Douglas Emmett Inc (DEI) 2015 Q3 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 statement are based on the beliefs of and assumptions made by 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. The Los Angeles labor market continues to improve. During the last 12 months alone, LA added 85,000 jobs, reducing the unemployment rate from 8.1% to 6.2%. We had job gains across our diverse industry base, led by healthcare, leisure and hospitality, and construction. Our premier submarkets continue to outpace Los Angeles as a whole, with West LA unemployment in September down to 5.2%.

Against this strong economic backdrop, our office portfolio had another very good quarter. Rents in our core Los Angeles markets are averaging double-digit growth, and the leases we signed this quarter bear that out with our best metrics since 2008.

Starting cash rents on our leases this quarter were 10.2% higher than the ending cash rents on the expiring leases for the same space. Even more important, the straight-line comparison for those same leases was up 26.1%.

Our residential platform remains fully leased and continues to post impressive year-over-year asking rent growth, with Q3 up another 4.6%. Same property office cash NOI growth was up approximately 6%. As a result, our overall same property cash NOI increased by 5.6%, year-over-year, our largest increase since 2008.

With that I will turn the call over to Kevin.

Thanks, Jordan. Good morning, everyone. We've had a busy and successful quarter with our refinancing program. After paying off the last half of a $400 million loan in July, we have now completed refinancing almost all of our 2015, 2016 and 2017 debt maturities. Only a few small loans representing an aggregate of about 4% of our debt are now scheduled to mature in those three years.

We have begun to turn our attention to our 2018 maturities. For example, in October we paid down $254 million of a $510 million loan that matures in April 2018. We continue to enjoy historically low interest rates on our borrowings. In July, we closed a seven-year $180 million loan with interest effectively fixed at 3.06% per annum for the first five years. In October, we closed a seven-year $400 million loan with interest effectively fixed at 2.64% for the first five years.

In addition, we increased our available liquidity by upsizing our credit line in August from $300 million to $400 million, while extending its maturity by three years to August 2020. We are also busy underwriting acquisition opportunities in our markets. Most of them are office and a few multifamily.

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

Thanks, Kevin. Good morning, everyone. I will begin with our results, address our office and multifamily fundamentals, and finish with an update on guidance. Compared to a year ago in the third quarter of 2015, our revenues increased by 8.1%, about half from our acquisitions during the last year, and the other half from better performance at our continuing properties. Our FFO increased 12.3% to $70.4 million, or $0.40 per share. Our AFFO increased 27.5% to $58.7 million or $0.33 per share, reflecting lower [TIs] this quarter compared to a year ago.

Comparing our same property cash results in the third quarter of 2015, to the third quarter of 2014, revenue increased by 3.5%, primarily driven by higher office rental revenue as a result of both higher occupancy and higher in-place rents. Expenses decreased slightly by 0.1%, and, as a result, our same property cash NOI increased by 5.6%. After eliminating the impact of prior year CAM reconciliations and lease termination fees from both periods, our core same property cash NOI rose by 5.1%.

Our G&A for the third quarter was $6.9 million or only 4.3% of revenue. We are pleased that we maintained our G&A expenses essentially constant, even while increasing revenues. This kept our G&A percentage well below that of our benchmark group, converting more of our NOI to cash flow.

Now turning to office fundamentals. In the third quarter, we signed 174 office leases covering 641,000 square feet, including 265,000 square feet of new office leases. The leased rate of our office portfolio remained at 92.8%, with our core LA market still essentially fully leased at 96%.

As Jordan mentioned, rental rates are rising across our entire portfolio. Our cash rent roll up this quarter was a positive 10.2%, while more than 90% of the leases we executed for [West] Los Angeles this quarter included rent bumps over 3%.

Our portfolio continues to exceed the overall submarket lease rate by an average of 395 basis points. On a mark to market basis, our office asking rents since September 30 exceeded our in-place rents by 12%, up 210 basis points from the last quarter and our best since 2008.

On the multifamily side, our 3300 units were fully leased at quarter end. During the last 12 months, we raised our same property residential asking rents by an average of 4.6%. At quarter end, the current annualized asking rents for our multifamily portfolio exceeded our in-place rents by $18.7 million per year, about half of which related to our 235 remaining pre-1999 units in Santa Monica.

Now, turning to our balance sheet. At the end of September, our net leverage was 40% of enterprise value. We had $10 million in cash on hand, no outstanding balance on our upsized credit line, and, as Kevin mentioned, owning insignificant debt coming due in 2015, 2016 or 2017.

Finally, turning to guidance. We have narrowed the expected range for our 2015 FFO to between $1.62 and $1.54 per share. We now expect our 2015 AFFO to be between $1.26 and $1.28 per share, raising the midpoint of our guidance by a penny.

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). Jamie Feldman; BofA Merrill Lynch.

Thank you. Kevin, I think you had mentioned you are underwriting some office and apartment acquisitions. Can you provide a little more color as to what you guys are working on? And maybe give an update on the latest on the EOP assets?

You know, Jamie, we've got a policy to not comment on potential acquisitions, so I don't think I'm in a position to add any color.

Okay. I guess, if we were in the market right now talking to brokers, what would they say in terms of the timing of the EOP deal?

You know the deal is in the market, so we're not going to talk about that deal right now. The other stuff, we give you, I mean, even if you put EOP to the side, there's office stuff out there and some residential stuff out there, which is what we are trying to tell you. In the past, when you guys have asked us [if there's] other [office stuff] on the west side, actually, and the residential is actually west side too.

All right. So EOP aside, how do you think of financing additional acquisitions?

I'm happy to, in general, say that if it is single buildings or smaller deals then you know we're not very interested in issuing equity. Those we would do on our balance sheet. If it's a larger deal then, as I have said before -- and I am pretty committed to this, I'll say it again -- on a larger deal, we should be expected to do the same thing that we're trying to do on the Century City deal, which is we would put in maybe 15% to 20% of the money. We would not issue any equity or our plan would not be issuing any meaningful equity, and probably zero equity, and then we would have joint venture partners in the deal, two or three. And that would be the source of our equity. I would expect our leverage to be modest.

Do you have a leverage level that, like a maximum leverage level you're comfortable with?

Our history has been that we have run the company at leverage levels that ranged broader range, between 40 and 50, and really tighter range closer to more of 40 to 45, 46. And that is the zone which I'm comfortable. If we're at 46, I'm thinking I'm getting a little tight. If I'm 40, I'm really comfortable. If I'm in the 30s, I'm real, real comfortable. If that answers your question.

Got it. All right, thank you.

Gabriel Hilmoe; Evercore ISI.

I guess, Ted, just given the third quarter results and guidance for this year for cash and NOI, I realize you're not giving guidance for 2016 yet, but just when you think about what is implied for Q4 I think it implies something in the low to mid 4% range. Do you think that's a good run rate going into next year, or you think the number potentially accelerates, given what you have seen on the leasing front and potential for occupancy take up?

I think that the implication for Q4 is, of course, it is a broader range because of the range that we gave on that. I think cash NOI is a very volatile number from quarter to quarter, so it is hard to really project out that exactly. As you said, we're not yet giving guidance for 2016. Long run, the trends continue to be good trends for us.

Okay. I guess, then just on Warner Center, it looks like you've got about 210,000 square feet rolling over the next four quarters, which is quite a bit lower relative to probably where you were a year ago, which, I think, was around 280. I guess when you look at what is rolling over the next 12 months, can you give us a sense of maybe what you think the mark to market is on that space? I think in-place rent is around 230 or 240?

I think it depends a little bit -- Warner Center, the rents have actually been moving up a little bit over the last six months to a year, just being pulled up by the general rents in LA, particularly in Sherman Oaks. A lot of that is going to depend on how that rent pulls up over that next period of time. It's not way off in terms of a mark to market, you probably got a good sense of where the rates are in Warner Center. It's not way off if it's 240. Truthfully, I hadn't looked at that number.

Warner Center itself is 87% lease, so especially considering the pressure from the surrounding markets, it is not surprising that they are running up a little bit. I mean, the rental rates are clearly up from their floor. That is not surprising, certainly going on there.

All right. Thanks, guys.

Craig Melman; KeyBanc Capital Markets.

Can we just touch on the 10.2% mark to market in the quarter? How does that break out between some of your different submarkets? Were there any there that skewed that a lot higher?

Clearly, we've had very nice rent growth in the last two or three years in the west side, in Sherman Oaks, Encino, and less rent growth, although still some, in Honolulu and Warner Center. As a result of that, you would expect that there is going to be better rent roll up in those areas.

On the other hand, that number from quarter to quarter, when you get down to the submarket level, is so volatile because the effect of the rent bumps and which leases are coming up and when they're from. I couldn't give you the details by submarket in a meaningful way even if I was inclined to do it. But, clearly, if you took a whole year's worth of things, you are going to see better roll up in the West LA, Sherman Oaks, Encino than in Warner Center and Hawaii.

As I said on the call, I thought the straight-line roll up was even more impressive and meaningful because those are the leases we live with going forward for longer than a quarter. I mean -- and that's great, in terms of future cash flow.

Sorry, I was just going to say absorption in the last two quarters has been kind of flat here. I know you guys aren't giving guidance for next year, but I'm just trying to think through the mark to market on the portfolio versus spreads could trend versus the benefit of additional occupancy upside for same store for next year. Should we be thinking about it that occupancy maybe is a little more muted until Warner Center and Honolulu pickup, and most of the growth is going to come from the bumps and rent spreads? Or do you guys, what you are seeing in the leasing pipeline give you some sense on acceleration on occupancy into early 2016?

Most of the Company is 96%, 97%, it's very hard to get above that number. Just from that alone, if we are going to get occupancy gains, it's going to have to be in Warner Center, and maybe to a lesser degree in Hawaii.

Quite frankly, I'm not sure, other than in Warner Center and a little bit in Hawaii, I'm not sure occupancy is even a great goal for us anymore, other than as an impact that's been able to move rents up, which is now more of the primary goal.

If you guys had to peg it, what do you think the mark to market on the portfolio is today?

We give it.

Yes, we gave that to you. It's 12%.

All right, great, thank you.

Just in case you missed that, that is up another 210 basis points from last quarter, so we are seeing that move up nicely now.

John Kim; BMO Capital Markets.

I think there was some commentary on rents you are signing now with annual rent bumps above 3%. Can you just repeat what this figure was and how --?

At this point in the process, about 90%, this last quarter, 90% of the leases in West LA that we signed had rent bumps above 3%.

How would that compare to 12 months ago?

The easy thing is if you go back 24 months ago it was a really nominal number.

Then 10%.

And then what happened, as you recall, we told you guys we were going to put that, start asking for fours, and we did that probably not quite two years ago. Since that time, every quarter, you've been seeing it go up as the market adjusts to that piece, and at this point, at least in West LA, they pretty much know they're not going to get a 3%.

Okay. I understand we are going to --

Usually, that means 3.5% or 4% when it's above 3%.

Right. I understand we're going to get a meaningful comp trading in the market, but can I ask what you think the appropriate cap rate is of your portfolio?

I've been asked that a lot of times on these calls and I always say the cap rate that I think of what I'm thinking of buying a building, the way it is calculated and done, doesn't compare very easily to the cap rates that you guys quote when you're looking at the public companies' cash flows or AFFO, or whatever the number you are looking at. I've never felt like that was a good stab for me to go out and give, because I was worried it wasn't going to be used properly.

Okay, thank you.

Jed Reagan; Green Street Advisors.

On the 12% mark to market rents, I guess sort of falling on Craig's question, can you break that out by submarket or market, just generally? I mean, I think you've given a little color on that, but not specifically on deals signed last quarter, but just in general where that might shake out between the various submarkets. Are there any outliers on the high or low side?

Clearly Warner Center and Hawaii, because they haven't had the double digital rental increase recently, they are at the low end of that piece. The rest of the markets are grouped at or above that number.

Yes, I think they're actually, whether it be in Encino, Sherman Oaks or all the West side, they are leveling out a little bit, growing all together now pretty strongly. Do you remember a while ago a huge outlier was Santa Monica or maybe the triangle in Beverly Hills? I'm not sure that is the case anymore because they are all moving at a good clip now.

Would any of those be in the 20% to 30% range on the positive side?

Certainly, I mean, again, if you assume that Honolulu and Warner Center are flattish, then the implied average is pretty high for the rest of the things which does approach --

Certainly above 12.

Yes, that is right.

How about Westwood, does that one stand out?

We will have to get back to you on that.

Yes.

Fair enough. Then just on Warner Center, can you talk about just the leasing pipeline you are seeing out there in general? And I guess the mix of industries and tenant sizes that you are seeing the most activity from and the most focused on?

Let's start with the latter thing first because I think that we contribute to the confusion in terms of things. We talk about Warner Center and everybody says larger tenants. In Warner Center, our median tenant size is only 3300 square feet. We only have six tenants over 50,000 square feet in the entire portfolio. The bottom line is our focus continues to be to try and create small tenant buildings out there and expand that level of things.

That being said, we have to look at all the tenants and you can only convert buildings at a certain rate to that level. So we do look at larger tenants as well. Your first question was the pipeline?

Yes, just the pipeline.

Yes, I think, again, we have really good feelings about the long-term success of Warner Center. And we did see the market move up, our building, our portfolio move up this quarter. We are hoping it keeps doing that.

Okay. Thank you.

Brendan Maiorana; Wells Fargo Securities.

This is probably for Ted or Jordan. I mean, just looking at the spreads in the quarters, it is as simple as saying your mark to market across the portfolio is plus 12. You guys put up a plus 10 in the quarter. It feels like it is a pretty normal quarter versus where you are overall for the portfolio.

The statistics don't relate, as you probably know, quite as easily

A plus10 and a 12, sound close together but they come from very different places.

Yes, when you have very high rent bumps, the aspiring rents will always be significantly better than that number, they have some additional rent bumps in there than the average portfolio. So I think, I think it is more, as Jordan says, more coincidental.

But the plus12 is, that's cash to cash or that's a GAAP number?

No, it is current cash to current cash --

Current cash to market cash. Starting rents. Not like some average rent or something. Starting rents in the market today to the rents in place right now.

Okay. All right, fair enough. Then this one is probably for Ted. Looking back the past couple of years you guys have had, your occupancy has moved up, although it has flat lined a little bit this year, but your office operating margins have actually moved down a little bit, which seems a little counterintuitive when you have got higher occupancy. Is there opportunity for you guys to move margins back up to the 67%, 68% where you were, versus 65% where it is now? Or is it just operating expenses that moved up across the board so you're not likely to get back to that level?

Operating expenses, actually, if you are looking on the office side -- I haven't looked at the percentage recently because it is not one I keep track of -- but the office expenses this quarter were literally down from last year, as opposed to having growth. So I think that there are opportunities and we worked really hard on them.

That is a very small move, but I hadn't focused that there was any type of trend or that they were moving down. We would have to look harder at that to see what is going on.

I think that part of that may have to do with non-cash, some of it. We have had our non-cash revenues going down and it is why we wouldn't be thinking about it from an operational point of view.

As we bleed off (inaudible) . Yeah, I don't like the non-cash stuff. That might be it because that has been impactful.

Brendan, if you want to talk to Stuart or me later, if we can come up with some, if we come up with something we can talk about, we would be happy to do it. But I haven't looked at that.

Yes, that would be helpful because thinking about it your occupancy is higher, you guys have been moving rents up, you've been pretty good about keeping expenses in check, so I would think the margins would move up, but it looks like they've moved down. Good point, maybe it is at --

The non-cash maybe where it is.

Okay, all right, thanks, guys.

John Guinee; Stifel Nicolaus.

A couple of questions. First, and I can't remember if you have a policy on this or not, but it looks like you are about to start your expansion and re-skinning of the Hillside Apartments in Honolulu. What is the start on that? Then is there a return on cost, incremental return on cost, that you're providing?

Incremental return on cost. Let me give you an idea as to what kind of cap rating we thought we were building it to. I have a number in my head but I can't remember --

We told them seven to eight.

That is a very fair number.

Good.

We think we are building it, seven to eight cap rate range, we're super comfortable with that number. In terms of starting, we have one last little permit thing to work through with the utility guys and we're starting.

Then Landmarks at Brentwood is still in the entitlement black hole?

Yes, it is, but you know what? It's moving along and I'm feeling as good as you can ever feel about that process. We haven't been tripped yet, not that we're not expecting to be tripped, but it has not happened yet.

Okay, then the last of the questions, it looks like your lease transaction costs are continuing to come down modestly. How much of that is leasing costs, which there probably isn't a lot of room, and how much of this is the actual hard dollar spent inside the space. It looks like you were $19.00 last quarter, $22.00 this quarter, is that 50-50 on leasing dollars versus tenant improvements?

The decline and a lot of the variability is mostly in the TIs, because if you think about the leasing commissions, you don't really -- there's not a lot of changes in that. Frankly, as the value of leases go up, that number actually is going to rise up slightly. So that most of it is in that TI pieces.

I think that number moves just based on larger or smaller tenants that we do in the quarter because larger guys seem to get a little higher TIs and smaller guys get a little lower TIs.

It's a very low number. Thank you.

Rich Anderson; Mizuho Securities.

Hi, Rich. Maybe we lost Rich. Rich, are you on mute?

Nick Yulico; UBS.

Hi, this is Ross. You guys had a good quarter of leasing, 640,000 gross square feet, but the net absorption was only about 1300. If I go back and look at 2Q, it was a similar dynamic, like 680,000 square feet of gross leasing, 22,000 square feet net absorption. Where I'm going is if I put all this together you guys at least about 1,300,000 square feet in the last six months, but 23,000 of net absorption. It suggests you guys have a ton of churn going on. Where are the tenants who are leaving going? And why are they going?

They are not necessarily leaving, that includes renewals. Frankly, on the margin, that little bit of absorption is either a guy expanding or pulling somebody in from outside of our portfolio. But, in general, just in general, we are going to around roll about 10% of the portfolio, right? Every year, so you should the thinking, hey, 1.5 million to 2 million feet a year of leasing is going to happen.

Now, we are pretty full so we break down the new and renewal for you, but a ton of, you know what those ratios usually look like. A lot of it is just guys coming up and renewing and then moving on. That is the leasing. That is one of the great ways we keep our costs down.

When a tenant is leaving you -- for the tenants who are leaving at expiration, where are they going? Is there a trend?

Let me address that because I think it is a different thing in our market than a lot of other markets. With smaller tenants, when they want to contract or expand, they have to move out of their space. If you have a 2500 medium-sized space, we're not going to upsize you to 3000 square feet because it's just not really practical.

If you want to increase your thing by 20%, you're going to go to another space. We try and are often very successful in getting that other space to be in one of our buildings, but other times, frankly, we do not win that battle and they go someplace else because they want a smaller or larger space than they currently have. That is the biggest factor in movement.

That is how we keep our TIs down. If someone is at 3000 feet and they want 4000 feet, we don't go and just crush the neighboring suite and leave ourselves a half suite and rebuild the space. We try to move them to another 4000 foot space.

That all makes sense. Appreciate it. Thanks, guys.

Bill Crow; Raymond James.

As you look at the Landmark, it helps illustrate, I guess, some of the inflation going on in construction and land costs. How well are you tracking that? You're not going to start until 2017 at the earliest. Talk about the inflation that you are seeing in the costs there.

We're not overly focused on the inflation costs right now because it is a little ways off. We adjust that number actually for you guys when we do spend a little time with contractors when we're working on something, which we had to do last time we adjusted it when we were finishing getting our environmental impact reports submitted because we had to go through a little bit of it with the amount of garbage coming out of the site, etc. I would say we are a little more sensitive to those changes in Hawaii, where we're really in the process right now.

I'm not sure that I can say -- I mean, construction costs have obviously, it's certainly gone up, but I would say that there's probably other groups building in West LA or that have done some stuff in West LA that have a better feel for that than we're going to have right at the moment.

Here's the other thing I would say in terms of looking at our economic modeling is that at this point you also have rents going up, so I think that the net impact of that has actually not been significant to our bottom line.

Okay, I was thinking more in terms of replacement costs based on construction.

Yes, I know, I figured that is what you were thinking, and I was thinking is there a number that I would be comfortable giving for replacement costs for what we're trying to do on that apartment building? I saw on your sheet you were trying to triangulate to that. I don't think with the information we have I could give you super, current real-time number on that, which I know is what you're asking for.

Okay. That is it for me, thanks.

Rich Anderson; Mizuho Securities.

Can you hear me?

Yes. Let me say, did you have us on mute?

Something is wrong on my end, which is typical. As far as this quarterly result with the great numbers, the spreads and all of that sort of stuff, how much was this already factored into your guidance? You didn't really change your guidance at all for FFO. Or did the deleveraging efforts offset whatever upside you saw this quarter that you didn't expect?

I think this was consistent with our expectations. We are obviously very happy to have those fulfilled, and I know a number of people were a little uncomfortable whether we could get from the first half of the year to the second half of the year. We are happy to have actually accomplished that. But I think that we felt that these numbers were good numbers, but not outside of our expectations.

Not outside of our range.

Okay. High end of the range?

The range is the range.

Okay. All right. Then I probably ask some form of this question every quarter because I remember back in 2006, 2007 when you were doing rent rolls 45% or greater, those were the heydays, and you are trending back at least in that direction. I can't remember what your response has been to this question in the past, Jordan, but would you say that the market is setting up similar to, better, equal to, or lesser than that period of time in terms of how the whole supply/ demand fundamentals are setting up?

I don't know whether they'll in a volatile fashion run up to a peak the way they did last time, but I would say that what's driving what's going on here right now is a much stronger and wider base than what was driving the run up in 2004, 2005, 2006 and 2007. It is way more comfortable, a way better percentage of expenses for the tenants. The tenants are very profitable. We're seeing strong balance sheets and good credit. We're seeing a good diversity of industries. You're not seeing like a heavy lean on -- I remember before it was -- these mortgage guys were taking huge chunks of space, the residence mortgage peddlers.

I feel like it is, on a bunch of fronts, it is healthier than it was before. By the way, it includes, to a great extent, this conversion over to more of the 200 feet per person, the more efficient space, the conversion over the flat screens and the smaller cubicles that don't take as much filing. I mean, all that, being able to absorb that process through our portfolio at the same time as the strength in this market, all seems really healthy going to just literally more functional space for our tenants. As opposed to the -- some of the tenants before that were literally just space grabbing, whether it be a big dot.com guy that didn't exist a year ago and all the sudden now needs 50,000, 100,000 feet. What's going on now seems a lot more comfortable, and it is backed by much stronger, more established tenants.

Not that you're looking in San Francisco at this point, but do you ever take a look at that market and just do your own comparative analysis about how the dynamics are playing out in Southern California, versus Northern California? And do you feel like there is a space grab going on there and that's not happening this time here?

Obviously, everyone knows, Ted expanded wildly up there and there was a --

Right, but a lot of people are saying it has been a more thoughtful process this time around versus 2000.

This is Kevin, I think that is right, but our tech dynamic is a little different than up north. We've got a different ecosystem. It really, it floats around green tech, manufacturing tech, like the B3 Bomber, which is going to be great for the region. In our specific markets, it's the convergence of tech and media. So we have got Hulu and Netflix and Amazon driving production, which is one of the main drivers of LA. We don't have as much of the broader tech that San Francisco has. So I don't think we've experienced the grabbing space because it is available and the growth that has happened up in the Valley or up in San Francisco.

Would you be nervous if you were up there right now?

I think that's a better question for John Kilroy or somebody who is in that market, rather than us.

Okay, fair enough. Thanks very much.

Manny Korchman; Citi.

Kevin, maybe a question for you. On past calls you had talked about meeting with foreign capital and the environment there. Can you give us an update on anything that has changed or the way they are approaching either partnering up or buying assets or whatever else they might be thinking about?

I think that -- I expect that at the end of 2015 we're going to see a record level of foreign investment across the United States. There's a high demand for quality opportunities of scale within the United States. We're pretty positive about it.

Maybe on Santa Monica, there's a slight occupancy dip. Was that structured in that you wanted to roll the spaces to high rents and current tenants weren't paying, or was that just move outs, or a combination of the two?

It's not structured, but from 100%, how do you not have a dip? What did we --?

Any time a market is above 96%, there is a downward -- somebody moves out, you are just going to have that happen. So I really encourage you not to get caught up in the noise in the 98%, 99% leased range. We're not, we're not deliberately holding space off the market.

Right now, I think we're 98.9%.

Right.

That's off of 100%, I guess. Yes, that's only just friction.

Great. Michael has one for you guys as well.

I can't remember if there was something particular in the fourth quarter between AFFO and FFO, it just looks like the implied guidance for fourth quarter has an $0.11 delta, there's only $0.07 this quarter. It's been about n$0.09 on average the first three quarters. I didn't know if there was anything wider from a cash perspective that would take down AFFO more than what it's been the rest of the year.

There's obviously always some noise in there with respect to the straight line and so forth, particularly in that first half of the year, there was some real noise in that first quarter with the FAS 141 that we got from the land acquisition in Honolulu. In addition, we had some unusually high TIs in the leases that we were signing last year, as you'll recall, that number popped up. We were spending a lot in those things. That, I think will come down and continue to come down as a result of the leases we have been signing with lower TIs.

Is there any sequentially that would cause it to go from a $0.07 drop to an $0.11 drop? Because this quarter you reported $0.40 of FFO, $0.33 of AFFO. That's going to gap out in the fourth quarter to basically $0.41 down to $0.30.

Right. Remember, the leases we signed in a quarter impact the AFFO in the next quarter or the quarter after, and we've already talked about how the last two quarters have had relatively lower TIs and so forth in the leases we signed in those quarters. Do you understand what I'm saying?

Right.

If I sign a lease this quarter, it actually doesn't impact my AFFO this quarter. It's more likely to be next quarter when we actually build out the space.

Right, so the leasing commissions is going to ramp sequentially.

Yes, so it will be a quarter or two lag, and if you look at the TIs and LCs they've been coming down, it is mostly, as I said earlier, the TIs that have been coming down in terms of what we have been granting, and therefore you would expect there to be somewhat better things. In addition to that, there's just a lot of random noise that comes through that, those numbers.

Thanks, guys.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for closing remarks.

I just want to thank everyone for joining us, and we look forward to speaking with you next quarter.

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