Douglas Emmett Inc (DEI) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's fourth-quarter 2014 earnings call. Today's call is being recorded.

(Operator Instructions)

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

Thank you. Joining us on the call today are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; 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.

I will now turn the call over to Jordan, who will start with a review of 2014 and the fourth quarter. Kevin, then, will give a brief market overview followed by Ted, who will discuss our results, our office and multifamily fundamentals and finish with guidance for 2015.

When we reach the Q&A portion, in consideration of others, please limit yourself to one question and one follow-up. Jordan?

Thanks, Stuart. Good morning everyone, and thank you for joining us. I would like to begin with an overview of our 2014 activity and our accomplishments in the fourth quarter.

In 2014, we executed 733 leases, for a total of 3.1 million square feet of gross leasing. At year end, our office assets were 92.5% leased, our highest since the recession.

Occupancy at the properties we own, throughout the fourth quarter, increased 93 basis points to 90.6%. In addition, as a result of rising rents in our markets, our new leases were more valuable than our expiring leases, with straight-line rents increasing 6.2%. Our multifamily portfolio keeps humming along with high occupancy and asking-rents up 6.6%.

Looking at our financial results, we increased FFO to $0.39 per share in the fourth quarter, bringing our total for the year to $1.54. By keeping G&A and CapEx low, we again converted a very high percentage of our FFO to AFFO, achieving $1.21 per share in 2014.

I am very pleased that we kept same-store expense growth under 2% last year. This is a tribute to our operating group and, especially, to our sustainability team, since 2014 was the warmest year on record in Los Angeles County.

Degree days, a key measure of cooling requirements, were up an incredible 141% at the measuring station in Santa Monica and up 69% at the measuring station at LAX. Despite this, we were able to keep electrical utilization in our portfolio essentially flat, by continuing to implement the latest best practices in sustainability.

Over 90% of our eligible office space is Energy Star, certified by the EPA as having energy efficiency in the top 25% of office buildings nationwide. While our utility costs still rose as a result of rate increases, these programs were critical in controlling that increase.

I would like to highlight a few other accomplishments of our operating group in 2014. Our integrated operating platform has always been a key competitive advantage in servicing our small, tenant base and keeping our occupancy well above market, but we keep getting better.

In 2014, we added senior team members in leasing, accounting, portfolio management, and capital markets and enhanced the automated processes we use to run our operations. I'm proud of the results.

We still kept our G&A at only 5% of revenues. More importantly, in our annual online survey sent to our 2,600 tenants, 1,450 responded, and the average satisfaction score was 4.45 out of 5, which is 7 basis points higher than in 2013.

During the last few months, our capital-markets team has been busy. We refinanced the loan on our Moanalua Hillside apartments in Honolulu. We acquired a west-side office building. We acquired a third Honolulu multifamily property and we agreed to purchase an office building in Encino.

During 2015, we also plan to secure permanent property level debt for our new properties and to refinance some of our debt maturing in future years to capitalize on favorable interest rates. We continue to make progress on our two apartment development projects. Of course, we're also always working on more property acquisitions.

Overall, I'm excited, as we move into 2015. Given our expanding economy, we expect to see meaningful submarket occupancy growth, fuel significant rent increases and, with our expanded capital markets team, hope to see continued investment activity. I will now turn the call over to Kevin to provide some color on our markets and recent acquisitions.

Thank you, Jordan and good morning, everybody. We continue to see growth in our Los Angeles markets with optimism over the Southern California economy and real estate markets, driven by improving employment numbers and strong demand from our region's diverse industries.

Unemployment in west Los Angeles has dropped from approximately 8% two years ago to approximately 6% today. In 2014, the greater Los Angeles office market posted its highest level of net absorption since 2005, with west LA accounting for over 42% of the total.

For the first time since the recession began, the average leased rate for all Class A office space in our core submarkets, of west LA and Encino-Sherman Oaks, exceeds 90%. As we reported, our buildings in those markets are over 95% leased. We're seeing demand from many industries, with healthcare, entertainment, real estate and technology being strong drivers this quarter.

Most of you have seen the headlines about the impact of the convergence of the technology, media and advertising industries in Silicon Beach and about Los Angeles emerging as the world's leading producer of digital content. The expansion of those industries has been benefiting the Westside and our portfolio, both as a result of demand from tech and media firms themselves, as well as from their content and service providers.

In response to the strengthening fundamentals, we've been seeing some increased transaction volume in our markets. In the last few months, we've announced three acquisitions.

First, we bought Carthay Campus, a 216,000 square foot office building, adjacent to our properties in East Beverly Hills, for $75.3 million. Just like our last three office acquisitions, we bought Carthay Campus with substantial vacancy and with the belief that the property would benefit from the high leasing velocity and increasing rental rates we are generating at our neighboring locations.

The results, again, demonstrated the power of our platform. Our leasing team moved the building lease percentage from the low 80%s in mid-October to approximately 92% by year end.

Second, we spent $146 million last quarter to purchase the 468 unit, Waena apartment project, which is located within walking distance of the Honolulu CBD. We remain positive on Honolulu's multifamily fundamentals, due to the severe shortage of workforce housing and high land prices that limit new supply.

We did not underwrite any development while buying Waena, However, its zoning and generous 12 acres of land would permit a significant number of additional units.

With the December unemployment rate at only 3.5%, Honolulu's economy needs more workers and more workforce housing. According to the city and county of Honolulu, Oahu needs over 24,000 additional housing units to address pent-up demand and new household formation.

Last fall the city of Honolulu released a new set of initiatives to encourage workforce housing. The move to expand workforce housing, especially around downtown Honolulu, should also enhance the value of our office assets.

Third, we expect to close our purchase of First Financial Plaza, a 224,000 square foot Encino office building, during the first quarter. This building will be a great addition to our Encino-Sherman Oaks portfolio, benefiting from the operational efficiency of our platform and adding to the synergies we derive from our dominant position in that submarket. I will now turn the call over to Ted.

Thanks, Kevin. Good morning, everyone. I will begin with our results, address our office and multifamily fundamentals, and finish with 2015 guidance.

Compared to a year ago, in the fourth quarter of 2014, our total revenues increased by 2.3%. Our FFO increased 6% to $68.1 million or $0.39 per share, and our AFFO increased 4.1% to $53.6 million or $0.30 per share. During 2014 as a whole, our FFO increased 3.4% to $1.54 per share, and our AFFO increased 2.5% to $1.21 per share.

Comparing the cash-basis results for our same properties in the fourth quarter of 2014 to the fourth quarter of 2013, revenues increased by 1.2%. Expenses increased by only 1.6%, well within our expectations, despite both higher utility expense and a tough comp as a result of low multifamily expenses in the fourth quarter of 2013. And, as a result, cash same-store NOI increased by 0.9%.

Our G&A for the fourth quarter was $7.2 million or 4.7% of total revenue, well below our benchmark group. For all of 2014, we again kept our G&A under 5% of total revenue. Some of the fourth-quarter expense savings mentioned by Jordan were offset by $600,000 of acquisition expenses.

Our other income in the fourth quarter included $2.2 million of FAS 141 income that was accelerated as a result of the expected acquisition of the Harbor Court fee in 2015. Because we now expect that acquisition to close this month, our other income in the first quarter should include the final $6.6 million of FAS 141 income related to that ground lease.

Now turning to office fundamentals for the quarter. We signed 151 office leases covering 595,000 square feet, including 218,000 square feet of new-office leases.

Our fourth quarter renewal volume tends be less than other quarters. However, our renewal volume this quarter was the best for any fourth quarter since 2011, and our renewal percentage was the best for any fourth quarter since 2007. On a mark-to-market basis, at December 31, our office asking-rents exceeded our in-place rents by 5.6%.

On the multifamily side, we had fully leased our 3,300 units 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 same property, residential asking rate by an average of 6.6%. At year end, the current annualized asking-rents for our multifamily portfolio exceeded our in-place rents by a total of $18.6 million, about half of which related to our remaining [pre-19-9] units in Santa Monica.

Now, turning to our balance sheet. At the end of December, we had $18.8 million in cash on our balance sheet and $118 million of availability on our line of credit. At year end, our net leverage was 40% of enterprise value, well within our target range.

During the fourth quarter, we refinanced our only material loan with a 2015 maturity. Despite this, we expect to see a significant amount of financing activity this year. In the next few months, we intend to pay down our credit line with permanent financing secured by our recent acquisitions and our upcoming acquisition of First Financial Plaza.

We also expect to refinance the $100 million of residential loans, currently due in 2016 and 2017, and our $400 million loan currently due in 2017. Although fixed-rate debt will increase, 2015, in interest expense, including accelerating about $1.5 million of non-cash unamortized loan fees, refinancing will significantly stretch our maturities schedule with today's advantageous interest rates.

In December, we increased our annualized dividend to $0.84 per share. Our cash flow continues to grow so that we have a substantial liquidity margin beyond our current dividend payout.

Finally, turning to guidance. For 2015, we expect FFO to be between $1.57 per share and $1.63 per share, and our AFFO to be between $1.20 per share and $1.26 per share. This does not include expenses or revenue from any additional acquisitions beyond the one we have already announced, even though we continue to work on a good pipeline. As a result, our guidance is not directly comparable to that provided by [mentally] analysts, whose FFO forecasts project the benefit of the NOI from additional assumed 2015 acquisitions.

We know that our underlying assumptions are important to many of you. Starting with 2015, we are giving you assumptions for average occupancy rather than year-end occupancy, which we hope will be both more useful as well as less volatile.

We do want to reiterate that we provide the assumptions supporting our guidance, solely to illustrate the variability and variety of assumptions needed to give that guidance. We do not manage to these assumptions as though they were goals, and they do not shape our business decisions as we seek to maximize long-term values.

As you review our guidance please note that, first, our guidance for 2015 does not assume revenues from any new-lease terminations or from prior year [cam affliations], as they vary unpredictably. Adjusting both years to exclude such items, our core, save property cash NOI, should be between 2% and 3% greater in 2015 than in 2014. Second, in 2015, we expect higher interest expense and lower revenues from FAS 141, which, together, negatively impact our expected 2015 FFO by approximately $0.08 per share compared to the 2014 numbers.

Finally, our guidance assumes that our other income net will decline to a normalized run rate after the first quarter, during which we expect to acquire the Harbor Court fee interest. That transaction will accelerate $6.6 million of FAS 141 into other income. 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 Emmanuel Korchman from Citi.

Hey, guys, thanks for taking the questions.

If you could help me walk through this. You had good renewal and new leasing. You had some of the backlog coming back into the pool, so that helped drive occupancy upwards and zero absorption.

But it doesn't seem like occupancy ramped enough for all those things coming together. So can you help us figure out what piece we're missing to get to where you ended the year?

I don't know if I understand the question. What number to what number are you trying put together?

So you had an occupancy ramp in 4Q. Part of that was your backlog of leasing came down. So you used up some of your backlog. You had good new leasing.

So you're talking about part of the increase in occupancy was that leased to occupied rate shrank a little bit.

Yes.

Okay.

Then you had new leasing of 218,000 square feet.

Okay.

You had essentially zero net absorption in the quarter. So where or why is your vacancy ticking up enough to take over those two things combined? Because income I think combined, those would lead to a bigger occupancy increase than what you witnessed.

The first point which is the point about the spread between leased and occupied shrinking doesn't affect the lease rate. It only affects the occupied rate.

As you saw, the occupied rate actually had a really nice quarter going up to by 93 basis points. What might make sense, frankly, is I'd be happy to walk you through -- Stuart and I will walk you through the reconciliation of that, but I think part of the issue may be that the shrinking spread affects occupancy but not lease rate.

Okay. We can take it offline.

And then just as we talk about transactions, you guys obviously want to grow the portfolio. But do you have any appetite for dispositions either to search firm holdings or to take advantage of the recent cap rate environment?

Well, I wouldn't say we have a large appetite for dispositions. There's some times we can look at some things, but there's nothing that I would say is -- would be significant that would be on our list at the moment.

Thanks.

Your next question comes from the line of Jamie Feldman from Bank of America.

Great. Thank you.

Hey, Jamie.

Hi, there.

I guess just sticking with the guidance. The same store outlook, can you just talk about what the moving pieces are in terms of how much of the cash number, how much is from contractual rent bumps, what leasing spreads do you think you will get on a cash basis?

And then I guess also in terms of occupancy, your average occupancy that you guided to is actually below your percent leased. So how should we be thinking about that?

Well, let's take the last question. There's a lot of questions inherent, so I'm not sure we will answer all of them. We will take the last question first because I can remember it first.

That is, there is always a spread between leased and occupied, even at the lowest point in the thing. So that the fact that it's below the leased, we would actually expect that to be true. If that makes sense.

So I guess to ask it another way, do you think -- so your average occupancy I guess at the midpoint would be up 100 basis points year over year? Does that mean that your percent leased at year end 2015 would be like 93%?

Not necessarily. You're going to one of the problems we had last year. We had been rolling along with a pretty -- with a slightly stable spread between leased and occupied. And last year that number widened dramatically, over 100 basis points, and threw off our end of year occupancy by a lot, threw off everything by a lot.

So that's why we went this year to the average, average for the year. I mean, Ted says in the script it's less volatile and hope it's more useful. But we also frankly are hoping it's more predictable.

So it's still going to be at any point in time that spread, and we're finding right now in particular is pretty volatile.

Okay. So it sounds like there's a good chance you just don't catch up with it, period.

Well, what happens is, even in the tightest market, I don't know, maybe you remember, Ted, but I don't think we ever got tighter than 120 basis points or something.

I think the lowest was actually about 70, but that was -- again, we have -- it's a volatile number.

Think how tight that is. Because that means guys are signing their lease and basically walking in and moving in their space almost immediately.

And that the rest of portfolio is just super tight. So you got to be pretty -- for your leased percent to be close to or on top of your occupied percent, you've left no room for between the time the guy signs the lease and he moves in.

Okay. That's helpful.

And then I guess back to the first part of my question. What are you guys assuming for cash rent bumps and leasing spreads?

Well, I think for cash rent bumps, we've given you the information. So Honolulu is in the high 2%s, and the rest -- and Warner Center is at 3% and the rest of the portfolio is averaging somewhat above 3%. So if you roll it all together, you're probably looking at something in the neighborhood of 3%.

So why wouldn't you have better growth? Sounds like you have that -- the high end of your normalized range just from rent bumps.

Are you talking about embedded rent bumps in new leases that are being negotiated or in all rent bumps that exist today in all signed leases right now?

The latter.

Well, you still have a ton of old leases that's were done at 3%. So it's going to be hard to average off of 3% even if we were doing all 4%s right now.

We don't roll that much in the portfolio every year to change it. You got to go through a few years of the higher -- of getting the higher embedded rent bumps.

And then what are you assuming for leasing spreads?

I think what -- I don't think we're talking about what we assume. We're not giving that guidance.

But what I would say is that the question of how you -- that is the spread of 2% to 3%, at 3% you would assume that would imply that leasing spreads were pretty constant during -- were pretty zero during the year. And the lower rate is how long it takes us to get from the current spreads being slightly negative to a positive spread. Does that make sense?

Are you talking about the end of the spread from the rent at the end of the lease to the beginning of the new? You're asking the spread between the end of the lease to the beginning of the new lease, what's the difference between those two cash numbers?

Yes, I assume that's the driver of cash NOI, like the guidance you gave.

Yes.

Well, one of the factors.

Okay. All right. I appreciate it. Thank you.

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

Thank you.

Just clarifying, not to beat a dead horse on the average occupancy. So implicit in this guidance, at 90.5% at the midpoint, are you assuming that average occupancy in 2014 was 50 basis points or 100 basis points lower?

We're not assuming because we actually have the numbers.

Right. What was the actual number? Sorry.

The actual number was about 90%.

90%. Okay. That's what I was coming up. So it's 50 basis point increase in occupancy embedded at the midpoint of guidance.

At the midpoint.

Average occupancy.

That is correct.

Which assumes some level of net absorption based on either closing the gap leased versus occupied and/or just net absorption, naturally.

At the midpoint, that's correct.

Okay.

Can you maybe talk a little bit about the acquisition pipeline? I know this time three months ago you guys talked about it being very full and then you closed on a few and you got another one teed up here. Just maybe shed a little light on what's happened to the pipeline since.

Wow, my first question.

Congratulations.

I will remember this moment forever.

So I would say that, look, 2014 was better than 2013, and there were some transactions that had some pretty eye-popping dollars per square foot. And that always brings out more sellers who want to take advantage of that market.

So I would say that our pipeline, I'm pretty optimistic at things in the pipeline that we're looking at and at things that will be coming out later this year.

In the near term, it's looking a little bit lighter, obviously.

My team is actually pretty busy, looking at underwriting a number of projects as we speak.

I think it's fair to say that Kevin came and closed four deals almost immediately, three, four deals. Three deals almost immediately. Yes, it's probably lighter than a deal a month. But he has a good amount going.

Let him run with it, Jordan. He was setting the bar high for himself.

(laughter) That was a pretty high bar. I don't want you guys to --

To qualify, I said we're underwriting. We don't put an offer in on everything that we underwrite.

And then final question is just on the liquidity and the availability to execute on some of these deals. I know the leverage is low but -- and I see embedded in the guidance here is some refinancing activity. What's embedded in terms of incremental liquidity being raised?

It says in Ted's guidance page, it says we don't assume that we raise any. You mean issuing equity?

I see refinance, refinancing and permanent financing. So refinancing and refinancing, I assume limited incremental liquidity. And then on the obtaining permanent financing, let's say you raise [100] -- financing of our recent announced acquisition, how much is that?

What we said to you is that we intend to pay off our credit line out of those proceeds, which would give us enough -- which would give us back the $300 million of liquidity there. And in addition, while we don't assume additional proceeds from the refinancing activity, I wouldn't at the same time say that there wouldn't be additional proceeds.

When we try to do financings, we try to maximize the amount of liquidity we can get from the assets we are pledging there because once they're pledged, they go off the line for whatever period of time they're financed for.

Yes. I think more the issue is do we want to let our overall leverage level float up and at what point -- because we don't have any problem with liquidity in terms of we can get equity to buy buildings by refinancing what we have. It's not very highly financed.

But there might be some point when we would say well, we don't want to keep pushing our leverage level up. We will watch the pipeline on what's happening and make that decision. We don't have to face that right now.

Okay. Thank you.

And your next question comes from the line of Nick Yulico from UBS.

Thanks.

Ted, I think earlier you said that the mark-to-market opportunity on your portfolio was 5.6%. Did I hear that right?

You're correct.

Okay. And that's measuring just in place leases versus where you think market leases are today?

It's asking rent at that particular building or that particular space versus in place.

Okay. And then as you look at your expirations over the next two years, let's say, is that the -- do you expect to achieve that gap, or are you dealing with higher rent expirations and maybe markdowns in the next two years overall?

Rent expirations don't matter, right, because it's a rent in place versus what the market is. But I would expect that gap to widen because I think rents are going up and the leases we signed are in place, and so and always the bulk of our leases are in place. So if rents are going up at a good clip, then usually your in place to asking will widen.

Okay. So how should we think -- if we look at the expirations that you have this year, are you generally looking to have increases in rents, flat rents? Are you dealing with roll-downs? Can you give some color on your different markets in that regard?

The problem is that -- and we've said this to you guys lots of times but I'm going to say it again. This metric in every given quarter is very different, and so predicting it quarter to quarter even for us is very hard.

When we look at that cash rent roll-down number, for example, one of the things that's happening now is we have 10 year leases now starting to come off from the peak times. And given that those peak rents often had a 4% bump, you see that the cash rent roll-down can be substantial in any quarter when one of those leases hits.

There are not as many of them, but they still hit. That's going to make it a little more volatile. We still think the trend line is that that cash spreads will continue on a trended basis to come down, but individual quarters could be low or high.

It has trended down. It's really bounced around. Last quarter was basically flat and this quarter was negative five. Pretty big of move.

If you went a couple quarters before that, it was negative 7 and it's coming down for numbers like negative 11and 12. It's working into the right direction, but it definitely bounces around to get there.

Okay. And then just lastly on Warner Center, Woodland Hills market. You have a decent amount of lease expirations there this year. You have lower occupancy.

Is there any realistic scenario where you could actually be increasing occupancy in that market? Could you talk a little bit about how you're thinking about those expirations today?

That is such a negative way to ask that question, I can't even believe it. I mean, is there any way to survive Warner Center? Is that the gist of what you're asking me?

No, well, look, there's a fair amount of expirations, and it's where you have the most occupancy upside.

I agree. That's better.

How should we think about that?

Let me release the numbers on Warner Center. Last year we had a tremendously high level of roll. We rolled 600 -- we had 600,000 feet of roll and a 2.8 million-foot market for us.

So that means almost 25% of all leases there rolled. With that happening, and plus we knew we had AIG giving back in that year, which isn't even in that roll another 40,000 feet which was part of the lease they had done the previous year.

We held the lease percentage there to only losing about 25,000 feet. That was -- so each quarter people say to us, what's going on. We say we have a very full pipeline. We're signing a ton of deals out there.

You guys saw that we signed a ton of deals out there last year. I said -- hey we're doing an overwhelming amount of stuff in Warner Center, and Warner Center is impacting our estimates of spread of leased to occupied, our estimates about time for people to move in, et cetera, et cetera.

So now we sit here looking at it saying, last year we started at a leased rate and essentially almost ended at that same leased rate. This year roll, we only have 270,000 feet. Not 600,000 only 270,000 feet.

Still, with an extremely active pipeline. So I feel, and feel, hope, I don't know which word goes in that spot, that we have a real good opportunity to move up our both occupancy and leased numbers in Warner Center this year, and I'm very optimistic about it.

You guys sound pretty positive. Thanks.

All right.

Your next question comes from the line of Gabriel Hilmoe from Evercore ISI.

Ted, just going back to the occupancy guidance for a second, I don't know if you mentioned this, but can you just talk about the progression through the year, just given where you ended last year on a lease basis? I know you said the spread will remain there, but is there a downtick early and then things get backfilled as we go or is it flat quarter to quarter?

We would typically expect -- again, we're not going to give sub-guidance because then it's really volatile. You would typically expect that the first quarter would be a little slower because people don't focus on their leases in December. And then it takes them a while then they get back to January to do it.

And there are typically a fair number of expirations at the end of the year just because people line that up. You would expect first quarter to be slower than the rest of the quarters, but again, we're not going to give quarterly guidance. We don't need to do that.

Okay. Fair enough. And then just on the same store guidance, do you have a breakout of what the expectation is for office versus the multifamily for this year?

No, although I think it will be largely consistent with what it has been in prior years. So we would expect the multifamily to continue to do well and frankly better than the fourth quarter because that 7% increase in expense was a little bit of an anomaly. And we would expect the office to do -- to be less than that.

Okay. Thank you.

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

Good morning out there.

Hey, Alex.

Hi, Alex.

Hey, how are you?

Ted, we will go to you first. On the debt side as you're looking at these refinancings, are you looking to do, again, are you looking to do like the variable with a swap, or is it going to be straight fixed debt?

And then what length of term are you looking at? Should we think about 5 year or 10 year? And are there -- apart from the accelerated finance fees that you mentioned, are there any other prepays or is there any timing adjustment we should be aware of with that swap that burns off in July?

Starting with the last question, just so I remember it, I would not expect anything that you would need to model on the swap expiration in July. In terms of the loans, when we do a -- put together a loan package, we actually look at both fixed, quote-unquote, and then bank loans that we then swap to fixed.

From our point of view, it's not really a big difference which one we do. It depends on availability, rate and all of those factors on individual loans.

Similarly, the lease term varies a little bit from what we do from loan to loan, depending on what we think about the assets and what's available and the yield curve. But I think that you can expect that we're going to hope to push out things a little longer than our typical -- than we've been doing it.

So if the you want to model seven years, that's probably not a bad modeling point. But it will vary from loan to loan.

Okay. And just confirming, so with the swap, you're not -- in your guidance, you're not assuming that that goes to a floating to boost guidance, we should just assume that remains that fixed rate?

I would do that. I don't know exactly what the timing of that refinancing would be, but I wouldn't -- I would not assume that there's a long period of floating rate for present purposes.

Okay. And to Kevin, and I think it was you were talking about Hawaii and the opportunity there for workforce housing, apartments, et cetera. Often areas where there's a huge demand for housing, the local authorities make it so difficult to build that it never happens.

So, one, do you see increased opportunity to actually build? And then two, presumably if you see that, others see it. So what's the competition out there?

Well, the big problem in Hawaii is it's so land-constrained in the ownership that a lot of times it just doesn't pencil to take the market value of land and try to develop. And so they're looking for ways to incentivize folks to build. The majority of that building, if it takes place, is going to be out in west Oahu, out by Kapolei, where the majority of the land is.

So I don't really see that new supply as impacting our existing inventory. And it's this double-edged sword of they really need to increase their labor pool so that they can grow their economy.

So they do need housing to be able to grow. And so I don't think that an increase in housing is really going to be bad for us because it's going to grow the overall economy in Hawaii as they get more people in the workforce.

I could add to that. One thing which you're saying, Alex, is right, understanding the west side and around here. They make it so hard to build no matter whether the community needs it or not.

But in Hawaii, they recognize that they need workforce housing, and they wish they were making it easier to build. The real problem there is just the cost to build. Everything in Hawaii just costs a lot more to build.

And then to double down on that problem, the prime lots, the better land that's in close to downtown and near where all the jobs are, when they do -- when it does trade, the more economically profitable thing to build is condos that you sell to off-islanders. So workforce housing is expensive to build and it's not even the most profitable thing to build for a guy that owns a piece of land.

And that has actually caused that number to go backward, not forward to grow a little. It shrunk because it's been replaced by maybe someone tearing down or going condos or building new condos on the location. So you can't almost go of to Hawaii and read the local paper and not hear about their need for workforce housing or about the legislature or the city or the county trying to put programs for workforce housing.

You know what? They're not super wealthy and therefore their programs need to get funded for them to be effective. A lot of times they have a problem funding the programs. But they want it to happen.

Okay. Thanks. Thank you.

Your next question comes from the line of Jed Reagan from Green Street Advisors.

Hey, good morning, guys. Just a question on guidance, maybe I will just ask it a slightly different way.

As we look at the average occupancy guidance for the year, it would suggest that you think you're basically going to hold flattish versus where you ended 2014. Just wondering if that's a fair way to think about it, and then maybe asked another way, do you think you will have a chance to make any meaningful improvements in your percent leased rate in 2015?

So going back to what Jordan said a little while ago, I don't think we're focusing on percentage leased because that would get us back in the business of predicting spreads which we told you guys we've gotten out of that business. But on the occupancy side, I think that it is fair to say that we're -- that the midpoint of the guidance does take you to holding serve with the year end, and that as we talked about earlier, that could vary during the year.

I think one of the things that's also true is this is probably a year when we think it's time to focus on. In that balance that you're always making between occupancy and rent growth, I think we're probably going to focus a little more on rent growth this year. Again, there's no single way, but that's probably in the balance.

Okay. Thanks.

And I think you have talked previously about being able to push rents in a lot of your markets, 5% to 10%. I didn't hear you quote that this time. Is that similar or is that changing at all?

That, certainly outside of Warner Center, it's probably closer to the 10%. And we would hope that that will transition as the other markets have moved up now above [90] and as we become stronger. But that's the future and we will see.

Okay. Thanks.

And then looks like fourth quarter leasing volumes slowed a bit from where you had been earlier in the year. Just curious if that's a timing issue or if there's just a general slowdown in activity that you're seeing. Maybe you can talk a little generally about how the leasing pipeline looks as you sit here today, maybe any larger moveouts in 2015 you're looking at?

So fourth quarter in recent years has tended to be well below the average anyway. So the fourth quarter if you look at the renewal leasing, which is really the area that was slowed down a little bit in the fourth quarter, it actually was, as I said in the script, it was our best fourth quarter in terms of leasing volume since 2011.

So I think we're -- I think while it slowed, it expected slowing, and I think that we continue to feel very good about leasing pipeline out there.

Any moveouts that are on the radar screen for this year, lumpier ones?

Nothing of large size, and as Jordan said, I think what we're really happy about is that the moveouts in Warner Center is --

Just the overall roll's less, therefore we're not fighting against that wave. We're back to being in a position to make gains.

Thank you.

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

Thanks. Good morning.

Hey, Brendan.

Hey, guys. It's just the way it goes. Anyway.

So Ted, you said best renewal percentage since 2007. I know fourth quarter as you highlighted tends to be a little lower from a leasing volume standpoint.

But you didn't have too much in terms of expirations that came up. And your new leasing volume was reasonable even though it was down relative to where it was past quarters, and you had short-term leases that increased by about 35,000 or 40,000 square feet.

Taking all that together, I was surprised that the net absorption was flat in the quarter. Was there something that caused net absorption not to be positive when it seemed like the elements were there when it would have turned -- would have been positive.

Well, it didn't. The answer is I don't -- I'd have to -- let's go through the math because the answer is it didn't, and the answer is there is no --

A lot of the stuff he said was accurate. We could go through the math.

There's no great hidden thing that happened that I can think of. We can go through the math and actually check it. But nothing to report.

Okay. All right. Fair enough.

Second question is from a CapEx perspective, you guys have been the most efficient from capital as a percent of leased, percent of overall NOI, however you want to look at it. But it has moved up a little bit over the past couple of years.

And it looks like if I'm doing the math right on your FFO to AFFO guidance, CapEx, TI leasing commissions, base building is probably going to be around that $50 million to $55 million again in 2015, which is where it was in 2014, although it was -- and that was -- tended to be higher than it had been in prior years. Is there anything that's keeping CapEx a little bit higher than where it has been in the past, albeit still low relative to your peers?

Yes, I think we've told you there probably are a couple of things in it. The first one is that we have -- as lease rates move up, then the leasing commissions also as a natural impact of that move up.

Secondly, we've told you that as we -- right now, a lot of the new leasing we're doing is coming in Warner Center. And it's also coming in spaces in our -- the rest of our portfolio that maybe haven't been leased for a while because you obviously tend to lease the best spaces in a tight environment.

You're more likely to lease them. So we do think that there will be -- that the TIs will continue -- TI's leasing commission will continue to be perhaps a little higher than they've been at another point in the cycle and that will calm down then as we get these spaces leased up.

Okay. All right. Thanks, guys.

Thanks.

Your next question comes from the line of John Guinee.

Okay. We will talk about something different here.

(laughter)

Okay. What pricing, what underwriting, what cap rates are you paying these days specifically on the three acquisitions you just made?

I'm sorry, I wish -- I thought you were going to keep going with the question. Kevin, do you know those numbers? Do you have a feel for that?

I don't have the Carthay number in front of me, but it was in the low 5%s at 82% leased. Wyana was also somewhere in the low 5%s, and First Financial was in the mid-5%s.

Okay. Good.

Second question is, looks to me like your net debt to EBITDA just crossed the 9 threshold, 9 times, because basically you're acquiring $310 million worth of assets without issuing any equity. So how are you thinking about getting your leverage a little bit more in line even though that might tank FFO a bit?

I'm not sure that the assumption is correct, but I will let Jordan answer.

I don't feel stressed about our debt level, and I don't feel stressed about our coverage level or our cash flow. Frankly, I think when I really look at the Company's cash flow and even if you compare it to other companies, our coverage and even our coverage of our dividend is excellent.

So I'm not -- when you say how do I think about getting in line, I can't say I spent a lot of time thinking about getting it in any other line other than the one that it's in now.

Perfectly acceptable answer. Thank you.

(laughter) All right. Thanks.

And your next question comes from the line of Rich Anderson.

Thank you. I missed year-end target occupancy all of a sudden.

(laughter) Well, it did make for more exciting calls, but I was drinking a lot more last year. This year might be a little easier.

Thinking back to 2014 and the issues you had with having to down-draft in occupancy communication, do you think at least looking at this occupancy average, not much over 2014, do you think you're dialing in some amount of incremental conservatism based on the experience you had last year?

So once you adjust for the decision we made to move the Harbor Court fee acquisition into 2015, we actually did pretty well on our AFFO and FFO guidance things. And we know that the occupancy, particularly year-end occupancy, was a problem and -- but again, we don't really manage to that.

We did review both what we'd give you with guidance and how we'd give it fairly carefully. We think it's fundamentally sound.

And the only thing I will say that was really true is that we'd like to react a little quicker to trends, new trends during the year. But other than that we actually felt pretty good about the approach.

And then when you mentioned, Ted, I think you said market rent growth approaching 10% except for Warner Center.

Yes.

What are you guys thinking at Warner Center?

Warner Center is up off the bottom. So it's come up off the bottom. It's I think going to show some growth this year, but it's a little harder to say because there we are more balancing.

I said we were balancing toward rate in the rest of the portfolio. In that area is one where we have to be a little more balanced.

Okay. If your total portfolio is [5.6] mark-to-market, do you have a guess of where you are at Warner Center? Maybe I should know that but what's your thesis?

It's probably trivially negative.

Trivially negative?

Yes.

Okay. And then last question.

You mentioned the bumps in the range of 3% when you add it all up. What are new leases being signed at, and did you mention that? If you did, I apologize.

New leases in Hawaii are 2.5%, going to 3%, so not fully, but we're pushing 3% now. Warner Center is probably still 3%-ish. And in west LA and Sherman Oaks-Encino, it's 3% going to 4%.

And so it depends on the individual lease negotiation, whether we trade that away for some other thing that we want to get like higher rents. But across the board, in west LA and Sherman Oaks, all new proposals go out with 4%s in them.

With 4%s in them. So a trickle up to the bumps relative to where they are today.

That's right.

Okay. Great. Thank you.

Your next question comes from the line of Mitch Germain.

Hey, good afternoon. Just, Jordan, quick question. Would you revisit a co-investment vehicle now that deal flow's picking up?

Well, if you're saying if it was a very large deal and I needed equity, would I go -- look at doing it as a joint venture, the answer is yes.

But not a co-mingled fund for acquisitions?

No. That was great to have that money during the recession, and we bought a huge amount of square footage during the recession. We don't need to do it. It's expensive for us to do it. It creates commitment for us that now we have to spend that money first.

It's much better only when you have a big deal to be able to get the partners together and do it then. We did a lot of work to create that group of partners, so I'm feeling pretty good about it.

Thank you.

Your next question comes from the line of Jordan Sadler.

I guess as a follow-up to that last question, I was going to ask something along the same lines. To the extent that a large portfolio were available, would you rather in terms of raising or availing yourself of capital, do a joint venture or would you rather look at maybe some type of transaction similar to what your neighbors at Hudson Pacific did with the recent EOP transaction?

Well, the thing that Victor did has to be offered to you, let's start out with that. You're not really saying --

I guess would you issue equity?

Okay. So my preference would be to do the joint venture.

I feel like if you look at our buildings and where the stock's trading and where you can filter through and value the buildings, why would I want to sell buildings for less than I'm buying buildings for? That's essentially what if you do a significant stock offering what you're doing.

That's fair. Okay. Thank you.

Your next question comes from the line of Steve Sakwa from Evercore ISI.

Yes, just two questions. Jordan, I was wondering if you could just speak a little bit about the pipeline and the demand that you're seeing up in Warner Center.

What types of tenants? Are those tenants typically expanding? Are they coming into the market? Are they already in the market?

Could you just tell us what industries, just a little more flavor would be great.

I don't know if I'm the best person to answer that. I can tell you that I think it's a whole -- it's a variety of industries. There are tenants coming into the market. So it's not just trading.

Actually, overall the market lease rates in Warner Center are going up. And if you really -- I hate to even say this, but if you look at the market overall, it's better leased than our particular portfolio. And it's the only market where our portfolio is underperforming the overall market lease rate.

The reason for that is a number of the larger buildings in that market are single, like 400,000-, 500,000-foot single tenant leases that's go on for a very long time. When you put that into the mix and you look at where the buildings that have multi-tenant nature, so they're rolling something every year, the multi-tenant guys are always going to be at a little bit of a disadvantage to the overall market which has a number of buildings that are 100% leased. But even if you just look at the multi-tenant guys, obviously the overall number is moving up.

So it's not going to move up by guys trading. As a matter of fact, interestingly, that's the one market where our larger tenants, when they renew, because of wanting to maybe make the space work better or feeling like they can become more efficient on tenants, they might renew a little smaller but still the overall lease rate going up because more guys are coming in.

And I don't know if you can speak to this but just the tech demand that you're seeing down in LA? I know that Playa Vista has been a market that has captured a lot of market share. Do you see any of those tenants heading north at all or is just the distance from where they live just make that market not acceptable to them?

I can't say that tech that we've seen in any meaningful way out there. It's more established entertainment, back office. You've heard us talk about the music side, and guys that have refocused themselves on their overall cost.

And because of their workforce age are saying, well, it's meaningful to us to have housing and schools that are good, that you don't have to go to private school, all that. That's where you see those groups moving out there.

Tech seems to be pretty young. Not a ton of people with kids and stuff.

That being said, there's a lot of these small apartments that have sprung up all around Santa Monica, and a lot of the smaller tech firms we are seeing some from that. It's just that there aren't the huge for plates for people like Google.

They have space here in Santa Monica for example, but they don't -- they can't get their 900,000 square foot campus. You just couldn't get that done on the west side.

Okay. Thanks.

Your next question comes from the line of Emmanuel Korchman from Citi.

It's Michael Bilerman.

Just a couple of quick follow-ups. In terms of the same property cash NOI you have in the sup, core same property cash NOI in terms of the guidance, one excluding lease term fees and prior year Cam reconciliations.

So there is about 100 basis point difference between the two. Is that effectively saying that there was call it $3 million of positive Cam reconciliations and lease term fees in 2014 that you do not expect to reoccur in 2015 but if they did, that would be an additional $0.02?

No. Yes and no. So it does say that right now we had -- there's about call it $3 million is in the right zip code. But there's a difference because what we don't do in looking at 2015 is we don't look forward and say, let's assume we have a bunch of Cam reconciliations going one way or the other.

So we just don't project that because it's too difficult. Similarly, for example, remember 2014 we told you a story about a full floor tenant in the second quarter that came to us, and within two weeks, we had made a deal with them where they paid us a substantial termination fee.

When we do guidance for 2015, we don't project that any of that's going to happen. If it happens, great. If it doesn't, it doesn't.

So what that means is yes, there's about a $3 million differential between the two years. But what will actually happen in 2015 is largely unpredictable which is why we broke it out so people aren't confused.

Do you have just the amount for -- we have the historical lease term fees from the K from 2013, 2012 and 2011. Can you break out for 2014 what that total lease term fee was and how much was the Cam reconciliation that you're effectively not projecting?

I know in totality it's $3 million, but understanding the split between the two would be helpful.

I don't have the exact numbers, Michael. Assume it's half and half; in that you will be very close to being right.

In terms of the occupancy, you ended 12/31 at 90.5%. Do you know where that was on January 31. Was there a dropoff at all in the first month of the year?

As I said, the answer is I don't offhand know that because it's a different reconciliation process on a month versus a quarter end where we're very tight on checking it out. But I will say that what I said earlier, which is that you could expect that January will have more than the usual number of move-outs because of the December 31 year end.

And it will have a little less leasing volume than the average month because people don't get back to work and to a point where they sign the leases in that quarter. So for those reasons, you would generally expect it to go down a little bit.

Okay. And then the last one, just on unit deals. I take your answer to Jordan about doing a large, very large stock offering effectively like Hudson Pacific did with Blackstone to do a joint venture transaction.

But I'm curious in the three single asset deals, you've always talked about units being a weapon in your arsenal. And certainly when you had the fund, the deals that you would you do on balance sheet generally would have had a unit type deal or they would have gone into the fund.

So did units come into the discussion for any one of those three deals that you actually executed? And is that any bit of a discussion in any of the deals that you're working on today?

Well, yes, I recently did work on a unit deal, but it didn't get made. And frankly some of my own interest in it waned where I was pushing towards a cash deal because I don't like the spread between what we're buying buildings at and what the buildings in our portfolio are being valued at.

I just said I'm -- you've got to be -- it's just too hard to make that deal, to give -- even when a guy -- unless a guy is willing to adjust the price of a building in order to effectively protect their taxes to tie out to the way maybe another building I own right next door is being priced effectively through the stock price and say to himself well, this will all adjust together. It isn't worth it to me.

I guess you could take it one step further and sell interest in assets and buy back your stock? Doesn't sound like you want to buy back stock and raise leverage even if you're comfortable with leverage where it is, but there's a double whammy in terms of using cash to buy back stock.

But if you're not happy with where the market price is relative to where your stock is and you think buildings are worth a lot, why not sell 25% or 50% interest in a handful of buildings and do stock buyback and narrow that gap?

I don't know that I -- let me say -- I will say this vis-a-vis the stock. I'm not sure trading in the stock versus trading in the buildings is two different things. And we're a lot more confident in the underlying value of the buildings than to say the stock's going up, down or all around and becoming a trader in our stock.

I will say this since you gave me the opportunity to do it. During the recession, we were one of only four REITs that bought back our stock.

So we're not unwilling to do it, but I also want to buy buildings. Buying back our stock takes away -- uses cash and takes away the opportunity to buy buildings.

To also be fair to your point, one of Kevin's ideas for ways to get equity on some deals we were working on was to throw in some of our buildings in that same market and say we will put our position in these on the same basis as your buildings in that same market. So it's very easy to compare building to building, let's say if they're next door, and say now we're going to have this bigger pool. And then we weren't in a position of raising our leverage level and we still controlled more buildings.

Right. Okay. Helpful color. Thank you.

Your next question comes from the line of Jed Reagan from Green Street Advisors.

Hey, guys.

I know Time Warner has a termination option later in 2016 for the big space in Burbank. Just wondering if you had any visibility on their plans at this point?

No, not a lot. I feel like they had one that just passed or something. Didn't one just pass in January?

Yes. I don't think it's 2016. I thought it was 2015.

The notice date is in 2015. The expiration or the effective date is in 2016, and I think we will be surprised if that happens. But then they get to make their decision.

So the mention in disclosure, the option to terminate in September of 2016, that window has already come and gone you're saying.

I don't believe it's come and gone, actually.

I feel like it was right now.

I think so too. I think it's in the few months.

Maybe.

Okay. But they haven't reached out to you for any discussions or anything?

They're a big tenant of ours. We're always talking to them. They didn't reach out and say hey, we're terminating. That's for sure.

And just as a quick follow-up to Steve's question earlier, with all the tech activity driving Silicon Beach and just the market in general, is it time for you to get more aggressive to go after that type of demand either with more concessions or maybe even entering a new submarket like Playa Vista or Hollywood? Is that something you think about?

It's definitely something we think about. Candidly, we underwrote a property in Playa Vista that recently priced. We liked it because it was on 20 acres of land and had a big surface parking area that we thought later you could develop and had density.

The issue on it was there was no rollover for seven years, and the co-mingled core funds chased after it and drove it to a pricing level that we were uncomfortable pursuing. We do look at opportunities in those markets. We just haven't found anything that's super compelling that fits within our smaller tenant close drive-by box that we like to traditionally invest in.

Okay. Thanks.

(Operator Instructions)

Your next question comes from the line of Jamie Feldman from Bank of America.

Great. Thanks.

Just quickly on the landmark. Can you just remind us where you are on the approval process and give us some thoughts on the hurdles you need to get started?

We have submitted everything that was asked for on the environmental impact report. So -- and we've gotten a bunch of comments, but we need to get a full set of comments back. We need to respond to those comments, and then that report has to be issued and reviewed and commented on by the community and all that good stuff.

We've already had meetings with the community. I don't expect any of this to be easy or go down smoothly. But I guess for where we are in the process and for the feedback we've gotten so far, this is probably as good at it gets.

It's never that good. But this is as good as it gets.

What's after this phase?

Well, then you go through the community comment and then they go to their councilmen in the area. And they say -- we like it, we don't like it, we like it with this. We like it with that, we'd really love it if it was half as tall or whatever their comments are.

You go through and you try and craft something that works for everybody, and then you go through planning and the city council to get your approval. And once you get that, then you can move forward with construction.

Part of the thing that can stretch or shrink timing is there's a point where you think you're going to get it, but you still have a couple months to get the city council approval and some other approvals. And different people do different things, whether there want to start spending the big money of the architectural fees. Right when they get it, they can start building.

Or whether they want to make sure they have it them sped architectural fees, which could add another three or four months to the time it takes to start construction. And we just have to look at the environment as we approach that date to make that decision and how much consternation or acceptance there is around the deal.

Okay. Great.

And then just the multifamily same store expense increase, I think you mentioned before that there was higher utility costs, but is there anything else in that?

The biggest -- probably the biggest thing that's in there, you should look at 2013 was just off in the terms of trend. No one particular thing, but it was low.

That's probably takes it down to about a 4% increase if you eliminate that, and then utilities expenses was the -- counted for almost half of the remaining or about half of the remaining increase. So the overall expense level ex -- if the you compare it to last quarter, ex-utilities, you could see it's really not as big a problem as first looked when we first saw it.

So I guess if you think about next year, this is a good run rate or you're actually now higher than normal?

The one thing you have to include in next year's run rate would be Wyana. Remember, there's only -- in the fourth quarter there were two days of expense from Wyana in the quarter and going forward we will have the full quarter of it. But I think.

I'm thinking more margins than dollar.

I think this quarter was -- I don't think -- there's always unusual things in every quarter, but I think this is a fair thing to use.

Okay. All right. Thank you.

All right. Well I think we're done with questions. So thank you everybody for joining us on this call, and we look forward to speaking with you again next quarter.

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