leased there and maybe there's some risk that that could move down as we think about the next year or couple years?

I don't think it's sustainable in a multi-family building -- I mean not multi-family, multi-tenant building to stay at 100%. I do think when you see that happening it's a good sign that rents are going to move at a quicker clip than they have been leading up to those numbers. Usually it's a pretty good trade to back off the 100% or 98% or whatever and be in the 95% zone and allow rents to move up quickly.

Look, there's times, just like with anybody, where everything is so full that you're going to be close to those numbers. If the sub text of your question is, is the NOI sustainable? I would expect the NOI to grow regardless of whether we're at 100% of 98% or 95%. But to just that one metric of a group of buildings that are multi-tenant staying at 100%, I do not believe that is sustainable.

Okay.

Brendan, I do think that within the overall west side market, I think we're probably fine. Individual submarkets will move above and below that. And I think it's just quarterly fluctuations there.

Okay. That's helpful.

And then just the second question, it looks like at least over the next four quarters, based on your disclosure of lease roll, there is -- maybe there's a little bit higher roll in Warner Center and a little bit higher roll in Olympic Corridor relative to what your overall -- relative to the percent of square footage in each of those submarkets. Are you concerned that -- I know Warner Center's where you're looking to lease up, but are you -- is there problematic roll in either of those submarkets? And is there -- is this going to be a situation where there's a lot of leasing activity but maybe there's not that much pickup in terms of occupancy or lease percentage, if the same level of activity keeps up into next year?

I don't think that -- as you look at those, you're right. There's variations from quarter to quarter. But I don't think any of those numbers are really outside of historical -- sort of what we would expect ranges. So in any given quarter, they pop up. But actually I think that the lease roll looks better this year than last year. So I'm not particularly worried about it.

Okay. All right. Thanks.

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

Hi, guys.

Hi, Michael.

Hi. Tough year on the guidance front.

(laughter) Well at least for sure on the end-of-year occupancy number. (laughter)

Well one question on that front from me is if you guys had been giving guidance on the percent leased all year long, would that be out-stripping your expectations?

Well I expected a pretty strong year on leasing and we've had a very strong year on leasing. Frankly, if we hadn't had the aberrant first quarter, it would have outstripped my expectations for what we've seen in second quarter, third quarter and what I think is continuing.

First quarter -- and I'm still a little bit of a loss to why it turned out to be such an odd and backed up quarter in a sea of success. But it was. And it kind of set us off on a bad guidance path and otherwise for the remainder of the year. It's easy to be a weak fourth quarter. It's hard to be a weak first quarter because it has an impact that trails for three more quarters after it for the year.

But I would say that this year we've had equivalent and very satisfying recovery in our markets in terms of leasing and rental growth. I'm very pleased with it.

Stuff that we've looked at that we looked at in the past and made estimates about where rental growth would go and where occupancy would go, we've watched -- on deals we've gotten an not gotten, we've watched ourselves beat those numbers. And of course, with our portfolio, guidance aside, we've done there also extremely well in terms of rental rates and in terms of leasing.

When you look into 2015, is it the case that you're more optimistic now on 2015 than maybe you might have been just because 2014 is shaping up to not be as good as you thought and some of those commencements slip into next year?

I didn't say 2014 was not as good as I thought. We had a weak first quarter.

Actually, 2014, overall as a year -- good performance. And I think that performance will continue to be good through 2015. Any one of these individual numbers like end-of-year occupancy, they're going to vary on things that aren't necessarily telling me the overall economic health of the portfolio.

I mean, I will tell you this, we are seeing very strong underlying fundamentals in our markets. And you guys are seeing it reflected in a lot of the numbers that we give you, the lease numbers and movement and rental rates and comparative rental rates and the way the markets -- the other submarkets -- the occupancy is moving up along with us.

So, but for -- my feeling is but for the fact the guidance numbers hadn't been where we had originally predicted or hoped, we're having a -- this is a very good time for real estate in these markets.

Right.

And my 2015 comment was on same-store NOI growth. I would think that that picture will look better given the weakness in 2014 from where you had guided to and given the strong leasing that you're seeing.

Yes. I don't have a good look at what I think 2015's going to do. And there's always numbers that could be in 2014 that make the 2015 comparison hard. And there's numbers that will be in 2014 that will make the 2015 comparison easy. And we got to look at where that all ends up and then where that comes out. And we'll certainly give you guidance on that.

But overall, aside from that comparison, I feel, yes, we're going to have a strong 2015.

Thanks. I'll jump back in queue.

Thanks.

Your next question comes from the line of Jordan Sadler of KeyBanc Capital Markets.

Good morning, guys.

Hi, Jordan.

I'm struggling because it does seem like you've reported some statistics that are positive. But again, this is kind of the fourth time that we've seen some kind of tweak to guidance and that's been somewhat unfortunate in what seems to be an overall improving environment. So your guidance tweaks are obfuscating the story.

And I'm wondering what have you done differently this time from the last three times there have been tweaks in guidance this year and -- or, what are you planning to do differently?

Well I think basically you're talking about end-of-year occupancy, again, I would say this. If you look at the way leased-to-occupied as a -- the difference has stretched out and you were to make the same assumptions we were making, which it's going to go back and normalize itself, you would probably see about 150 basis points -- something in that range, of increased occupancy in the end of the year. Which frankly, that alone would have put you at the bottom, even with the weaker first quarter that we had, it would have put you at the bottom of the original range that we gave out even before anything at the very beginning of the year.

And as we've watched that spread widen throughout the year, we certainly have -- and as you're saying -- have had the feeling that we're chasing it down, even though we're doing a lot of leasing. And we -- I can't help but give you guys the best information we have each quarter when we have it available. And that's what we've been doing.

So I said in my prepared text, we're assuming through the rest of the year that this spread stays the way it is. It's not -- we're not assuming that it's going to shrink back down. We're not going to assume we're going to pick anything up. At some point, it probably is going to normalize. But I'm not planning on it in 2014 anymore.

I guess, with all you due respect, this is not necessarily the best information if it's subject to change on a quarterly or intra-quarter basis. Right? And that, therein, lies the issue. My question is, are you changing the metrics that you're using because it's just not necessarily useful and it's creating noise, in my opinion, vis-a-vis irrelative to your story.

So are you going to eliminate the end of -- how relevant is the office occupancy rate as of year end? And why is this still a number that you're guiding toward?

Well I will tell you that that's a good question. And I certainly have asked myself that plenty this year.

It's a number that, quite frankly, you guys have asked for. And so we started giving you some time ago. And it's very hard to take something away once we've been giving it to you. If you actually look back over the last few years, we have guided to that number and missed it on the high side by as much as 200 basis points many times. But of course, when you miss it on the high side nobody cares. And when you miss it on the low side it's become a very large area of focus. Either side, I'm not sure it matters a whole lot.

I have not -- never spent the time. You guys put together your models and however you put them together, they're numbers that are meaningful to you. And we've tried to give you all the numbers you feel are meaningful. We don't go to you guys and say, you're wrong. That's not meaningful. This is meaningful. You're right, because it's not worthwhile argument.

You're not going to like hearing that from me. You're going to say I know my business and our business is to try and do our best to give you the information that you ask for.

On previous calls, I have certainly said I don't feel this is the most key number in terms of determining the economic health of the portfolio or the Company. But people wanted it so we've done our best to give it to you.

Is there another number that you feel would be a better predictor of your cash flow or of your actual core growth? Is it average occupancy or is it just certain leasing statistics you'd like to offer -- something that you feel more comfortable with?

Because I think it's a little bit of a dance in that we're looking for inputs to a model to get to an output, which is ultimately cash flow. Right? And/or value. And this just seems -- we don't necessarily all need to beat our heads in or against the wall for some metric that you guys don't even have -- you don't believe in or have confidence in.

Jordan, as Jordan said, you're right. We want to go back and look at the metrics we're giving you and try and come up with ones where it can be more useful than it's been this year. And we're going to be doing that. So that's one of our goals over the next three months.

We actually didn't -- can't do it in the middle of the year. It would be too much of a problem for you. But we do intend to look at that. And average occupancy may be the right -- may be a better metric to look at. There may be other ones. But we are strongly committed to doing that.

Yes. That's a fair -- your question's fair and that is the correct answer. We are looking at that. And it may be that we are going to try and coax you off of that number on to a more meaningful number for all of us and more predictable number.

Okay. Thanks, guys. I'll hop back in the queue.

Thanks, Jordan.

Your next question comes from the line Alexander Goldfarb of Sandler O'Neill.

Good morning out there.

Hi, Alex.

Hi. How are you?

Good.

Just going to the guidance thing -- sorry about that. I think if we look back over time, you guys have actually done a pretty job of hitting the actual guidance range that you've laid out. So obviously the components can change, but at the end of the day the numbers that you -- the guidance range that you set -- you're pretty good at hitting.

When we look at the fourth quarter, it does look like you need to have a pickup of about $0.02, almost, to get toward the bottom end of the new range. So given that we're sort of halfway through the fourth quarter, can you just give us some of the drivers that will get that extra penny or two -- or basically $0.02 -- that will make sort of the low end of the guidance range work? That would be helpful.

Sure. The first thing that will help us in achieving that is that as we -- as Jordan said, in the third quarter our occupancy was substantially below last year. We've already moved occupancy up by the end of the quarter and we've already told you that during the fourth quarter we expect occupancy to move up significantly again to get to about flat.

So as a result of that, we expect the average occupancy in the fourth quarter to be above -- noticeably above the average occupancy in the third quarter. And that, right there, is a good piece of the equation. Secondly, in terms of the expenses, the third quarter is always our highest expense quarter because of the utility issues over the summer. And this year we had a record hot summer and that meant that the utilities were even higher.

So again, we should see the office expenses -- while the revenues should be going up, office expenses should be going down. And we also -- the acquisition we did will add a little bit. But truthfully, because it -- we have to expense the acquisition expenses for any acquisitions we're doing, I don't expect the acquisitions to have a significant positive impact but it will probably be slightly positive.

But, Ted, basically what you're saying is all the things together at a minimum are going to give you $0.02, or more like $0.03, in sequential pickup to get to the bottom to midpoint of your guidance. Or should we think about you guys being more at the low end of your guidance?

I think that we give you guidance. And when we do that, we expect to be in the middle of it. I don't think we -- there's a reason it's a range, Alex. It's not a -- but we're not -- we don't pick a range that we think we're just going to barely make.

The center is the center of our expectation.

Yes.

Okay.

Second question is, just on Kevin, in your opening comments you mentioned about increased acquisition opportunity. Obviously for quite a number of conference calls over the years, the question's been asked of looking at different markets. We're pretty late in this cycle, which would make expansion to new markets probably a bit tricky for the investment committee.

But can you just give us a sense for what Kevin's working on? And when you say new acquisitions, are you talking within your existing submarkets, maybe a little expanded within greater LA or if you are now considering other geographies?

Office and residential in our existing submarkets, and I included in that Hawaii.

Okay. But any -- so within there, are you thinking about like in the Hollywood or anything like that? Or it would be already in areas where you guys already have a physical presence?

It's deals where we already have a presence. I mean, buildings that you would say, wow, that fits right in that portfolio perfect.

Okay. Cool. Listen, thank you.

Thanks.

Thanks.

Your next question comes from the line of John Guinee of Stifel.

Hi. A couple questions.

First, if I look at page 22, Landmark, Brentwood, California -- it looks like you're going to build that at less than $300,000 a unit. Is that because you have a very low land basis or is that the development cost for apartments in your part of the world? Is there something unusual there?

Yes. I mean, it's a low number. I think it's low because they're high-end units so you'd think it would be a high number. But it happens that it's at a location where we already have -- well, first of all, we don't have land costs included in that. Let's start with that. And we say that in the footnote on that page, I think.

But secondly, the entire parking garage is already built and supports the towers. So we are literally with a -- I think is a four level parking garage covering the entire block, just kind of putting a rectangular square to penetrate through that, eliminating a couple of spaces but going all the way down to the basement and just pulling a tower straight up from there, which the savings are enormous.

We already have the parking. We have a bunch of staging and stuff we can do on-site. It's a straightforward tower -- straight up in that location.

So our cost associated with just building the tower and not all -- not as much of the exterior landscape and parking, et cetera -- although it does have a good amount of landscaping and has a nice pool deck with very significant landscaping -- it's just a lot cheaper per unit to do that. So you don't have parking and you don't have land, is a real simple way of saying that.

So then I guess a multi-pronged question.

One, when will you be through zoning and hopefully be able to break ground? Or break concrete, I guess? And then second, what would be the -- what's the yield on incremental cost? And what do you think the yield would be if you fully loaded all your costs in on this? Or I'm sorry, fully loaded market, land and garage costs.

My guess is if we fully loaded everything -- okay, so let me start with there are no assurances that we can do this. We have gone as good a response as you could ever get building a tower west of the 405 in Brentwood so far. And we -- the big hurdle is the environmental impact report and its impact on traffic and the communities surrounding us -- feeling about the project.

We've met with all of the homeowners associations and we have submitted our EIR. We have gotten not much back from the city. They're reviewing the EIR. We're in this sort of zone where we should start getting some responses from them. And from that, we will get a much better feel as to where this is headed.

It was a very good -- if you just look at the basics of the environmental impact report, it's a very good report. We don't increase traffic and a lot of the stuff people look for, we don't have shadowing on other people's properties. And it's surrounded by other high rise buildings so it doesn't change the skyline and all of that stuff.

So all of that stuff looks very good. We still need to get the response back from the city on that and allow the community to comment on those responses. Now once that's happened, I'm going to start feeling much better. There's the answer to that.

The answer to the fully loaded and where we are today, I would suspect that fully loaded, this thing would be -- a good day would be five, something in that range in terms of cap rate. I think we're going to be many hundreds of basis points above that because of having this big boost up, although rents in the area are very strong.

So if you were able to build a you tower and the conditions were right, even if you had to fully load in the parking and the land, maybe it would be a low -- both. The question all surrounds what would a guy sell a piece of land for where you could build a high rise tower? And that would be a very high number.

We happen to have this site that had a market on it that had huge trips associated with it. That -- I'm not sure that exists anywhere else. So it's hard to put a real value to the land.

Great. Thank you.

All right.

You have a question from the line of Rich Anderson from Mizuho Securities.

Thanks. Just a quick follow-up.

What is the time duration with the Beverly Hills acquisition at 83% occupied? You mentioned $4 million of input.

And I'm looking at your occupancy in Beverly Hills, obviously ridiculously high. That is a number you're shooting for, high 90s? Or is this a different kind of asset all together.

No, it's -- why I like that deal and that one certainly gets a good nod to Kevin and his group -- why I like that deal is we own a couple big buildings right there. I mean, like you could almost throw a baseball to where this is.

And we are really full and we see the kind of tenant demand that our system's generating. And so when that -- he brought that, I'm like well this is great because we're going to nail this vacancy. And I'm feeling very good about where we'll go with that building over the next quarter or so.

Okay. And then if I could just follow up on the occupancy lift, I guess 185,000 square feet over the next three or four quarters. And I just do that quickly in my model and I get like maybe $0.02 or $0.03 lift from just that move. Am I way low? And, not that you're giving 2015 guidance, but how impactful is that 185,000 square feet?

I'm giving Ted a second to think about it because he's got -- that's going from square foot to NOI or cents per share. (laughter)

I'm not sure -- I think -- I'd have to do the math in my head, which is never a good thing to do on these calls. And I also think one of the things that I would caution you about, again, is making the assumption that all of that excess thing's going to come in over the course of the next quarter or two. It sort of depends on what our leasing is the next quarter or two. That was the -- I don't want to say error. But that was our track --

That was our problem. We kept collapsing it back to normal and saying, okay boom, we hit normal and we're off to the races. Maybe your assumption's right and it's certainly not unreasonable to assume that the thing will collapse back to normal. But we're not making that assumption.

I think we'll give you what we think about 2015 on our next call. And we'll have to think through all of those things.

Well just on the elevated interest, the interest expense with the refinancing of the debt, what's the tradeoff there? Is that going to be enough?

There's -- everything we're doing, I feel is a healthy move. So allowing that spread to widen, I think that's a healthy move.

Obviously we have enough control that we can say we're going to give up this and we're going to speed up the move-ins. It's healthy. It's economically healthy to let that happen. That's number one.

Same thing, which has a slightly negative impact to taking our debt stack. I think there's a great opportunity now if you look at the debt we have and the flexibility and we have some unencumbered buildings, we're going to enter into a process now, because we like where interest rates are and we're looking at our maturity schedule, and we're going to stretch that out aggressively again as we have many times in the last essentially 30 years we've run this Company. So that means that we're going to pay some costs today in order to have the rates that we like stretched out for 7 and 10 years on the loans that are in place today and re-stretch that out. So we have to see.

We'll try and hold those costs down. Many of those costs that flow through the financial statements are actually non-cash because of the way GAAP accounting works. But they still flow through. I will admits, I'm less sensitive to those. But there is actually -- if we look at something and we decide it's worth breaking a swap in order to do something new on a loan and stretching it way out, that's a real cost. Right?

But you take that cost and you add it to what the rate you're getting on that debt going out and you say, that's still a really good deal. I like that deal. So you're willing to do it even though you eat that cost at that point when you do that.

So we're in that's process right now. We're out working on those loans and we just wanted to give you guys a little bit of warning that those numbers are going to flow through next year.

Okay. Fair enough. Thanks.

Your next question comes from the line of Brendan Maiorana of Wells Fargo.

Thanks. Ted, a couple of clean-up questions for you.

So just it was asked about the Q4 number and you've got improvement in there in terms of some occupancy, some NOI. We know you've got the debt [re-fi's] that you're planning on doing for next year. Is there sort of anything else anomalous in Q4 as we would think about that going into 2015? Or is Q4 relatively clean quarter?

I think that if taking out -- obviously the Carthay thing has some and the refinancing we did in Moanalua, both of those which you should understand and know about. They both have a little bit of sort of noise in the quarter. And I think you also should note there was a footnote about sort of [FAS] 141 income that's in the guidance model. But I think what we try and do now for you is anything that we're sort of aware of that you might want to know, those footnotes in the guidance thing try and convey that to you.

Okay. That's helpful.

With respect to just the occupied versus leased discussion that we've had, how is it -- is the retention ratio or renewal percentage of tenants, has that been lower this year and that's causing the widening of the leased-to-occupied spread? And if that's the case, do you expect that to change next year? Or is it just longer TI buildout and longer lead time?

Retention hasn't really changed. Retention's still good.

It's really this larger tenant and making the deals with them when the deal could be made to soak up space to be able to start pressing rents in places like Warner Center and saying, look, let's make these deals and get that space off the market so that we can start creating tension out there. And by the way, it's working. But it's really stretched things out.

And so, Jordan, if we sort of take away the Q1, the drop Q1, just from a leased percentage -- sort of we'll forget about the occupancy stuff because there's noise in there, as we talked about. So you guys dropped 60 basis points in Q1. You moved up 30 basis points in Q2. You moved up 60 basis points in Q3.

So that's -- it's adjusting for the 60 basis point kind of anomalous drop in Q1, you're up 90 basis points kind of year-to-date. Is that, just from a big picture perspective, where we are in the cycle is kind of picking up about 30 basis points a quarter? Is that kind of a reasonable expectation for your portfolio and where it stands?

Well if you could move a portfolio this size that's already in the 90%'s 1% in a year, that's pretty cool. That's a lot of money. And it's not as though we're telling you that we're moving our portfolio from like 83% to 84%. We're up in thin air and we're climbing higher.

So I don't know if there's a normal but I think that if we could pick up even 100 basis points a year and get the whole thing back up to where our best was, which was almost 96%, that's pretty good. And anything over 100 basis points is outstanding.

Okay. No. That's very helpful color. Thanks, guys.

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

Hi, Ted. On the 14 NOI guidance, is there a bottom end of that range?

(laughter) I think it's implied in the word up. So we think it will be positive so that would give you a sense of the bottom.

Okay. And then on the TIs that you talked about, those have been running pretty high. I'm just curious if you're seeing any signs that make you more optimistic that those concessions might start to level off a little bit or moderate? Or do you think they're going to continue at sort of an elevated level?

That's an interesting question.

I think that if you look at it, it's been that renewals have been pretty much fine, I think, in terms of historical averages. And new have been a little high, which reflects, as Jordan said, sort of the type of space we're leasing and where we're leasing it.

So we're actually thinking about that issue and seeing what we can do. Hopefully as time goes on and the markets improved, you shift more of that to the tenant. But it's probably going to be elevated while we're leasing out these spaces that haven't been able to be leased out in the prior periods.

Okay. Thanks. That's helpful.

And then just lastly, curious if you had any thoughts on the Boston Properties, large transaction with [Norges], and whether a deal like that would be of any interest to you. And where would, in a transaction like that, do you think you would see a surprisingly low cap rate or surprisingly low to many of us on a transaction like that?

I thought that was a good -- I'm not sure how that -- how you're asking me that question regarding our Company. I think what Boston Properties did there, joint venturing with Norges, which has a very long view and shifting some of their capital out of that deal into -- I guess they had described it -- their other development deals. That looked pretty smart to me.

In terms of Douglas Emmett, we've said to you in the past in terms of those sovereign relationships, we feel we have a good set of sovereign relationships. And for us, it's not a similar situation. It more relates to when there's a large deal and if I feel like we need a lot of capital to make that deal work. They are similarly minded to the way we are in terms of a long-term hold and buying the best properties in the markets we're focused in. So they're good partners for us that help -- so that we don't have to issue equity in order to do very large deals. And we can still kind of control them and have a significant investment.

So for us, those relationships head in that -- more in that direction. For them, they're shifting where they have a lot of equity and a very large deal. They're reducing the amount of equity in that deal, still controlling the deal as part of their portfolio, and moving some of it into a development deal. So kind of different -- there are two different ways of dealing with those groups.

I guess just since we don't see a lot trade in your core markets, I guess I'm also asking you do you have any sense as to where a valuation on a trade like that in your markets might come out? Would it be a very low forward cap rate type deal, do you think?

Yes. There's no secrets to where some of the large deals -- the ones you guys all know I worked on in Century City, which was a large deal -- where those deals are trading. They're trading at similarly extremely low cap rates and, frankly, very low all cash IRRs and low leveraged IRRs, although no one's using a ton of leverage. But all three metrics are fairly tight.

Now I will also say that on that large Century City deal I worked on, as time has progressed and I've watched rental rates move in Century City, those rental rates have beat our pro forma. So I certainly wish we had bought it. But it is what it is.

Okay. Just with your stock trading probably after today at something like a 5% implied cap rate, I know your sense of your own NAV is probably higher than ours or higher than others. You still have no interest in pursuing any asset sales or partial asset sales to fund anything related to stock buyback?

I probably don't have a ton of comments on asset sales or stock buybacks because we haven't -- it hasn't been the front of my mind recently. Although I agree with you that the value of our assets is well below the -- I mean well above where the stock price would imply.

I don't look at that situation in the way you guys definitely should as a spot on, spot trading opportunity every time. So I have assets that are worth more in the stock. (inaudible) in the stock, I should issue stock. We don't look at it that way. I take a much longer look and look at the impact on the portfolio and on controlling the portfolio.

As I've said, I think there's a lot of value to our controlling some more real estate. I think our stock is under-valued. So I'm not anxious to issue stock to buy real estate. And so we look for alternatives and that's why those relationships with the sovereign investors are very important and good for us.

Thanks for the color.

Your next question comes from the line of Nick [Uliko] of UBS.

Hi. It's Ross Nussbaum here with Nick.

Hi, Ross.

Hi, guys. On your comment on acquisitions, do you have anything under contract or you just are looking at a lot of stuff right now?

We don't -- we typically don't comment on it until we are ready to announce an acquisition. And that's typically when we close.

Would you be disappointed if you didn't buy anything here in the next three or six months? It sounds like you guys --

We have been repeatedly disappointed.

Yes. I would definitely disappointed if we didn't buy anything in the next three months. Yes.

Okay. Second question's on the development side. Can you just remind me, have you actually broken ground in Honolulu or you're going to get that done before year-end?

We're still planning to get that done before year-end.

Okay. Meaning breaking ground, right?

Breaking ground.

In a month, right? And then at the Landmark, Jordan, what percentage -- if you had to put a probability on actually getting a green light moving forward, what probability would you assign?

Well any sane person would assign a very low probability to building a tower on the west side, probably the first tower to be built on the west side in 30 years. 40 years. Maybe even -- yes, probably 40 years.

But being a very optimistic real estate guy, of course I expect to get it done. I wouldn't be doing all this work if I didn't want to get it done.

But I think any reasonable person would call this a long shot. This is swinging for the fences, which is something we don't normally do as a Company. But the opportunity is so special and unique and exists for us. And so we had to -- so I felt like we had to invest the capital and take a shot at it, which that's what we're doing.

Do you have the opportunity to do condos there versus rentals as well? Can you remind me?

There is -- well you have an opportunity to do anything because we're going up in front of the city. But we felt that doing the rentals and offering the city this certain percentage, which would be low income and inclusive in the high-end stuff and we know they had an interest in us sort of targeting some older people that would also live there, let's say the grand parent set because a lot of these units are designed for the kind of millennial tech group because we have a lot of tech companies that are in that neighborhood. I think that mix really vibrated well with them.

When you say selling condos it's kind of a free for all. I think that's one of the reasons we're getting a warmer -- and by warm, we're still inside the refrigerator -- but a warmer reception than you would have otherwise expected.

Appreciate it. Thanks.

Your next question comes from the line of Michael Bilerman of Citi.

Yes, good morning out there. Ted or Jordan, the AFFO, the midpoint's been $1.21 the entire year. Is that -- I'm reading that correctly. Correct?

Yes, I think you are.

So I'm just trying to reconcile that with the same-store cash NOI that started the year up 2% to 3% is now up to 1%. So let's call it 100 to 200 basis point decline. The same store NOI, let's call it an aggregate between resi and office circa $370 million.

So I'm just curious why the drop, which would be $3.5 million to $7.5 million, $0.02 to $0.04, is not being reflected? Or what is the offset to cash same-store NOI dropping? Where are you getting the pickup?

Well a lot of it, as you can see in looking at it, is in some places in other income. So starting at the top, we have done some things to try and correct it in the expense side of things so that we've done better on expenses than we had expected to do. So getting down from revenue to NOI, that's partly there.

The funds have done better than we expected. And that comes in below NOI even though you would think we would consolidate it if we could under GAAP because we own 70% of the larger fund. So that also brought into it. And as I said, there was some additional other income that came in to the things from number of sources.

But the expenses would be -- you're saying non-same-store pickup? Because I guess assuming the same store NOI, that would have been reflected in that change going from 2% to 3% down to up to 1%.

You're correct on the -- that's why I said -- but I'm saying in terms of getting from where we were, the answer is yes, there's some non-same-store things in there. But just from our guidance, I haven't really got in my head how to reconcile it to sort of the numbers here. I'm just going back to where we were at the beginning of the guidance to now.

But what might make sense, Michael, if you want is give us a call and we can sort of walk you through this offline when I've got some numbers in front of me. But --

Hard math to do on the fly.

Look, interest and other income was $2.2 million this year. You've already done this year $7.5 million.

So clearly that's an area. But I didn't know how much of what was embedded in the original forecast -- it sounds probably closer to what it was last year than this added income that you've received.

It was. Although, also, I will say that the expense side was higher, I think, in the original forecast. But again, be better to talk about it when I have both the original and that one in front of me because it's been now almost nine months since we did that.

Okay. And then I would concur with Jordan, my two cents would be given average occupancy and average leased in a period end. And that way we have all the information based on what you are projecting for that perspective.

Okay.

And then the same-store NOI, what is implied by the forecast for the fourth quarter in terms of what we should expect for office and multi-family? Your office is running down about 90 basis points year-to-date and multi's running up 5%. And it blends to basically being flat.

So you're going to need a pickup in the fourth quarter. And I'm just curious, how should we think about the two parts of your Company to produce -- to basically move up the entire level in the fourth quarter?

Multi-family, as you know, has been pretty consistent performer. And so I don't expect huge changes in it -- in that side of the equation. And, as I've said, on the other hand on office, we expect office to be better than we were in this quarter because of the increase -- the gap between occupancy should get a little less and expenses should be -- should come in a little better.

Okay. And then just on acquisitions, you talked about a good pipeline. Can you define how you view good? Is that in hundreds of millions of dollars? What in your mind is a good pipeline?

Yes. It's in hundreds of millions of dollars.

And then you want to be --

Accounting transactions, where they are, the good deals, how much money are we putting out -- I feel good about all of that.

Okay. Thank you.

Thanks.

There are no further questions at this time.

Okay. Well thank you, everybody. We appreciate you joining our call and look forward to speaking with you at a similar time next quarter.

This concludes today's Douglas Emmett conference call. You may now disconnect.