Douglas Emmett Inc (DEI) 2015 Q2 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. (Operator Instructions). I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

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

We had another good quarter, thanks to the continued expansion of the Los Angeles economy and the lack of office construction. Office rents in our core LA markets are growing by double-digit rates year over year.

Looking back over the last two business cycles, our core markets have achieved meaningful, long-term, noncyclical rent growth in contrast to other port markets, like New York, Boston, and San Francisco. In each of the previous two cycles, rents in our markets have grown more than 55% during the expansion, but declined by an average of only 16% during the subsequent contraction.

Office rents are now approaching the prior 2008 peak, and we continue to be extremely supply constrained. Most other gateway office markets are facing significant new supply. Construction as a percentage of existing office stock is 7.7% in San Francisco, 2.5% in Boston, and 1.2% in Midtown Manhattan, but less than 0.1% in our core markets.

In short, we do not see new supply as a threat to ongoing rental rate growth during the remainder of this cycle. In fact, in the last two expansions, we saw rental rates grow exponentially as the cycle progressed.

The leased rates in our core LA markets are approaching all-time highs. So, our primary focus this year has been on rental rates. Comparing new leases to the expiring leases for the same space, starting cash rents this quarter were 6.1% higher than the ending cash rents. And straight-line rents were up 21.1%.

Our residential platform continues to be a star. Our portfolio remains fully leased at our highest rent ever. During the last year, we increased our same-store multifamily asking rents by 4.8% to a level 18% above the 2008 peak rental rates. Our capital markets team continues to work on acquisitions.

We have also been spending significant time on our loan program, as Kevin will discuss. Kevin?

Thanks, Jordan, and good morning, everyone. The underlying fundamentals in our core markets are fueling strong increases in asset prices. In some cases, pricing has already exceeded prior peaks.

For example, 2700 Colorado, an approximately 307,000-square-foot class A office building in east Santa Monica, was recapitalized last quarter for $915 per square foot. In 2007, it traded for $720 per square foot, which was the high water mark for Santa Monica in the previous cycle.

In Beverly Hills, 100 North Crescent, a 116,000-square-foot boutique office building, traded for $1,100 per square foot, and several other smaller office properties are under contract for over $1,000 per square foot.

For a variety of reasons, these deals were not appealing to us. However, we do share the underlying vision of sustained rent growth fueled by strong tenant demand and a lack of new supply. As a result, we continue to work on assets in our markets that fit our profile and where we see value.

As Jordan mentioned, we've been active on the financing front. In April, we closed a nonrecourse $340 million interest-only loan, which matures in April 2022 with interest effectively fixed at 2.77% per year for the next five years. We used a portion of the proceeds to pay down $140 million of our $400 million loan due in 2017 and then, on July 1st, paid off the remaining balance of $260 million using cash on hand and funds from our credit line.

On July 27th, we closed a nonrecourse $180 million interest-only loan with the interest effectively fixed at 3.062% per year for the next five years. The loan effectively matures in July of 2022. We're also considering increase in our credit line capacity by $100 million to a total of $400 million.

We prefer secured property-level debt over corporate-level debt, even though it requires more time and effort to arrange. Secured debt enables us to avoid the financial covenants and rating conditions that forced many other REITs to sell equity at low prices during the recession.

In addition, our secured debt provides flexibility since we typically negotiate an 18- to 24-month cost-free refinancing window. In the last year, we have already refinanced the lion's share of our 2015, 2016, and 2017 debt maturities. In the next few quarters, we expect to complete refinancing our remaining 2017 maturities and will consider refinancing some of our 2018 maturities.

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 an update on guidance.

Compared to a year ago, in the second quarter of 2015, our revenues increased by 6%. Our FFO increased by 0.3% to $71 million, or $0.40 per share. And our AFFO increased 4.8% to $59.6 million, or $0.34 per share.

Comparing our same-property cash results in the second quarter of 2015 to the second quarter of 2014, revenue increased by 1.5%. On the office side, we saw higher base revenue and parking income. And multifamily rents again moved up nicely.

Expenses increased by only 0.6%, well below the 2% to 3% that might be expected in the current environment. And as a result, same-store cash NOI increased by 2%. When we eliminate the impact of prior-year CAM reconciliation and lease termination fees, our core same-store cash NOI rose by 3.3%.

As reflected in our guidance, we expect that our same-store cash NOI growth will continue to improve in the second half of the year. In fact, we are now assuming that core same-store cash NOI for 2015 will grow between 3% and 4%, an increase of 0.5% from our assumption last quarter. This is being driven primarily by improving revenues and lower expected growth in operating expenses.

In addition, because of somewhat better revenue from noncore items, our assumption range for same-store cash NOI growth is now between 2.5% and 3.5%, increasing the midpoint of that range by a percentage point from our prior assumption.

Our G&A for the second quarter was $7.5 million, or 4.7% of revenue. By keeping our G&A percentage well below that of our benchmark group, we convert more of our NOI to cash flow.

Now, turning to office fundamentals, in the second quarter, we signed 199 office leases covering 679,000 square feet, including 200,000 square feet of new office leases. The leased rate of our office portfolio increased to 92.8%.

As Jordan mentioned, our cash rent rollup this quarter was a positive 6.1%. In calculating that amount, if we excluded the renewal of our headquarters space here in Santa Monica, even though its terms were at market.

If we included our lease in the calculation, our cash leasing spread would increase to 9.6%, and our straight-line spread would improve to 24.8%. The impact of this single lease on the numbers for this quarter underscores our warning that lease rollup numbers in individual quarters can be quite volatile.

Our portfolio continues to exceed the overall submarket lease rate by an average of 350 basis points. On a mark-to-market basis, our office asking rent at June 30 exceeded our in-place rents by 10%, up 40 basis points from last quarter and our best since 2008.

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 4.8%.

At quarter end, the current annualized asking rents for our multifamily portfolio exceeded our in-place rents by $19.9 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 June, our net leverage was 42% of enterprise value. We had $75 million in cash, no outstanding balance on our credit line, and no material debt maturities remaining in 2015.

I also want to update you on our ATM program, which has reached the end of its three-year statutory life. Even though we haven't needed to access the equity markets during that period, we filed documents yesterday giving us the flexibility to raise up to $400 million through an ATM if needed during the next three years. While we don't have any current plan to access our ATM program, it's a useful and cost-effective option if we need it.

Finally, turning to guidance, we are raising our guidance for 2015 FFO by $0.02 to between $1.61 per share and $1.65 per share and our guidance for 2015 AFFO by the same $0.02 to between $1.24 per share and $1.28 per share. As I mentioned before, this is driven in part by better same-store cash NOI. In addition, we are narrowing our assumption range for interest expense, which lowers the midpoint for that range by $1 million.

For more information on some of 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 we can take your questions.

(Operator Instructions). Craig Melman, KeyBanc Capital Markets.

Good afternoon, guys. I was hoping you could maybe talk a little bit about the kind of decline in the lease rate at Warner Center, if that was driven by one big lease, or is this a trend that we should expect to continue?

Well, I don't think it's a trend you'd expect to continue. And it -- quarter to quarter, I think it's tough to see what's going on there. I still feel very good about where Warner Center's going. And I feel like it is in recovery, and our future is bright. But, of course, I would've liked to see better performance out of this last quarter.

And then I guess, just to follow up to that, as we look at most of your markets outside Honolulu and Warner Center, you guys are pretty well stabilized there. And you've had nice acceleration and same-store NOI growth. And rent spreads are improving. But, as you look out into 2016, do you guys feel good about being able to keep that trajectory up without a significant improvement in Warner Center, or does that start to plateau or potentially roll over?

Well, I guess a lot of that depends on which metric you're talking about. The occupancy metric for sure -- leased occupied depends on Warner Center because there's not very many other places where we have vacancy that we could fill.

In terms of growth in NOI or same-store NOI or rental rates, I still feel very good about those numbers. And I think we're just starting to kick in. So, I don't feel like we're hampered there. Did I answer -- was that your question?

Yes, on the same-store NOI, if you look at what bumps are that you guys are getting in leases, those are traditionally, what, between 3% and 4%?

Well, some are start going 5%, but yes, as it moves closer to more -- I think, as it goes to more closer 4%, which I think this quarter we actually do have a higher percent that are closer to 4% than closer to 3%, it certainly kind of puts in you a position for strong improvement going forward.

Okay. Great. Thank you.

Thanks.

Manny Korchman, Citi.

Hey, guys.

Hi, Manny.

Going back to earlier comment about assets trading at peak levels, I think your comment was that you continue to work on assets in your markets that fit your profile. What are you looking at to sort of differentiate yourself as either bidder, or what types of assets are you looking at that you're not going to just go and pay the highest price for these assets, or is that what might happen?

You want me to take that? Sure. We gave two examples of recent properties that traded where they didn't quite fit our profile. And so, other people came in. So, like 2700 Colorado was an example of a local manager who's looking to recapitalize with a passive capital partner. That's not our profile. We love the asset, but that's something that we're not going to bid on.

But, as I mentioned last call, for assets that have some vacancy or where we can add some value or we see value in an asset, those are the assets that we're most interested in. And I think that we'll be competitive in a bid process.

We're usually the best bidder on multitenant with some upside vacancy, whatever you want to call it, in the markets that we're focused on where we've got to get a lot of both expense synergies and synergies from our leasing platform being in, like, sort of full swing.

Right. That was it from me. Thanks.

Nick Yulico, UBS.

Thanks. Lot of talk about how I guess West LA office rent growth looks like it's accelerating, and yet when you look at the overall cash same-store NOI growth, your office pool at one point, 2% doesn't seem to fully reflect that. So, I was hoping you could maybe break out a little bit how the West LA portfolio is performing versus the San Fernando Valley and Honolulu.

Well, so, one of the things that probably helps in that number is, if you remember, there's a significant differential between core same store and same store. And that's all been concentrated in the first half of that -- this year. So, as we told you from the start of the year, we expected those numbers to be challenged during the first part of the year.

I think that, if you look, I don't think we break out those numbers specifically ever. But, we actually divide it between core LA markets, which we include San Fernando -- we include Sherman Oaks-Encino as well as West LA and Warner Center.

It is very clear that Warner Center, while it's up off the bottom in terms of rent, it's not moving up significantly. And its contribution to NOI, as Jordan said earlier, will largely come if we have occupancy growth there.

But, on the west side, we've got double -- and Sherman Oaks-Encino, we've got double-digit rent increases. And we have in place very nice bumps. So, in prior years, we had bumps being offset by the roll down. And now, we have sort of both of them acting in the same direction.

Okay. So, it sounds like, when you're talking about your core LA submarkets rising at above 10% on rents, that's most of your LA portfolio?

That's correct.

Okay. And so, you're just dealing with I guess more of an occupancy bouncing around in -- I guess in the valley versus more of the traditional -- versus your West LA or non-valley portfolio? That the way to think about it?

The -- if Sherman Oaks-Encino, which is in the valley, is actually -- we treat that as part of core LA because it's -- that one, again, is essentially full. And you're seeing, as you said, bouncing around from quarter to quarter. One will go up; one will go down. But, it's pretty much full. Warner Center, on the other hand, remains a market where occupancy is our -- .

-- Well, we're under occupied. So, we think we have a lot of room there to move that one up.

Okay. But, as we look at your overall guidance this year for the office, cash same-store NOI growth, I know you guys don't specifically break it out by market, is sort of West LA, is it performing above the average, and there's some of your other markets that are performing below that?

So, again, going back, core LA, including Sherman Oaks-Encino, which is performing about the same as the west side, that we have very good rent growth in that. Warner Center, we have very modest uptick. We're just off the bottom in terms of rent growth. And we're looking to add occupancy there. Honolulu, we added some occupancy or some leased rate this quarter. And rents are moving up, but not in the way they're moving up here in the core LA markets.

Okay. That's helpful. Thanks, guys.

All righty.

Gabriel Hilmoe, Evercore ISI.

Thanks. Jordan, just going back to your comments on asking rents approaching kind of the 2008 peak, I guess, given what you're seeing in the market today and what you're seeing in your portfolio, do you see a fundamental picture that supports rent growth that I guess would meaningfully surpass the prior peak as we kind of get into 2016 and 2017?

Yes. I can keep talking, but the answer's yes.

Okay. Fair enough. And then just going back to Warner Center, I think you've got about 75,000 square feet rolling there for the remainder of the year, which seems pretty manageable. But, can you maybe just handicap the level of retention you think you'll be getting on (inaudible) space?

I don't have any reason to believe the retention level on what we have left that's rolling, which as you said is pretty manageable, is any different than the way it's been going forward. I know you can see from our stats, when we post those stats, our average retention always revolves around 70%.

Okay. Thank you.

All right.

John Guinee, Stifel Nicolaus.

Great. Great. Nice quarter, guys. Thank you.

Thanks, John.

Hey, a couple comments. Maybe about a year and a half ago, the big Century City deal by JPMorgan was on the market. It was a couple billion dollars. Times, Tishman, Cornerstone, BXP, you, Irvine were sort of the finalists. Most everybody had sovereign wealth dollars. To the extent big deals come on the market in your backyard, is it the same group of characters, very well-regarded, big-name players with the same sovereign wealth funds who'd be in at the end of the day?

I think that's reasonable to assume. Each deal appeals in different ways to different groups. But, you certainly are naming all the groups that I wish did bid on the stuff we're interested in. So, you got -- you are right when you talk about interested parties on that deal.

And then talk about the mass transit expansion that's going on in West LA. I think it's reaching all the way to close to the beach. And what's going to happen at the stops? Are they going to up-zone those for high-density office, or what's the plan there?

They're definitely not up-zoning them for high-density office. There was a location just at the east end of Santa Monica right at a stop, where I think it was Heinz assumed they would be able to talk them into some sort of up-zoning. And after years, and when I say years, I think it was like seven years, of battling it out with the city council, the city council approved it.

And almost instantly, the community started issuing -- was putting on -- collecting signatures for a proposition to reverse the city council's position or recall it, some of them, and whole -- and as soon as those signatures came in, the city council literally unwound their approval and said: We have changed our mind. You are now not approved.

And they pretty much at that point threw in the towel and said: Well, there's never going to be any up-zoning that's going to be available. And they sold the site.

So, we actually had a separate question just on that issue as to whether they -- city -- and we've asked this, whether the city intends to approve sort of, from those hubs, the transportation to the office corridors because you would think that it would dramatically change the way the buses would route, right?

You could come in, and then if you needed to go -- kind of goes along Olympic, and as you know, we own most of the buildings along Wilshire, which most of the office space is along Wilshire. And we thought, how are the people -- that would be a very long walk, probably not an appealing walk. So, how are people making that last leg? It's not going to just be like a zillion Uber cars.

So, they're -- we're trying to find out where they're doing something about that. We're looking ourselves at what we can do about that. So, I hope it's going to be good for us. I think it's going to be good for us. But, it makes -- the best it could be for us, we have to use the fact that people could come in here without fighting traffic and go to work in our buildings. And we have to make that last leg available, too. And we -- and that still has to be figured out.

So, you're telling me you have the best weather in the country, and nobody walks?

Well, yes, that's some truth to that. I think they get their exercise like on the weekend walking or something, but they don't walk to work. You're correct.

All right. Thanks a lot.

Alex Goldfarb, Sandler O'Neill.

Good morning out there. Just continuing on the theme of impossible to build, can you just give us an update on the two apartment projects, including the cost increase at Brentwood? So, both were pushed back. Brentwood is now -- surprised it was pushed back, a little more surprised on Hawaii, but the cost increase as well Brentwood, so if you could just give us some color.

Yes. So, I don't know if it's pushback or whatever. Brentwood's just -- and we've always said this is a long-term, long attempt to do something that I think in every way is right. It's right for the location. It's right for the community. It's right for traffic. But, there's just a kind of cultural rejection of development that's so deep rooted in the way the city operates that, even something that's great for them, it takes a long time to work it through the system.

And so, we're hopeful, optimistic, but it's just going to be a long process. So, any type of kind of being or not being on schedule, any schedule's fictional. It's just -- you just work through as they drive us through the way.

And is the budget -- what about that? I assume that that's sort of set. That's quantified, right, or is that also a moving target?

We -- as time -- we only can have a rough budget because we only have kind of rough parameters. And we've put together what we need to put together. Obviously, we haven't done a full set of plans. That would be enormous amount of money. We've put together what you need to put together to have a fully -- to have a complete environmental impact report and submit it and have something we go -- okay. We would go and do plans consistent with all of the design and stuff of the environmental impact report. You can't get great numbers without really getting biddable plans.

So, that's -- the budget is based on extremely preliminary stuff, but everything you need for an EIR. And you can do stuff on sort of per square foot it would cost just to build this. And we don't think we're going to -- we obviously don't need to build a parking structure. And we have structural engineers go in there and go: What are these connections going to cost as we penetrate through because the whole site's underlayed by four levels of parking. So, we don't have to build parking.

And that's what we have. And until we have real plans that can go out to bid, we're not going to be able to do very much refinement. You can move numbers a little bit, only because you'd say: Well, at this time, construction costs have increased because, obviously, we're not in a recession anymore. And therefore, you can take a look at those numbers and increase your numbers a little bit just to reflect it. But, it's still not really a bid number. It's still got a lot of guess factor in it.

Okay. And then a second question, Jordan, is, on page 6 in the presentation that you guys put out, which highlights the rental aspects that you talked about as far as the market and the limited downside, can you just talk a little bit about what your views are on this cycle, how much longer it has to go?

And also, as you guys talked about -- as Kevin talked about some of the -- our valuations recently, is your sense that people are pricing in sort of the 50% to 60% peak to -- or trough-to-peak rent increases that the prior two cycles have underwritten, or are people pricing something less than or more than?

Well, let me just -- so, I know a lot of people may -- because I know a lot of people on the call look at our -- the packet -- our earnings package. And we also did release this other thing. And maybe they haven't examined it that well. You're referring to a -- literally a 20-year history on asking rents for our market, which is an extremely interesting graph. And I encourage everybody to go look at it.

It's got a couple of interesting points to it, one of which is that, as -- and people that know the LA story know there was Prop U. And then there was limited supply that could be built. And then the supply was built. And we sort of dried up. And as that process now progressed and we aren't able to bring supply on anymore, and believe me, rents are moving pretty fast right now, so if you could build today, again, you would definitely build.

And so, we've seen that cycle play through now actually two kind -- one smaller recession at the end of the 1990s and then, obviously, in early 2000s where we call the dot-com one, and then the one that we all just suffered through.

And interestingly, these cycles now, the floor -- the recession floor is still higher than the prior peak. And so, the -- over 20 years, it's a pretty good looking curve. And if you actually start looking at the curve over a shorter period back really when no real -- when all new supply was gone after that last dot-com one, the kind of visual direction of the curve is relatively steep, if you're -- for your own purposes project out.

So, the question that's being asked is just, is that kind of directional intuition that you get from looking at this chart, are people pricing in a similar -- even if there's another recession, having the floor of that next recession be still above the peak of let's call it -- now, it would be above the 2007-2008 peak.

And it's hard to tell exactly what is in people's runs. But, I think it's real reasonable to assume that people are using the next two, three, four years of pretty aggressive rent growth. And we're seeing pretty aggressive rent growth.

We also aren't seeing anything that's peculiar to our markets that would get in the way of that. So, I suspect what most people are doing is looking at the industry's -- look at the pace of rent growth and saying: What can happen most likely from the outside, whether it be a shift in the capital markets, a shift in the national economy, that would throw the monkey wrench into where your eye would kind of lead this curve off?

So, that alone causes you to go: Hmm, I feel like I can see out two, three, maybe four years. And I think that's where people are being very aggressive in terms of their rental growth and their runs.

Okay. But, are you comfortable underwriting a trough of 2008, or you would -- in your underwriting, you would give yourself more cushion there?

I'm sorry. Could you say that again?

If you're saying that people are looking at this and underwriting that rents don't go below the prior peak, are you comfortable as you guys look at acquisitions, with that mentality, or you underwrite further downside potential?

Well, truth -- again, when someone does a 10-year run -- I've never seen a 10-year run that actually underwrote a dip in rents. So, all they ever do is they change the growth assumption of rents.

And what will happen is you take the first few years, which you feel like you have some visibility, and then you stabilize. And then what you do is you look at where you are today, 10 years out, and you go: Well, somewhere, by some pattern, at the end of 10 years, do I think it's reasonable to have gotten from the rents we are at today to those rents performing in 10 years?

So, I doubt there's a trough in people's assumptions. There's never a trough in people's assumptions. But, I don't -- I do think -- I don't think it would be unreasonable if there was such a thing as that for people to say: Yes, we don't -- we feel like rents have a -- are at a very stable and increasing place. And we don't see a lot of room for rents to back up so dramatically, short of a huge national hit, where they would dip dramatically below -- they might go slightly below the peak, what you're calling 2007, the 2007-2008 peak.

Okay.

[I don't think that'd be] unreasonable to think that.

Okay. Thank you.

Jamie Feldman, BofA Merrill Lynch.

Great. Thank you. Can you talk a little bit more about the leasing demand pipeline in Warner Center and Honolulu, or those are your upsides for occupancy?

Well, there -- demand, if it was, like, net demand, I'd go -- we would've had absorption. There's a lot of demand. There's a lot of activity. And we feel like, with all the activity that's there, that we ought to be able to hold and attract and trap more of it into our projects. And that's why we're optimistic about where things are going. It's a very active area. There's a lot going on, residential and new business, new small business and entrepreneurial people and [Westfield's] spending a lot of money out there. There's just a lot going on out there.

So, when you're there, you go -- and it's a great place. I have friends and including my sister who moved out there for lifestyle, schools. And she grew up on the west side like I did.

So, you sort of look at it, and you go: Wow. That is a very vibrant market. How does the office not slingshot back and catch up to all of whatever else is going on? And I think that's going to happen. It's not like there's no office being constructed. And by the way, every other type of product is being constructed around there, whether it be lifestyle stuff, retail, shopping centers, residential. So, I continue to feel like it's a good bet going forward.

But, is there a decent pipeline of big block users? I assume that's what it would take to move the needle on your occupancy, comparing today maybe to a year ago or couple quarters?

Yes, I -- big block users can move the needle if we have big blocks. One of the problems is we purposely are trying to move to, let's say, the less risky, higher kind of net value leases, which tend to be smaller leases. Those big block deals, when you're really focused on cash flow, are very hard on cash flow.

So, if you could suck up the pain and suffering, leasing up floors or multiple floors as either a single floor or parts of a floor as opposed to going to someone and saying: Yes, I'm looking for that five-floor user, and I'm going to clear a big block of space for them, that's -- that is -- does seem like a convenient way to move occupancy. But, long term, I'm not sure it gives us the best cash flow and performance out of the asset.

And so, yes, big block users are always helpful just in general to absorbing space in the market. But, it isn't the end-all answer. The end-all answer is just retain our people and keep moving the system and moving occupancy up through these other leases.

Okay. And then I know you walked through your cash balance and your credit line capacity. But, can you just let us -- like, talk us through how much capital you think you have before you'd need to raise more, assuming your investment activity ramps up here?

Well, that has a lot to -- I'm not a big fan of issuing equity. That -- there's no secret about that, right? I don't like dilution. And I feel we have a top-class portfolio that, at the moment, I feel is pretty dramatically undervalued vis-a-vis just -- if you just add up the debt and the equity and say: What would that mean I'm buying these buildings for?

So, I would more say that, instead of issuing equity, I would look for alternatives such as joint venture capital, which you heard us talk about on the Century City deal, before I would say: Well, I need equity. I have my back against the wall. So, I'm going to issue stock.

The question for me has more to do with, when would I think the stock is fairly valued where I don't mind issuing some equity, in a substantial way, but vis -- instead of saying: Hey, we'll put money into the deal. We'll get as much of it as we can. And then we're going to go get a JV partner for larger deals in order to continue to control what I think's great real estate in a great market.

And then along those lines, how do you think about the required returns to you -- like, for the real estate itself or to the real estate to you with a fee?

Well, we don't tend to look at the -- say: Hey, this works for us with a fee, but it wouldn't work with us without a fee. I'm getting joint venture partners because I need the money to buy something big, and I'm not willing to risk that much equity of the Company's balance sheet.

If you look at something that's very large and you say: Would I put -- it's probably not smart to put 20%, 30% plus of the Company into anything, no matter what it is, a sure thing. That's just -- because nothing's a sure thing.

So, more what we're doing is saying: Let's look at this. Let's look at the deal. Let's look at how many buildings it is, where they are, whatever. Let's look at the size of it. And what are we comfortable having? What's the most we're comfortable of the Company's balance sheet being exposed to that if whatever because you have to be able to deal with it if something goes wrong.

So, that's more how we look at it. And then beyond that, it's -- a good deal's a good deal, good for the goose, good for the gander. We made substantial -- we make substantial investments. You're not going to sit there and go: I'm doing this because the fee gets me over the line, and otherwise, I wouldn't do it, because we put a lot of money -- we want to put a lot of money into the deals. We just don't want to put so much money into them that it puts our balance sheet at risk.

Okay. And then I guess, along that line, what about the organization? How many more assets could your firm handle before you start to stress -- running your portfolio?

I think we're extremely well positioned to take on additional assets. A matter of fact, to say it even stronger, I doubt there's another platform or system in Los Angeles that is anywhere near us in terms of being positioned to take on additional assets smoothly and take advantage of where the market is now and hit the ground running hard.

Okay. That's helpful. Thank you.

Okay. Thanks.

Jed Reagan, Green Street Advisors.

Good morning, guys. On Warner Center, you talked last time about the 12- to 24-month time period for getting up to 90% occupancy. Just curious if you feel like those expectations have changed at all.

Other than the fact that I had hoped we'd do better this quarter, I still feel like that's a reasonable set of expectations. Anyone would say: Okay. Let's (inaudible) this quarter. So, maybe I should change them a little bit. But, I -- you know what? It's far enough out, and I like what's going on out there, I still feel good about that.

Okay. And you guys talked about some of the aggressing -- aggressive pricing levels you've seen on some trades in your markets recently. I guess just given the backdrop of sort of the recent uptick in treasury yields and borrowing costs, how would you characterize how cap rates are trending in your markets? Any noticeable changes one way or the other?

Well, it's funny because, obviously, cap rates are driven in part by kind of alternative choices that capital has, right? So, when you say interest rates go, they could go buy maybe treasuries at a higher interest rate or something; and then part by people's expectations for the investment in growth in rental rates.

I think, right now, in LA, I think -- first of all, you see a lot of people buying stuff without a lot of debt, so just in terms of a direct impact on the run, I don't think a change in -- slight changes in the cost of debt at least impact things.

And I think, in LA, I think people are a lot more focused on the second thing, which is how fast rents are moving up, than they are on the first thing, which is, well, if I hold onto my capital for another year, maybe interest rates will be 50 basis points higher.

And I -- and so, that'll be an alternative that I'll have that I can go into because the going-in cap rate I believe is much more reflective of where people are now, kind of the trajectory people are using for rental rates and occupancy rates than it is of kind of, hey, this isn't a great return, but I'm getting a worse return if I go buy treasuries.

Okay. That's helpful. And then I know you guys -- you don't own malls or hotels in Hawaii. So, you may not be super close to this. But, just curious if you're hearing about or maybe anticipating a slowdown in international tourism down there, just given a stronger US dollar and the -- some of the China stock market challenges and whether you have some concern that could affect your -- the value of portfolio down there over time.

Well, I would say, in terms of the value of the portfolio, if anything, the dislocation that happens in Asia makes people want to move more capital into the United States and probably, if anything, accelerates their interest in placing money into real estate assets. So, I don't think it reduces capital. I think it actually increases capital.

In terms of use, and this is obviously no secret, we just made that deal with China where now visas are 10 years. That's gigantic. And by the way, we go there -- Kevin and Stuart and I travel there and looking for equity. And they travel here, obviously, to invest and look at their ability to move around. Right when that change was made, it was made both ways. So, now, our visas are 10 years, and their visas are 10 years. And you're -- I think you're seeing it reflected both in California and Hawaii in terms of -- in migration of tourism and investment.

Okay. So, no obvious change that you guys are hearing on the ground yet or maybe even a positive change?

Yes.

Okay. And just last one, you talked briefly about landmark earlier. Can you just remind us what the plan B for that asset or site is, if the entitlement process doesn't go your way?

Well, we have -- and we frankly have kind of stalled. We can go back and just lease it as a market. It's in a great location with great parking, and it's a great structure. It's a red granite -- it's a beautiful market and in a great location.

We think this is an opportunity for us to do better and for the community to do better. The traffic driven by the market, at least if we go back to a classic market, supermarket, is really substantially more than the traffic that would be driven by the apartment tower that we're hoping to put there.

So, I think all the parties end up better off. There's -- we could literally just today say: Okay. That wasn't a lot of fun. And we would go out. And we would lease it again as a market, no problem.

But, we're making this bet, this investment of -- we got -- this opportunity got created by them not renewing their -- they had this whole series of five-year renewals. And I guess they missed the last one. So, we have this opportunity. And we're trying to take advantage of it to get something better for everybody.

Okay. Great. Thank you.

Thanks.

Vance Edelson, Morgan Stanley.

Thanks. Hi, guys. Maybe just sticking with development but now on Moanalua, the anticipated completion last quarter I think was listed at 2016, 2017. It's now late 2017. Anything we should know about delays there separate from the type of factors you mentioned on Brentwood?

And then on the same project, I think the little blurb in the supplemental used to mention the upgrade of the existing apartment building. It looks like that reference was removed. So, is there any change in the strategy there?

Well, I would say the primary change to the strategy that we have there is we want to get in the -- get this thing moving. And so, the things that we see as creating noise around just getting these first 500 units, these 500 units up and built, we're trying to move away from those things and move this along at a quicker pace. And that's all that's really going on there now.

Okay. Got it. And then just shifting gears for my follow up, you mentioned 2% to 3% G&A growth might be expected in the current environment and that you're extremely well positioned to take on more assets, as you pointed out. So, do you see any additional economies of scale as you leverage your current team? Are there opportunities for the 5% of revenues percentage to even decline some more as occupancy and rental rates climb and as you potentially take on more assets?

Well, for sure, as we take on more assets and then more gross revenue that that number will decline because I do not see any significant big expensive adds to take on even millions of square -- additional square feet. So, that would cause a decline. And obviously, it also will decline if simply what happens is rental rates go up. So, those are things putting pressure definitely -- as you're pointing out, they put pressure in the downward direction, or they're helpful to us in terms of that metric.

Okay. Great. Thank you.

Thanks.

Brendan Maiorana, Wells Fargo Securities.

Hi, thanks, guys. I thought your G&A was going to be going up because your lease cost went up so much. So, it's good to see that you can keep it under control, your lease for your corporate building.

Ted, a question, so, NOI, you guys, same-store core basis, you did I think 0.9% in the first quarter, 3.3% this quarter. So, your guidance implies probably like around 5% in the back half of the year. It looks like occupancy probably helps you out a little bit based on your guidance. You've got in-place bumps. But, is there major expense savings, because it seems like it's a little bit of a leap to get from 3.3% that you put up this quarter to kind of get to 5% just based on the basic parameters you have in your guidance.

Well, there certainly are some expenses savings we're seeing in the second half of the year, we're hoping for in the second half of the year. And in addition to that, what we have is we have the continuing kicking in of rent rollup from the first couple of quarters, and as you said, some occupancy, some good occupancy things, which in prior years, as I said earlier, sort of was masking the impact of rent rollup from continuing leases because the two were offsetting. And now, those should start to kick in and help us out in the back half of the year.

Okay. That's helpful. And I think maybe it was sometime last year, might've been sort of middle part of the year, when you guys tried to put in higher annual bumps, but it takes time for that stuff to come through. So, Jordan, you sort of referenced it in your prepared remarks, but are you seeing a notable change in kind of where in-place bumps are that are in the portfolio, in the rent roll today versus maybe where they were six, 12 months ago?

Yes, and actually, I think it goes back probably a couple of years now to -- well before -- since we started putting them in. And so, now, we've had -- we now are having the number of leases coming up on their first anniversary which have embedded rent growth which is higher than the 3% that we used to have. We have 3.5s. We have 4s. And as Jordan said, although not many of these have yet come up to their anniversary, we're actually getting 5s in some places as well.

Okay. And then just last, Ted, did you -- you may have provided this. I apologize if I missed it, but mark to market across the portfolio, I think you said it's about 9.5% last quarter. Is that about the same?

It's about 10% this quarter. So, I said it was up 40 basis points from last quarter.

Okay. Great. Thank you.

Thanks.

Rich Anderson, Mizuho.

Hey, thanks. Good afternoon, or yes. So, I just want -- one -- this is starting to feel a little bit like 2007 again. And I guess, if I had any worry that you'd kind of go out and you'd make a big deal or make a big acquisition of some sort and people think you overpaid and it muddies kind of the perception of what's going on, so is there any thought in your mind about letting things marinate for a little while and maybe taking the foot off the pedal if there -- if it's there on acquisitions? I know you're talking a lot about deal making. But, maybe this is not the time to be doing that.

Well, I don't want to make any deals where we're going to lose money. I would only make deals where we would make money. And there's -- it's so much in that question. I will start out with this. I believe in this market's long term, like 30-year long term.

Okay.

I also realize, as you do, that we're not at the bottom of a cycle, right, because we've had so much move up in value and whatnot. We've been mentioning that.

At the same time, the way we've built this portfolio and the way anyone builds a class A portfolio is buying class A buildings when they come available. Now, if you buy class A buildings when they come available, you need to, A, not overpay for them, or you lose money, although the question of winning and losing, you have to judge that in real estate, not over the next four quarters or eight quarters, but over a longer period of time, which I am confident in this market over a longer period of time.

But, you also have to do it in a way that doesn't put you in jeopardy or put the fundamental earnings of your company at risk. I think we're able to do all that. But, each deal as it comes up, we have to make that decision. And then we go ahead and either buy it, or we go: No. We don't like the way that came out.

Kevin described two deals where we were like: Yes, these guys are probably right. Rents are going up. Those aren't exactly right for us. And the risk associated with it, but put in, and that really is a single-tenant building and whatever. And so, we didn't do those deals.

Now, there could be some deals coming up where we'll go: You know what? Those are right for us. And they work long term in terms of controlling them. But, we don't want to put the Company at risk. So, we're going to structure it this way. And we're going to do that. And then we'll probably do those deals. But, you got to look at this stuff as it comes up.

Okay. And then any -- do you have any evidence of sort of an in-migration move, companies or people, from Northern California, San Francisco to Los Angeles? Do you keep track of that, or are you seeing any evidence of that?

Well, they're looking for their water. They're coming down. Where'd the water go? And we're like: We're sucking it up.

The -- yes, I can't -- obviously, and you guys know this, there's been a very big tech move down here because -- .

-- Yes -- .

-- They've shifted their focus to kind of entertainment content. And this is the heart of the entertainment industry.

And I guess, if your question is other industries that have made the shift down here, no, I'm not -- I can't think of any. The areas we're in here and have invested in have very good population growth. I've actually -- especially out in that Woodland Hills area, I've been surprised at how aggressive the absorption's been in terms of population growth taking on all those new apartments that were built and their occupancy levels.

But, I don't know that, aside from tech moving down here, that it's -- that there's just a general trend of people just kind of heading south from -- .

-- Okay -- .

-- North California.

Great. Thanks.

Okay. Thanks. I know we have -- I don't know. We lost our operator.

Bill Crow, Raymond James.

Great. Good morning. Good afternoon. Jordan -- .

-- Hi, Bill -- .

-- Can you give us an update on the relative success or lack thereof maybe of the downtown market and its transition to a 24-hour city? And I guess more to the point, are you seeing tenants get attracted down there from your core markets? It may not be your tenants because you deal with smaller sizes, but any movement there from the west side to downtown?

Well, I think that there is -- we're probably not the perfect people to ask about downtown. There's a lot of people with a lot of capital invested downtown that would be better to ask.

But, obviously, they've done -- spent a tremendous amount of capital and made a lot of changes there. And there's a lot of residential going in there. Have they made it to a 24-hour downtown? I don't think that's happened.

In terms of moves, I think west side tenants generally move, driven more by kind of commuting patterns and where their employees and where the senior people live. There may be some cases of people moving downtown just because they've gotten very large, and they're looking for an alternative. Downtown is obviously much cheaper than some of the other alternatives that could handle larger tenants.

I thought, for a while, that the west side, the larger west side tenants were generally -- the ones that are willing to pay pretty good amounts were generally going to Playa Vista. But, it happened so quickly and with what Google did that Playa Vista is generally full, soaked up.

So, now, you see them, again, looking for alternatives. And there's some new construction in Hollywood. So, some will go there. They want to be near the studios, and then to other places sort of along the 101 corridor out there, including Woodland Hills.

But, I -- every time this comes up, people say downtown. I don't see -- it would be very natural for some of these big guys to say: Yes, I'm going to go downtown where there's -- I can get huge amount of space, floors together, the whole nine yards, and it's not even very expensive to be there.

But, that doesn't tend to -- what I see, I don't see that tend to be their choice. Lot of times, more what I see is the tenants that are downtown sort of trading positions around. But, every once in a while, you'll hear of a larger tenant moving down there.

Okay. Appreciate the insight. Thanks.

Okay. Thanks a lot.

At this time, I show no further questions. Would you like to make any closing remarks?

Well, I'd just like to thank everybody for joining us. And we look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.