Douglas Emmett Inc (DEI) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly 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 Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. The floor is yours, sir.

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.

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.

Good morning, everyone. Thank you for joining us.

I am happy to report that 2015 is off to a good start. Office rents in our core markets are now growing near or above double-digit rates. As a result, the starting cash rents on leases we signed during the quarter were 5.2% higher than the ending rents for the same space. And straight-line rents were up 22%.

During the quarter, we achieved solid leasing velocity signing 715,000 square feet of leases and increasing the lease rate for our office portfolio to 92.6%. At the same time, move-ins pushed our occupancy rate to 91.1%. Our portfolio currently exceeds market occupancy by an average of 410 basis points.

Our commercial leasing and construction platform has compressed the transaction timeline to a very efficient four months. We currently sign roughly three office leases every business day, averaging 45 days between the first showing and a signed lease and just over two months between a signed lease and occupancy.

The performance of our multifamily platform is also excellent, with first-quarter asking rents up 5.9% over the same quarter in 2014.

Given the positive direction of market fundamentals and the effectiveness of our team, I'm excited about our outlook for the remainder of 2015.

Our local economy is expanding across a host of diverse industries. We expect continued rental rate growth. We have excellent deal flow, and we are extending debt maturities to take advantage of historically low interest rates.

With that, I will now turn the call over to Kevin for a more detailed update on our markets and recent capital activities.

Thanks, Jordan, and good morning, everyone. First, it is worth noting that the Los Angeles regional economy is now expanding and creating jobs at a higher rate than the nation as a whole.

In the first three months of 2015 alone, the overall unemployment rate in Los Angeles County dropped by 100 basis points to 7.2%. That is the lowest rate since June 2008, driven by gains of almost 26,000 jobs in tech, entertainment, professional services, and healthcare.

West Los Angeles is outpacing the region, with unemployment dropping to just 6.1% in March. This job creation is translating to the increases in market demand, office occupancy, and rental rate gains Jordan mentioned earlier.

Strong market fundamentals are bringing more properties to market. And I feel good about our acquisition pipeline. In general, we are most aggressive when bidding on opportunities where we can leverage our operating platform to create value.

In our four recent office acquisitions of low occupancy rates at closing, we increased the lease rate by over 1,000 basis points within an average of five months, while achieving higher effective rental rates than the seller.

During the first quarter, we closed two acquisitions. In February, we acquired the land under our Harbor Court office building in Honolulu in exchange for $1 million of units in our operating partnership plus the cancellation of $26.5 million of debt.

In March, we completed the purchase of First Financial Plaza, a 227,000 square foot office property in Encino. That property was subject to a loan with a high interest rate and a punitive prepayment fee. However, between signing and closing, we were able to substantially reduce the effective interest rate by negotiating a lower prepayment fee.

Since our last call, our capital markets team also closed two financings. Both of those loans are nonrecourse and interest only until maturity.

The first loan, which we closed in March, is $102 million 10-year term loan with interest effectively fixed at 2.84% for 5 years. The loan is secured by the Waena Apartments.

On April 15th, we closed a $340 million seven-year term loan secured by six office buildings with interest effectively fixed at 2.77% for five years.

During the remainder of 2015, we plan to extend our maturities and capitalize on the current interest rate environment by accelerating the refinancing of one or two additional property pools due in 2016 and 2017.

With that, I will turn the call over to Ted.

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

Compared to a year ago, in the first quarter of 2015, our revenues increased by 4%. Our FFO increased 9.3% to $76 million or $0.43 per share, and our AFFO decreased 6.2% to $53.5 million or $0.30 per share, reflecting our investment this quarter in tenant improvements and leasing commissions related to our large occupancy gains over the last two quarters.

Comparing the cash basis results for our same properties in the first quarter of 2015 to the first quarter of 2014, revenue decreased by 0.1%, reflecting high CAM reconciliation and lease termination fees in 2014, as well as some free rent this year associated with the large volume of tenant move-ins.

Expenses decreased by 0.4%, a testament to our operating team. And as a result, same-store cash NOI increased by 0.1%, while core same-store cash NOI, which eliminates prior-year CAM reconciliations and lease termination fees, rose by 0.9%.

As we mentioned on our last call, our same-store cash NOI growth will also be restrained during the second quarter. But we expect the headwinds to abate in the second half of the year.

We are increasing our guidance for core same-store cash NOI growth to between 2.5% and 3.5%.

Our G&A for the first quarter was $7.4 million, or 4.8% of revenue. By keeping our G&A percentage well below our benchmark group, we convert more of our NOI to cash flow.

Other income in the first quarter included the final $6.6 million of accelerated FAS 141 income from the acquisition of the Harbor Court fee. Excluding this and absent any other unusual events, we expect our run rate for other income, net of other expenses, to be in the neighborhood of $500,000 per quarter.

Now turning to office fundamentals. In the first quarter, we signed 182 office leases covering 715,000 square feet, including 216,000 square feet of new office leases.

As Jordan mentioned, our cash rent roll-up this quarter was a positive 5.2%. We expect the favorable trends underlying this increase to continue, although individual quarters can be very volatile depending on the leases we sign.

On a mark-to-market basis, at March 31, our office asking rents exceeded our in-place rents by 9.6%, up 400 basis points from last quarter.

On the multifamily side, our 3,300 units were fully leased at quarter end. During the last 12 months, we raised our same property residential asking rents by an average of 5.9%.

At quarter end, the current annualized asking rents for our multifamily portfolio exceeded our in-place rents by $18.5 million, about half of which related to our remaining pre-1999 units in Santa Monica.

Now turning to our balance sheet. At the end of March, our net leverage was 40% of enterprise value, well within our target range. After quarter end, we paid down $140 million of our $400 million loan due in 2017, and paid off the remaining balance on our credit line.

As a result, at April 30, we had $24.5 million in cash, and $300 million of availability on our line of credit.

In our prior call, we mentioned that we expect to recognize a total of $1.5 million this year in accelerated loan fee amortization from the refinancing of our $400 million loan. About half of that initial amortization was included in the first quarter and we expect the remainder to be included in the second quarter.

In addition, because the swap related to that loan doesn't expire until July 1, our second quarter will reflect another $700,000 in additional interest expense.

Finally, turning to guidance. With the spread between occupied and lease tightening, we now expect average occupancy in 2015 to be between 90.5% and 91.5%. Accordingly, we are increasing the midpoint of our 2015 guidance and now expect our FFO to be between $1.59 per share and $1.63 per share, and our AFFO to be between $1.22 per share and $1.26 per share.

For more information on the assumptions underlying our guidance, please refer to the schedule in our earnings package.

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

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Again, as a courtesy, we please ask that you limit yourself to one question and a single follow-up. If you have further questions, you may reenter the question queue. (Operator Instructions) At this time, we'll just pause momentarily to assemble our roster. Brandon Maiorana of Wells Fargo.

So, Jordan, your mark to market moved up to 9%. You guys, for the overall portfolio, you put up plus 5% cash rent spreads this quarter. And leased rate moved up a little bit, but not too much.

Have you guys kind of clearly moved into the phase where you're more concerned about pushing rents rather than trying to drive occupancy higher? And if so, is that the case in Warner Center as well? Or is Warner Center more about occupancy?

Well, you've perfectly answered your question for me. Everywhere, but not Warner Center, we are totally focused now on rents. And I think occupancy, I'm not pessimistic about even increasing occupancy. But for sure, we're not leasing, even across the broader market there up in good territory. Forget about the fact that we're such a huge [beat] on them. I don't feel we're leasing against vacant space in any significant way anymore, and I think we're pushing for higher rental rates. Other than in Warner Center where you're still leasing against vacancy, and we've got to fill that space that so we can put tension into that process.

And just as a follow-up to that, so you guys, I think, you've been clear that you felt the market was pretty healthy for a number of years now. And I think you've moved your ask up. But it seemed like given where occupancy was in a lot of your submarkets, maybe some of your competitors had been slower to move rents up, move asking rents up.

Have the competitors started to move rents up? So are overall asking rents moving up in addition to just Douglas Emmett pushing rents because your occupancy's high?

Yes. Yes, we're seeing that everybody is moving rents up. And, of course, they're are some smaller -- you know we're 90 -- yes, we're over 90%.

But there's smaller guys when they can smell that you can move rents, actually a lot of times will leap us for a little while because we have a bigger machine and we still want to make deals and all that good stuff, although, we are pushing pretty hard on rental right now. But they're all moving. Everybody's moving now.

So I don't think we're having trouble getting followers anymore. It's apparent to everybody that when you have a space and a tenant needs it or you have a renewal, you have a lot of say over with that rate will be, as opposed to going back some years when the guy had so many options, you couldn't tell what was going on, you were just helping to hold onto them.

Sure. Okay. All right. Thanks, guys.

Craig Melman of KeyBanc.

Was just hoping for maybe a little bit more color on the 5.2% rent spreads this quarter just in terms of whether it was pretty broad-based or are there any sort of outliers there that were a drag?

So there wasn't any major outliers. This number's very volatile. As you've seen from the last few quarters, it bounce around, and we would expect it to. But it's not like there was one lease that just pulled it up. It actually is pretty broad-based. But what's going to happen next quarter? We'll see.

That was a good question, though, because it made such a big jump into the positive direction. So we check for that. And I guess it's a good warning to tell you guys. This thing can really move around. And I don't want everyone crying on the phone if it moves backwards next quarter. But it's going in a good direction.

Okay. Thank you. That's helpful. And then just secondly, I heard the comments about what you guys have on the liquidity front, but also heard that deal flow is improving. And given where leverage is, just curious what you guys think your dry powder is today for future acquisitions.

Well, I think that, obviously, the company's generating a lot of good positive cash flow and we have room on our credit line, which I realize it raises leverage, although we just reduced it down, that -- so for still the types of deals that -- and Kevin can answer some of this in terms of deal size. But for the types of deals, other than very large portfolio deals where we would have a joint venture partner for the types of deals, we would think we would be working on (inaudible) single [resi] or office deals.

I would think we have enough money to do them, financing them conservatively, and putting them into the portfolio.

And our cash flow is building at a very good clip now. Also, I know you guys saw that we pointed out in the last four deals that we did, that I would have otherwise thought we might have suffered through a year to 18 months of very poor cash flow because we were buying very low occupancy buildings. The cash flow just leapt up almost immediately.

They don't show up in your same-store stuff, because, obviously, it'd be great if it did, because it would change things so much. But the cash flow was strong in those very quickly.

So I'm confident that, especially if we can find stuff like that, we would be comfortable buying it and then stuff that's better leased, comes with some good cash flow.

Well, what do you think, though, as of today, your total capacity to borrow is, just given your leverage targets?

I think we would be comfortable using the credit line. We probably, somewhere in the -- if we wanted to go beyond $300 million to $400 million, we would probably have to look for some alternatives, capital alternatives.

I like where we are on leverage. I also like the process that we're going through on debt. Not to steal some of Kevin's thunder. But we are rolling through our portfolio and restacking our loans so that we consolidate debt onto buildings at low rates, and we create a new pool of unlevered assets, and we keep multiple pools of leverage in play, so that we never do anything -- this process at doing it early and not when loans are due, are one of the ways we keep the risk associated with leverage low for us, because we tend not to use loans to their bitter end. We tend to refi them early and we tend to store our capacity in totally -- in buildings without any leverage on it. And we don't do anything, any type of debt that impacts the Company as a whole. So it brings down the risk of that.

But still, I like having the leverage in the zone we're in, and I think $300 million to $400 million beyond that would probably cause us to want to look for alternatives.

Great. Thank you.

Gabriel Hilmoe of Evercore ISI.

Just for Ted or Jordan, just on the 9% gap on the asking verses in place, I guess, can you walk through how much of that spread is typically translating into taking rents and just some of the recent deals you've signed?

Boy, that's a really tough question. I think that there's -- we tend to try to keep asking rents not [very] far from where we actually end up renting things. We're not a big spread in that part because, again, it's sort of this machine, and you're trying to crank people through if you make every lease a big negotiation.

So, but depending on the TIs, the space, and those sorts of things, you can get different spreads on different deals. So it's hard to factor it, but it's not a huge number for us.

Okay. And then, Jordan, just going back to Warner Center and what's left to roll there. I think there's another 165,000 square feet left this year. But I guess when you look at what's expiring versus the pipeline of activity in the market, I guess how would you characterize that compared to the amount of space you have rolling the rest of this year?

Well, obviously, I mean we talked about this and, I'm sure you, on the last call heard it, that the roll is a lot more moderate this year than it was last year at Warner Center and we have a good pipeline.

So we had feel good about working through deals and achieving that goal of getting the leased rate occupancy, the [last] occupancy rate up in that market and getting to the point where we can put tension on that.

I mean, I would -- I'm hopeful that with the kind of medium, large, small tenants swirling around in that market now, we're able to have a real impact over the next two, three quarters.

Okay. Thank you.

Jamie Feldman of Bank of America/Merrill Lynch.

You guys sound a little more energized on the acquisition front. We've got, it sounds like the EOP assets may trade in the next 12 months or so.

How are you guys thinking about acceptable returns on investment, both the stuff that you have in the pipeline and even bigger picture if we start to think about how EOP trades?

Well, I don't think we've changed our acceptable return thresholds. I mean, we're focusing on deals that have vacancy or some problem with the rent roll or something where we can apply our operating platform.

Frankly, a couple of deals have priced in Beverly Hills recently that we looked at and we weren't excited because they were low returns that were locked up and very core.

EOP is not going to be cheap, but -- oh, we don't talk about deals that are potentially out there on the horizon. So next question?

So I guess if you think about what you've -- I'm sorry. You are about to say something.

Jordan was.

I was just going to say that on the lot -- Kevin's right. We haven't really made big changes to the returns we're looking at that we want to get out of these -- out of good buildings.

But I will say while pricing is up, there's a lot of sense in which it's a little easier to have a reasonable looking run, because fundamentals are stronger now.

I mean, if you would have gone a couple years back or even a year back, certainly couple years back, you [add, you've] since that fundamentals were recovering and make a lot more of a leap to what was going to happen to rents. And I think you'll remember that a couple years ago, I said we're not there, but I think we're headed for double digit. Okay. Now I'm saying we're in double digit.

So it's a lot easier to do a pro forma and have the [run] work with returns and all that good stuff, and feel like you're not compromising returns when in your face you're seeing your own portfolio move at a clip that the numbers that you're pro forma'ing -- and these pro formas go out 10 years, so there's a lot of assumptions in there.

But you at least can look at the early years and go, that's super reasonable compared to what we're actually doing at this moment.

So I would say that on the stuff that -- it's why we're so much better bidders on the stuff with vacancy, because we have the confidence in the way we'll handle that vacancy from so much activity [and] the remainder of our portfolios [being] close to that, whatever our target is.

Okay. And then just a follow-up. So can you talk a little bit more about what's going on in Honolulu? I think you lost some occupancy there. It seems to be one of your laggard submarkets.

Yes, actually, I agree with that a little bit. I think -- I think that Warner -- I like Honolulu as a market, but I don't think it's unfair to say it's been a laggard. Although the economy there is doing very well, the strange thing is, is people always look at the indicator of the economy, they go, oh, look how low unemployment is. Of course, for a guy that owns office space, you go, well, if the unemployment's that low, where are my people going to hire the people to expand their office?

And, I mean, we really see that. The retail's booming and business is booming out there. But, every day, I mean every day in the paper they're talking about workforce housing. And you know we're focused on that, and getting more housing into that market.

And I feel like, I still feel very good about what's going on there and the banks there and all the kind of classic service providing companies there do seem to be kind of -- look like they feel wealthier and they're making good moves.

So, but you're right, it's a laggard compared to the stats we see on the market and it's a laggard compared to all of our other markets. Although, it's not as much a laggard as Warner Center.

I guess I'm asking, do you see it turning anytime soon for this will be it for the cycle?

I don't know soon or later or whatever, but I do see it turn. I mean, turn, I don't feel like turning's a -- that's what I'm saying, vis-a-vis Warner Center, I don't think you have to say turning to that Hawaiian market. I mean, it's not going to take a lot of leasing for us to move it up couple hundred basis points, and you'd be going, that's a fine market.

I would be careful about it. So when we talk about it being a laggard, Hawaii has been in the 89%, 90% leased range forever, basically. In the good times and bad times, it just sat there.

We did have one tenant move out this quarter, and it was 18,000 feet, and that's enough to drive something in a market that's that small. So I'd be careful about -- I wouldn't -- what Jordan I think is trying to say is, focus -- the long run, Hawaii is, it's fine for where it is, but it hasn't really picked up to the occupancy we're going to see in the other markets. But in the short run, we're going to have quarters like this where it's going to go down, and then, as you saw last year, it popped back up. And that's what's going to happen.

I think that's a fair statement. I expect a lot out of Hawaii. And vis-a-vis, my expectations, I guess I'm saying it's a laggard. But I think what Ted's saying is right.

Okay. All right. Thanks, guys.

Alex Goldfarb of Sandler O'Neill.

Two questions. The first one actually just sort of picks up from Jamie's. When you guys talk about underwriting and it's easier now because the fundamentals are better so you can pencil out the -- have more confidence in what you're underwriting, at the same time, it means that we're getting longer in the cycle, which means, the inevitable downturn is sort of closer.

So how do you balance sort of getting more bullish on the underwriting now, even know it technically means you're later in the cycle, whereas earlier on, there's more lead time, even though you have to imagine that upside because it's not tangible?

How do you do that tradeoff right now, especially how cap rates have come in and the bidding and returns are a lot more aggressive today than they were a number of years ago?

Well, I think the core of the answer to that is, you have to be prepared, and I don't care where you are in the cycle. In any cycle, you've got to be prepared the way we are to operate your buildings through cycles that are good and cycles that are bad.

So even if you buy buildings at the beginning of a up cycle, the middle, the end, you're going to operate that building through a down portion of the cycle. So you have to buy buildings that will operate well. We feel our team will be able to keep leased. We feel our operating platform is good and will handle it well.

I mean, if you start taking risks that are out of your kind of center line of ability and then also the market turns on you, then you probably have doubled down.

But I don't think we're doing that. I think we're adding buildings that are good buildings that go well with our core markets, and that we will -- that we expect that we'll operate these buildings certainly through another downturn, as you do too, but that either compared to last downturns, this one will be more shallow and the floor will be kind of comparable to prior peaks and that we'll end up even stronger.

Because over the long haul, when you look at what's going on in the markets that we're in, not over the short, kind of short cycle haul, the line has a pretty good angle. It has a pretty good angle in value. It has a pretty good angle in rental rates. It has a pretty good angle in occupancy. It has a pretty good angle in terms of the industries coming in and the growth of those industries and the lack of new supply. I mean, they're all good, long trend numbers.

So being able to add properties at prices which I admit, they're not great prices, but at prices that work that we think we can operate the building under in another downturn, and then build even a stronger portfolio coming out, this is a great opportunity to do that because people are trading buildings that we want to own.

So then just following that, should we expect more of the under leased acquisitions that you guys have done or should we expect more of the First Financials?

I mean, it would seem like at this point in the cycle the number of buildings that are 80% occupied would be much smaller than it was a few years ago. So just curious, should we expect more of those occupancy built-type acquisitions or are you now most of what you're seeing is more like the First Financials?

Well, it's always easier for us to buy what you call occupancy-build buildings and harder for us to buy what your calling First Financial buildings, simply because in a very hot market, people will pay up for leases in place in a way we're not willing to.

So of course, we look at what's coming available for sale. And great buildings, we will stretch for because we believe in the market long term. But at that little margin in terms of us being the winner versus not the winter, a lot of times, that is determined by a building that has vacancy or some work that needs to be done, and a guy will show up on a fully leased deal and we will just say, hey, we just can't get there. I mean, and we don't get those.

So we probably always, good and bad markets, will lean towards the, what you call occupancy-build deals through a kind of self-selection process.

Okay. Thank you.

Rich Anderson of Mizuho.

Jordan, remember when you went public and your mark to market was 45% positive?

Yes, I --

And you said don't start crying when that starts to moderate. And I didn't.

But I'm curious, leading up to that point, before you were a public company, how does this recovery resemble or not resemble that lead up, call it circa 2005ish, or something?

Well, if you also want to remember, I kept saying I'm worried about the national economy. And I said that. And it's easy to remember because when you go public, you're traveling for two weeks with I don't even know how many meetings a day, so I said it that many times, all right.

And I said a lot of times, I don't think our local economy has an issue, but the national economy has, I think has an issue.

I know today when people look at the national economy and all the worries that people have, interest rates could do this and wars could happen and all the rest of it, although I have to say, when I look at the national economy today and I look backwards than at what was going on, then I really did think the world had gone insane.

Now I'm not feeling so much as the world has gone insane in terms of our national economy. In terms of our local economy, I will say that the stuff that made me bullish then plus more, is in place now.

So then, I was just feeling the effect of no new supply coming in. I was just feeling the effect of our kind of let's say new economy industries kind of hitting their game again having come off the dot com shrinkage and all that sort of thing.

So today, I've seen it, we don't add supply when rents are going up. I've seen it flat out. And I could tell you, it's not just dot coms recovering. It's healthcare expanding, tech coming down and expanding, entertainment expanding, and, frankly, tourism, foreign trade. I mean, they are all on a ride. Research and healthcare research, the university systems literally themselves expanding.

We have industries, any one of which you would say, if you had that in your market, you'd go, that would be like your profile industry, and I feel like we have three or four of them.

So I feel very good. I feel like we have good, good to great fundamental ups in the next few years.

I am sure the national economy will do something to take the edge off of it. But I'm not -- I don't have as much trepidation as I did then when we were going public.

Okay. Cool. And then, to Ted, when do you think the kind of the trailing off of AFFO in the form of TIs and all the rest, when do you think that that starts to sort of level off and start to grow along with FFO?

Well, I think, first of all, you can see our guidance for the year and you can see --

Right.

-- that we actually think that that will be happening.

Okay.

I think the first quarter we had a huge amount of move-ins from the leasing we did in the end of the last quarter and through this quarter. And that, round up with a lot of TIs and leasing commissions that came into the process.

On the other hand, I think you noticed that the TIs per square foot per lease and new leases are coming down, came down a little this quarter. And I'm hoping over time that that comes down a little bit more.

So I think that the second half of the year we'll be seeing improvement in that impact on AFFO.

And if I could ask one quick one. Parking revenue is up. Is there anything to read in there or is there --

No. I think it's a similar thing of reflecting the increase in rental rates. So in effect, parking goes along with that.

Okay.

And so no factor really, other than rental rates that matters there.

Great. Thank you.

Jed Reagan of Green Street Advisors.

So just to kind of follow up on your comments from just then, Jordan. I mean, it sounds like you're maybe as bullish, if not a little more bullish than you were on the last cycle. And we saw 15% to 20% rent growth in west LA in the last cycle.

I mean, do you think that that's a realistic expectation for this time around? And you think that's a rate you can sort of push things the next couple years?

Well, are you trying to get me to go on this call and say, no, I'm expecting 20% right across the -- I'm not doing that.

But I am very optimistic about where we're headed in rents. I feel that we said we're headed to double digits and we're now in double-digit.

So I feel that the signaling that the Company's been giving in terms of the way it will be able to push rents is actually occurring. So I feel very good.

I mean, it's very rare moments when you get up above 15% rental grade, no matter what's going on in the world. So, I'm not in the mood of predicting that. But I feel very good about where our fundamentals are headed. And by the way, you're seeing it in our numbers, so you should too.

Okay. Sounds good. And on the cash re-leasing spread, I think you guys talked about, obviously, there'll be some ups and downs from quarter to quarter. If you kind of look over the trajectory of this year, do you feel like you could finish 2015 with kind of an overall positive print there?

I think that the trend line would suggest that. The quarterly variations, as you can see in the last two quarters, it's almost plus five, minus five at any quarter.

But certainly, the underlying trends, I think all of those things are good and, but for quarterly noise, yes, the answer is I would expect to be positive.

I would say [expect] and hope could be interchanged with each other.

I mean, I got to say that's a great question. And I'm super curious to see what happens at the end and when we look at it, the year as a whole. And I'm hopeful that it is. But that number has been such a wily coyote, I don't know what's going to happen with it.

Okay.

The trend is positive, though.

Okay, fair enough. And just on the increases in occupancy and same-store NOI guidance, just wondering to what extent that may be a function of better-than-expected leasing activity versus maybe just the spread between the percent leased and the percent occupied just narrowing a little bit faster than your expected.

I'd say -- well, we said we didn't have any timing expectations on that spread, having been burned before.

But I would say that it's more about that, that the leasing was solid and, but I think we expected it to be solid. But the spreads came in, and I think that gave us a little more confidence to push it by the 50 basis points.

Okay. Thanks so much.

John Guinee of Stifel.

A couple sort of macro questions, Ted or Jordan. First, it looks like your FAS 141 is about $12 million a year or $0.07 a share, which burns off eventually. At the same time, your rent-controlled restricted apartment units have about $9 million of upside once those rent controls burn off, or about $0.05 per share to the positive.

Can you walk through the timing of those two significant income streams improving or going the other way?

Well, so let's start with the FAS 141. It actually doesn't go to zero because there actually are some acquisitions and so forth. So you're not quite clear how that all plays out. But the stuff from the IPO is coming down, has been coming down, but it's sort of leveling off.

And how fast it comes down because it's mostly associated now with some big long-term leases, I think this year in the quarter, it was down by about $300,000, $400,000 for the quarter year over year. So that gives you sort of a sense of how it's coming down.

I think it'll come down a little slower each year and then it'll eventually level off to whatever the acquisitions are contributing to it.

That number for us is very low.

It, yes, it's --

We're already at a very low number compared to anybody else's financials your looking at in our business. I mean, so low that down more would be gravely low.

Right.

I don't know. Where do we compare, compared to our comps?

I think we're now in -- we're significantly below it. We're probably 60% of where the comp set is.

On the issue of the pre-1999 units and their roll-off in your numbers, you're right on your numbers. We don't have a lot of control over that. It really depends on when somebody dies or they cease having it or we find out they cease having it as their principal residence.

I think that we have generally, we have about a little under 250 left at this point. And we generally figure that we'll be rolling off, call it ten-ish a year of that.

So it's going to be -- it's going to come in over time, now over time people get older and older and so maybe --

It can't actually go at 10 a year. It has to go faster than that, unless we have a bunch of centurions living in those units. But we've been using -- somewhere there has to be a bulk of these things rolling out because the people in them aren't young, I can tell you that.

Okay. And the second question is, clearly LA County, 190 million square foot office market, West LA, Santa Monica is the epicenter of that market, similar to Park Avenue in Manhattan.

And it appears to us as if the market is heading east and south versus north over the Santa Monica Mountains. Can you kind of walk through your sort of five-year projection? Do you see the market continuing to spill east and south versus north?

East -- okay. East --

Towards Hollywood.

-- south. So you're headed down to Porta Vista and towards downtown versus --

Is that accurate in your minds? Or do you think it's really heading into San Fernando Valley?

I think that in terms of population movement, it actually is headed into San Fernando Valley. And in the end, real estate is about population.

And I think if you look at what kind of retail guys and housing guys, I mean, I think you're seeing that that's where the activity is, because they're capturing population movement.

I think the reason you feel east and south is east and south are the directions where you can build. And so you guys get a lot more info about east and south, whether downtown is doing programs to try to get people to develop there or a big Korean airlines building for their people there, whatever. That's where you can do it.

But if you're talking about where we're seeing kind of population density or densify, I would say it's west side and over the Valley and there's more -- I mean, you guys have seen it in our numbers. We used to report the Valley, of the Valley and the west side. And now we've been [saving you] for a while, and, by the way, you see it in rental rates and occupancy that -- actually, and you know Sherman Oaks has now started acting like the west side. And we're seeing it in rental rates.

All right. Thank you.

Derek [Van Ditskom] of Credit Suisse.

Just given sort of the asset pricing environment today and your ROIC on the Warner Center versus your other submarkets, can you kind of walk through the, I guess the investment rationale versus holding on to the Warner Center and continuing to lease it up versus potentially selling it today?

You want us to -- so you're asking why don't we sell Warner Center today?

Correct.

Okay. So, I mean, in terms of upside in an investment, I mean, and especially considering the question, I mean, even from your guys' view asking me questions of how can I buy on the west side pricing side, blah, blah, blah, and I said, hey, I love fundamentals on the west side, and I still think that we can, with the view of what's happening with fundamentals, we can make it work. And you guys are asking that question because of where pricing is, et cetera.

When I go to Warner Center, I would say both, I like the direction the fundamentals are moving in at Warner Center. I get it that you guys aren't seeing that necessarily yet, but we're seeing it. And I just told you I think population's moving in there.

And, I mean, why would I sell buildings that I think have great upside in occupancy and going to rental rate movement when I think all of that is ahead of me?

I mean, just classically, you want to like buy low and sell high, right? So I don't know. I mean, you'd have to have the view that Warner Center's not going to recover. But I don't have that view. I think it's recovering. And I'm not the only one, right? I mean, there's a lot of people spending capital in that area because of the way the population is shifting in there. And none of it's on office. It's all on apartments, housing, apartments, other housing, retail, and amenity-based stuff. And we're like the island of office in the middle of all of that.

Right.

That seems like a classic real estate play. And we have the infrastructure and everything that's needed to get the most out of that.

Right. I guess I'm looking more towards the cost of leasing it up versus being able to lease it up, right. So is the present value of selling today --

No, there's -- I mean, and it's very rare that it doesn't make sense to spend the money to lease property, particularly in this, for sure, Warner Center and all of our markets, leases have a positive value.

So leasing up a building, typically a leased building is going to be worth more. And I just said to you guys, fully leased buildings at market rents, we tend to have trouble getting the numbers that buyers, other buyers will say, like purely financial buyers, not real estate buyers, can get to, because it pushes the value beyond numbers a lot of times that we can live with.

Now, the other side of that is, you make a lot of money leasing up a building. So like the buildings we bought that had vacancy, I would say to those guys, why did you sell the building in this market with 20% vacancy? I don't know. They didn't have the platform or whatever to lease them up. We leased them up. We created value right away.

I feel the same way about Warner Center. I mean, certainly the leases we're doing there have very good positive value and positive value not to just to the building [and to] the market, the market itself has got a ton of energy in it.

So I don't think it's -- I think the cost of leasing has juxtaposed to the increase in value. I don't even think it's a close call, right? I mean, those are good buildings in a very solid market with good amenities and a well-educated dense population.

If those buildings we're even 90% leased, I think the value shift would be dramatic. Certainly nothing in the territory of what it is going to cost us, because I expect this to happen, to finish the leasing program out there and get them filled out.

Right. Okay. I mean, I guess from my perspective I look at it, I say, okay, if I have a dollar to spend, I could either spend that dollar at Warner Center or I could funnel that dollar into my Santa Monica portfolio or somewhere else. I mean, that's kind of how I look at it, right? If you're sort of a capital allocator, you say, okay, where can I best spend my dollar?

Well, yes, I understand that. I mean, I don't know -- hey, I like buying buildings in Santa Monica, too. I don't know that I have an opportunity to spend that dollar in Santa Monica right now. Actually, I think Santa Monica, anecdotally, I think we're like 100% leased in Santa Monica.

But I think I do have the opportunity to spend that dollar in Warner Center. And I think that dollar will provide not just standard returns, frankly, in Warner Center, I think they're going to provide outsized returns. So I'm comfortable with that, that investment.

Now, I don't know, I mean, if you said, oh, is there a building in Santa Monica I can buy and that's a building where I think we'll get extraordinarily good returns, and now I have to choose where do I put dollar, I don't know where that goes. But I don't think that's actually a decision that's being put in front of us right now.

Okay, fair enough. Now, just one last question. In terms of timing or timeframe, what do you think is sort of the time frame where you can get to sort of 90% occupancy for Warner Center? Is it sort of end of 2016? I mean, what, in your mind, is sort of the time frame for that?

Twelve to 24 months.

Okay. Thank you.

Manny Korchman of Citi.

Kevin, if we can just dig into the acquisition pipeline you brought up at the beginning of the call. What geographies are you looking at? And if you could just split for us between those properties that have the lease-up potential versus the fully leased properties in the pipeline.

Well, the majority of our time has been actually spent underwriting opportunities on the west side. And we purchased a campus which had the lease-up opportunity. And there have been a couple of other deals out there that have priced beyond where we were comfortable going because we couldn't get to the space to lease it up and hit our return parameters.

And, Jordan, maybe to approach Warner Center a different way. If that was a potential acquisition today, would you still be as interested in buying it? Or is this a matter of we're already there and we're invested and we think there's some upside, so we'll just stick with it?

I would consider it an extraordinary opportunity to take the position to buy today the position we have in Warner Center, the control position that we have in Warner Center, looking at the other demographics around it and the capital being spent around it. There's all kind of amenities-based and non-competitive. I would says this is an incredible opportunity to get into this market that I think's going to be a very strong market.

I actually was thinking to myself -- it's funny that you're asking me that, because, obviously, from the last question while Kevin was answering, I was thinking, wow, if I had like a building come up in Santa Monica, which it would be fully leased because Santa Monica's full, and then I had Warner Center and they were both big deals, and I said which one will I do?

If I did a gut check, I would -- and I love Santa Monica. I love the west side. But I would expect to make more money kind of pound for pound in Warner Center than I would in Santa Monica because there's just that much more upside there.

I think we're going to lease those buildings up. And as the Encino, Sherman Oaks market is converted to operating kind of better than better than [Kissing Cousin] to the west side, I expect that to flow into Warner Center.

You guys got to remember before [Illinois] and we got that huge slug of space brought on the market, Warner Center, in terms of quality of the building, the quality of housing around and education and workforce, the amenities, it was one of the highest rent markets in the Valley, higher than Encino, Sherman Oaks.

Thanks for that.

Well, at this time, we're showing no further questions. We'll go ahead and conclude today's question-and-answer session. I'll now like to turn the conference back over to the management team for any closing remarks. Gentlemen?

Well, thank you, everybody, for joining us today, and we look forward to seeing you over the ensuing quarter and on the next call.

And we thank you, sir, for your time, and to the rest of the management team. The conference call has now ended. At this time, you may disconnect your lines. And again, we thank everyone for attending today's presentation. Have a great day.