Douglas Emmett Inc (DEI) 2015 Q4 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to Douglas Emmett's quarterly call. Today's call is being recorded.

(Operator Instructions)

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

Thank you.

Joining us today on the call our Jordan Kaplan, our President and CEO, Kevin Crummy, our CIO, and Mona Gisler, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. And 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.

Thank you. I will now turn the call over to Jordan.

Good morning, everyone and thank you for joining us.

I'm pleased with our financial results for the fourth quarter and for 2015. Both FFO and AFFO were up significantly. Our office rents continue to rise at double-digit rates.

As a result, the straight-line rents on office leases signed during the quarter were 28.6% above the expiring leases for the same space. Our highest level since 2008. Our multifamily portfolio is essentially fully leased and those rents also continue to rise.

Overall our same property cash NOI for the quarter increased by 4.9% year-over-year. I'm also pleased to announce that we have agreed to acquire a portfolio of four office buildings in Westwood, totaling just over 1.7 million square feet for $1.34 billion.

These buildings are a perfect fit for our for portfolio. They give us a commanding market share in Westwood, one of our core West L.A. markets. As has been our plan, these assets will be purchased by an institutional joint venture that we will manage. We had originally expected that the seller will list all of their West Los Angeles assets in a single multi-billion dollar transaction. In that scenario expect to limit our equity contribution to around 20%.

While their decision to sell the overall portfolio in multiple transactions has some benefits for us, it creates more uncertainty at this point in the process. Depending on how we feel about other opportunities to deploy our capital in the near-term, we may choose to retain a larger percentage of Westwood in order to achieve our equity investment goals.

Overall, I'm excited as we move into 2016. Given our expanding economy and high occupancy rates, we expect to see meaningful rental rate growth. We also expect there to be additional investment opportunities. Finally, in December, we announced that Ted Guth has retired as our CFO and that Mona Gisler, our Chief Accounting Officer, has taken over as our new CFO.

I want to welcome Mona to her first earnings call. I also want to thank Ted for his many years of wonderful service. I am pleased that Ted is still part of our team, so we will continue to benefit from his tremendous experience and sage advice. With that, I will turn the call over to Kevin.

Thanks, Jordan and good morning, everyone.

As Jordan mentioned, we've had a busy and successful fourth quarter. Like Jordan, I am also happy about our pending Westwood portfolio acquisition. As we have said in the past, we target Class A multi-tenant buildings in our supply constrained markets and prefer properties with vacancy, where our management and leasing platform can add value. This portfolio meets all those criteria and will make us a dominant landlord in Westwood.

Subject to usual closing conditions, we expect to complete the purchase in the first quarter with a seven-year, $580 million nonrecourse mortgage loan. Our purchase price equates to $779 per foot, which compares very favorably with other recent sales in West L.A. We expect this acquisition to be accretive to FFO and to AFFO during 2016.

Turning to our other debt activities, we closed two term loans in the first quarter totaling $515 million, at an average effective annual rate of 2.66%, fixed for the next five years. We have also rolled over two small floating rate loans totaling about $35 million. That completed our goal of refinancing our major 2015, 2016 and 2017 maturities.

We are now focused on our 2018 maturities. Looking forward, we expect to see significant property sales in our markets in 2016 and remain hopeful that we can continue to make acquisitions that meet our target criteria. With that, I will now turn the call over to Stuart.

Thanks, Kevin, good morning, everyone.

In the fourth quarter we signed 167 office leases covering 634,000 square feet, including 232,000 square feet of new office leases. The leased rate in our office portfolio increased to 92.9%. With our core LA markets of West Los Angeles and Sherman Oaks Encino 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 positive 12.8%, and we continue to push annual rent bumps in our new leases, with most of our new leases in Los Angeles now at 3.5% or 4%. Our lease rate exceeds the relevant sub markets by an average of 330 basis points. On a mark to market basis, our office asking rents at year end exceeded our in place rents by 14.2%, up another 220 basis points from last quarter.

On the multifamily side, our 3300 units were fully leased a quarter end. During the last 12 months, we raised our same property residential asking rents by an average of 3.5%. At quarter end, the analyzed asking rents for our multifamily portfolio exceeded our in place rents by $18.3 million per year, about half of which related to our 233 remaining pre-1999 units in Santa Monica.

I'll now turn the call over to Mona to discuss our results.

Thanks, Stuart. Good morning everyone. It's a pleasure to be here and I look forward to working with all of you. I will begin our results and then discuss our 2016 guidance.

As Jordan mentioned, we are pleased with our Q4 results. Compared to a year ago in the fourth quarter of 2015 revenues increased by 6%, about half from our acquisitions during the year and half from better performance at our same properties. FFO increased 6.5% to $72.5 million, or $0.41 per share. AFFO increased 10.2% to $51.9 million, or $0.33 per share.

Comparing our same property cash results in the fourth quarter of 2015 to the fourth quarter of 2014, revenue increased by 3.4% primarily driven by higher office rental revenue. Expenses increased slightly by 0.4%. As a result same property cash NOI increased by 4.9%. After eliminating the impact of prior year CAM reconciliations and lease termination fees from both periods, core same property cash NOI rose by 4.7%.

G&A for the fourth quarter was $8.8 million. 2015 G&A was about 5% of annual revenue well below that of our benchmark group. Finally turning to guidance, for 2016 we expect FFO to be between $1.70 per share and $1.78 per share, and AFFO to be between $1.33 per share and $1.41 per share. We have not yet determined how much equity we will retain in the Westwood portfolio.

Accordingly, we have widened our guidance this year to reflect a range of contributions from this acquisition. I should note that like last year, we expect our growth to be higher in the second half of the year, both because of the Westwood acquisition and our estimates for continuing properties.

Our guidance does not assume any acquisitions beyond the Westwood portfolio. For more information on some of our assumptions underlying guidance, please refer to the schedule in the earnings package.

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

We will now begin a question-and-answer session.

(Operator Instructions)

Thank you. Manny Korchman, Citi.

Hey, it is Michael Bilerman here with Manny.

Hi, Michael.

Jordan, I was running if you could maybe spend a little time sort of on your joint venture for the Westwood portfolio? And I ask that because there's a couple of cross currents that are going on that, I guess, at least I'm having a hard time understanding. I think the market was well thought that Blackstone was going to split this up into multiple pieces and you were the winner of the Westwood piece. And the market pretty much took it as you'll do 20%, and so you'd have $150 million equity check for that portfolio and that would be sort of it until maybe the next thing comes. And then the market would evaluate how that would be funded. It sounded like, from your perspective, you want to deploy much more capital, overall.

And so I'm curious what that capital is? And maybe talk a little bit about the structure here in terms of your partner, how much your partner is willing to put up? Because I think there's just a little bit of confusion going on.

Okay. So, the deal that we've done so far -- and I'll back up and give you a little bit background. A lot of you guys of the background on this deal, but what we've purchased is four great office buildings right in the middle of Westwood, perfect Douglas Emmett, down the centerline, exactly what we want. And to be very frank, not only do I love the deal but if we had -- if the stock was at a different place, et cetera, I would buy 100% these building. So you would want to own all of them.

Now, in the midst of all of that -- this being in the core of this Blackstone portfolio, we had originally thought that the deal was going to come out as a much larger deal, which has pros and cons. Which we kind of said in the prepared remarks. But, the pros are that the buildings are coming out in a way where we aren't going to have to buy everything. And we will be able to be a little more choosy about getting exactly what we wanted.

Now these four buildings we actually wanted, all of them, no matter what would have occurred in terms of the packaging in the building. So that's great, these are great. The con is that we're not sure how much we will end up owning. If the other ones come out separately, we may not get them. Or they may not come out. We don't know those answers.

So we sort of looked at the situation and said to ourselves, look, in one sense you want to be greedy; it's a bird in a hand. So we have these deals. You want to own as much of them as you can because you know that's done and you know you like that price and you know you can make money on those buildings.

In another sense, we said, well, these other deals are coming out. They're coming out individually, and some of them are very good buildings for us to own. So we want to have the money to do that.

I saw that there's been some noise in the market. And I'd like to just start of by saying it is highly likely that we're going to essentially be at 20% to 30% of this deal. Would we go to 50% if we really felt like nothing else was coming out and we didn't need the extra money? We don't have the money to own 100%. And I'm not sure we have the money to own 50%, but we probably do. But it would mean we don't have the money to do anything else. So, we've looked at that.

Now I'm also not -- we have -- I know there is been some nervousness, do you have part --? We have the partners to do the deal. We have the partners to own a smaller percentage of the deal, the whole thing. But of course, I don't want to end up a year from now saying, wow, we did all the work and we only ended up with a small investment. I mean, that would be a drag too if nothing else came out.

So we're sort of walking that line right now and trying to -- in admist with what our rights are, trying to make a decision as to where we want to end up. That's kind of by way of explaining that part of it at least.

In terms of putting the money into the deal, and we saw questions about consolidation et cetera. It is not -- or at least for this initial deal -- unless we really didn't think anything else is going on, it is not, in my mind, a substantial capital investment for the Company. Did that answer a lot of what you were asking?

Right, because you think about this is as a 20% to 30% potential, so in that $150 million to $200 million of it an equity check. And I guess if other things would come down the pike, because of where your stock is you don't want to issue it, you would fund that through asset sales or some other means?

Well, we have -- what we've said, and the way I still feel, is that we're without issuing equity with the other kind of levers that we have, I would be comfortable and we would be comfortable $300 million, $400 million of equity going into something. If the opportunities are right and we like the pricing, et cetera. We love this deal. And frankly, I'd put a lot of money in this deal if I was worried that I was using up my firepower for other deals.

We have about $175 million in cash. We have good cash flow, so we generate cash. And even more than that, we have assets -- we can -- as you've already heard, we can pulse the JV. We can reduce the level of the JV. And we also have assets that are a very good fit with what we're buying that we can contribute.

Other equity.

That take no cash, right. None of those is issuing equity, but we do have a good mix of JV contribution opportunities that could get us to higher numbers.

All in all, just get cut right to is, I don't feel any of this would stretch our balance sheet. I'm not sorry, but I don't have room to do more. But all of the things we're looking at doing I still feel are relatively conservative and in line with the way we've managed our balance sheet for the whole career of the Company.

Great. Thanks, Jordan.

All right.

Brendan Maiorana, Wells Fargo.

Thanks. Could you guys provide maybe just a spread or the difference between the GAAP and the cash cap rate on the Westwood portfolio? And then are the fees for managing the JV meaningful to your bottom line FFO?

Well, I'll take them a little bit in reverse. None of the deals we are doing, or that we even have imagine doing, are driven by fees and they're not meaningful enough to cause you to go buy a building. Most of what you see is -- in terms of our decision-making, is the decision to buy buildings that we think are going to make money for us. And as I said, we would buy 100% of them. If we had the capital.

We're not big cap rate guys, as I've told you in the past. I do think it's reasonable to say that we're comfortable this acquisition will at least add $0.03 to FFO, if you want some sort of grading in terms of its impact. But we gave a little wider range because depending on where we end up it could be better.

Okay. All right. That's helpful. That was kind of around the number we got too. And then I guess -- I'm not sure if this is maybe Kevin or Mona. So you guys have three tranches or three swaps that roll off: two in April, one in August. Some of that debt comes due in 2018; the other is 2019. Your plans would be to refinance that debt? And if so, how the rates look versus what your in-place effective rates are on a swapped basis?

Relative to the swaps we have in place, the rates would go down with that caveat at today's rates. So I don't know where they're going to be in April. I don't know where they're going to be in August. But we would anticipate, based on where we are in the market today, that those interest rates should go down.

And your plan, Kevin, is to refinance those maturities --

Yes

Okay. In April and August?

Yes I mean just to add. Obviously, if rates are very low and as those swaps come up, and we have an opportunity to lock in a new set of longer-term lower rates and swap in there, we're going to take it. And that's the reason why we leave ourselves big tails on loans to give us the flexibility to take advantage of the market when rates are good.

Okay, thank you.

Thanks.

Jamie Feldman, Bank of America Merrill Lynch.

Thank you. I guess for Mona. Can you just talk about -- for the transaction, what the assumptions are at both ends of the range in terms of I guess the yield on the transaction and the ownership stake?

Hi, Jamie, and thank you for my inaugural question here on the call.

Honored to ask it. (laughter)

I think what we've said with regard to the range is that we're comfortable that it will add $0.03 to FFO.

I think you're trying to ask for some more detail than we're prepared to give out right now. And as you guys know, we historically -- and when I say historically, like every single transaction, we don't like to announce until they are closed. There's been so much in the market about this, and some that I thought was incorrect. Plus, we had to give you guys guidance and with the way the call rolled out, we got in a situation where we felt like it was good to give out some of this basic information on the deal and make clear to people what's going on, before closing. But, we're not -- the deal is not even closed yet, so where we are today and the information we've given is basically what I think we're comfortable with.

Okay. And then when do you have to decide how much of this you will take? Is this at the time of close or this could the stretch on for longer?

We have a little bit of time, not a lot. And I don't want to get into too much detail on our agreement and our structure, but we have a little bit of time. But we have to make a decision. We don't have a lot of time. And as I said, I don't know that, at this point, even 50% is on the table anymore. But we have a little bit of time.

Is there a chance you'll use any kind of bridge funding?

No.

Okay. And then can you just talk about the JV partner? Is a multiple partners or a single partner? And tell us more about who it is?

I could just say no, but I want to put like nicer words around it. But we're not going to talk about our partners in the deal.

Okay. All right, thanks.

All right.

Craig Melman, KeyBanc Capital Markets.

Hey, guys, maybe just a follow-up to that question. Is there a possibility in the structure to take more at the outset than have some type of put provision in there, if you guys decide you want to go after another portion of the portfolio?

That's a reasonable assumption, but I really don't want to talk about the deal that much, that structure. But I will call that a fairly reasonable assumption. (laughter)

Okay. Thanks. Maybe just going back to an earlier question about asset sales as a possible form of capital. I guess I'd have to imagine that there's some assets in your portfolio you think would be lower growth than some other assets you could buy from Blackstone. Just thoughts on whether you guys have a list that you can go to market with, or are you guys comfortable with your whole portfolio or [rather] just a lever?

Comfortable with our leverage. I'm definitely comfortable with our leverage. I think it's worth mentioning again -- which I know a lot of guys know. But there's no debt, no obligations up at the level of the public Company or at the master partnership. So it's all nonrecourse debt secured by buildings. That's all we've got.

So it's a very low-risk profile in terms of our debt in general, and we're obviously comfortable with our debt and all the other stuff around our debt. It's very low risk. They're very low risk obligations.

Where I would say -- so I wouldn't just start selling buildings other than if I wanted to still have capital to buy additional buildings. And I think our options there -- maybe there would be something to sell, but more can be generated. When I look at our partners and the deals we're doing, more can be generated by taking buildings that would be a good fit with that and putting them into those deals and all the JVs or other JV opportunities that just create -- do a much better job of creating, I would call, available and like-priced equity for deals for us to give us more control over a larger portfolio. So that would be the more likely thing we would do.

This is Jordan Sadler. Just a follow-up there. We know you don't like cap rates, but you do like making money and you do like growth. We realize and recognize you don't love all your children equally. And so the question really comes down to, isn't there something that you would be willing to part with or punt because the longer-term prospects of making money versus those -- the prospect of those that are front of you, vis-a-vie the Blackstone portfolio or otherwise, or they're just lesser than what's in front of you?

I could be. I wouldn't want to put it that way. I mean there may buildings that are worse at for portfolio as our portfolio shifts in another direction. Then, there's buildings that are a better fit. We might make those adjustments. I don't think -- I mean I think that's a fair statement.

But I'm still going to say I think we have a pretty good portfolio, especially as you look along the west side. And as we're expanding on the west side, there's more opportunity to create pools that have obvious synergies and get like-priced equity out of our buildings than to just decide I'm going to sell this, pay the taxes, buy that. That's not that great of a trade.

If you believe in the markets, you believe what you have going on at the time, you're better off looking for transactions that allow -- first of all obviously, to be fully priced in terms of when you are creating more equity to pass through to yourself. Then secondly, to do it in the most tax efficient manner.

Thank you.

Okay.

John Kim, BMO Capital Markets.

Good morning. I was wondering if you could maybe discuss your decision to consolidate the acquisition, despite owning perhaps as low as 20% of the portfolio? And then also --

I'm glad you're asking that because I saw some questions about consolidation. So let's start out with it's for sure not our decision. It's a very complicated set of rules. And if you would have asked me before I watched us go through all of this, I would've gone, yes, if you want more than 50%, you do or you don't. It really is very little relationship to what percentage you own any more with the way the rules have been rewritten.

I can tell you for sure that you can own over 50% and not be consolidated and you can own 20% and be said that you have to consolidate. Both of those, to all reasonable people on the phone, might sound like strange answers, but that's the way it comes out. It has to do with control and a number of other factors.

I can tell you that the work we've done 50%, 40%, 30%, 20% really in the way this thing is structured, it looks highly likely we will be -- I don't want to use the word required, because I guess we make the decision the end of the day. But, we'll be somewhat required to consolidate.

And since same-store is sort of a touchy subject right now, have you given any thought as to how you are going to include the performance in your same-store pool as far as the timing and whether or not it's your proportion and share?

Why is it a touchy subject?

I don't know. (laughter)

I think our same-store performance has been pretty good. You say same-store NOI performance has been very good. Obviously, we've given you guidance. We think it's going to continue to be pretty good. These buildings won't be included in it for a while. You've got some time before you have to decide how you deal with that. But I guess once we get to the point -- out at whenever it's proper to include it, then it will be included. You've got a lot of time in that program.

Yes. And then I know you won't disclose your partner, but maybe can you provide some characteristics of your partner, whether or not it's a pension fund, maybe geographic base? And also if you could comment on institutional demand for West LA products, at this time, from some of the major geographies, Canada, Middle East and Asia?

I don't want to talk about our partner, our partners -- it's not -- they -- that's not what we do. I'm happy to tell you that we have found good demand for -- at least when we've gone out -- with our platform and the properties that we think that are good to buy. We've found that there's good demand for us to have partners in the structure that we propose. And there really hasn't been any problems there. So there's still capacity. At least I can tell you for this deal. I don't know if the world changes in six months for the next one, I have no idea. But this one, as we sit here today, all good.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning, out there. So, hey, and appreciate it. I was getting a little nervous if you guys didn't disclose the EOP deal in the release. So just some quick questions here. One, you mentioned that there are potential for other parts of the portfolio, the EOP portfolio. Would any of that bring you to some new sub markets, or everything that you're looking at is within markets where you already operate?

Everything's within markets where we already operate.

Okay. So even something right adjacent to an existing sub market, it wouldn't be there it would be literally adjacent to buildings that you already own?

I don't know adjacent next-door, but they're all what I consider to be in the markets that we're already in.

Okay. And then as far as you guys in the presentation note a number of properties where you bought and you've improved the occupancy pretty quickly. Is that something that we should think about, like in less than a year that you'd have made a lot of progress on these assets? Or are there particulars about the leases in place that mean bringing it from 89% to like 95% may take longer than some of your other acquisitions?

Well I mean we're not making predictions about when the thing will be released to full occupancy. We have, obviously, a very good track record, and I hope we outperform our expectations. But there isn't any reason that I know of why the building would stop us from leasing it up, if that's your question. The rate at which we lease it up, you have our track record. You have a lot of information about the market. The fundamentals in the markets have been very good. The buildings are in great shape. They're well -- they show well. There's good space available in them. But at the same time, we have to deal with the roll of the buildings and we have some real leasing to do there too.

Okay and then just --

I was going to say, I think it's fair to add that our West side portfolio is 96% leased. And I think that our leasing team is excited to add to a little bit of inventory to lease up in this market because the fundamentals have been pretty good.

Okay, that's helpful. Finally, in the presentation, the investor presentation on page 16 where you guys talk about the apartment rent growth. It looks like this year is sort of plateaued, but year over year has been growing. So is the plateauing, is there anything going on there, or maybe it's just how the leases are rolling this year than it just looks like it's flattened out?

Hi, Alex, it's Stuart. We're still seeing good rent growth on the apartment side. It did slow a little bit. But asking rents are kind of volatile, quarter to quarter, with timing. But we still had 6% same-store NOI growth in the apartments. And we're still seeing good growth there.

Okay. Thanks, Stuart. Thank you.

Rich Anderson, Mizuho Securities.

Good morning, how are you doing? So, Jordan, you said that you're not really stretching your balance sheet and you mentioned kind of three options available to you. But could you comment at all -- if you were to say let's just assume 25% equity in the four assets, about how your leverage metrics might change even if it's minor? Or maybe your debt-to-EBITDA number comes down? I don't know how the dynamics work. Could you comment on that at all?

I can comment that it's minor. I don't want to give the numbers, but -- obviously, the fact of them telling us consolidation means that will all run through it, so you've got to deal with that, right? Because that's got to be in there and then you take out the piece at the bottom.

But if you kind of cut through all of that and you say to yourself, as you know we have $179 million in cash. So if you just did this, what's the little amount of debt? We have $3.5 billion in debt right now. So what's a little bit that we took additional, if we took a little on, I don't think you'd even notice it.

Well, except for the non-recourse debt that you would be taking on. Right?

That's what I'm saying. That has to be consolidated on. I mean we don't have a choice at that, so it's going --

Optically, your debt might go up, but in reality it won't? Is that kind of a way to think about it?

I would say you look at the Company, it is around 40% leverage. You look at the deal we're doing. It's around 40% leverage. You look at how much cash we have, and you say to yourself, well, how much -- how big a piece of the deal are they taking? And what I'm saying is, if you looked at the piece we're taking and the little -- maybe we take a little more debt, maybe stretch through every deal we bought, maybe we take $100 million, $150 million of debt across $3.5 billion of debt. I don't think you would find it to be that problematic -- we don't find it to be problematic.

Okay. As far as modeling all this. I mean you gave some numbers, obviously, in your guidance. But is this a partial impact to 2016 in the way you're thinking about it, and then full impact from there forward? Is that how we should be modeling?

Obviously, we're not even closed, right? So it's kind of a partial to 2016, so when we gave the $0.03 that we're comfortable with, at least $0.03 of FFO, we're talking about 2016.

Okay. And I'm sorry, just quickly. So the way to get to your number -- I assume there'll be some sort of minority interest, non-controlling interest line that you will provide that nets together interest expense, NOI and depreciation that will go to your partner? Is that how we should be thinking about it?

That's right, yes. So there will be minority interests and the $0.03 is after minority interest.

Right. So you have a range on that line for guidance?

No, we haven't provided guidance on that.

Okay. That makes it easy to get your number then, I guess. (laughter) All right. Thank you.

Jed Reagan, Green Street Advisors.

Good morning, guys. You mentioned the Westwood assets at 89% leased. What are those on percent occupancy basis? And then just a little more color on if there is some sizable move outs you're expecting in those buildings over the next year or two? And then just what sort of the capital plan is, how much redevelopment capital, reposition capital you expect to put into those buildings?

The occupancy is lower and honestly I don't know it, and I don't think we're going to put a pin on -- frankly, on both the numbers leased -- although, we know the leases. But occupied, you can't put a pin on it until you actually close and really have a number.

I don't -- I'm not coming to mind of odd or larger rollouts coming out. I think it has typical roll going forward. The buildings are -- one of the reasons we're so exciting with the match of these buildings is, they're similar tenants. It's high rise. There's not a lot of very large tenants. Like a big tenant in this deals is a two-floor tenant. So it's a super good fit for what we do right smack dab in the middle of our markets with all of our people being able to focus very well.

This place is buzzing. People are very excited about it here, because they're great buildings. And it lets us kind of go-to-town on some large assets in a way we've only really been able to show you guys on the deals. I know we showed you the examples of the four or five acquisitions we made earlier. It gives us kind of more to chew off.

The fundamentals here -- and you're seeing in the numbers we're putting out, are very good. To have buildings like this where we can take advantage of what is going on with the fundamentals with leasing and our operating metrics of our expenses and everything that we can do to improve the cash flow coming out of this building, it's exciting for this group. People are humming.

So we shouldn't --

To answer your question about capital, the buildings are in really good shape. So we're not anticipating to need to do any substantial renovation or anything. It's more about lease-up capital.

Got it. Makes sense. And I realize this may be tough to offer specifics on, but can you just talk generally maybe about the pricing power benefits you might be able to achieve going forward from moving to say a 10% market share in Westwood overall to call it 50% of the overall market there?

I would say that what's happening is, we -- it allows us to more rationally and directionally cause rents to do what we want to have them do. Being that we're long-term owners and we know that we want to propel things up and we want to sort of slow them down when they're headed down, it gives us more ability to do that. And we can, to a good degree, strip out any concessions. We can create a very rational and, let's say, comfortable market for people to lease into. Where there's not a lot of angst around are they getting the right, or the best, or whatever pricing. Because that always helps deals flow a little better.

And when you look at the tenant sizes that we work with, which is -- I don't know, 2,000 to 10,000 be typically, let's call it. They're not anxious to feel the pressure that, oh, they should have gone free rent. Or, they should have gone more TIs or they should have gone something. We try and get people comfortable that it's a stable market.

Yes, rents are going up. Everybody knows rents are going up, but there's not huge volatility in the type of deal you can expect to get in terms of the economics going into one of these spaces. It allows us to create a more stable and clear market for everybody, and therefore, that's how we keep all of our projects better leased.

So, I would say we could -- when rents are going down, you can't change the direction of rents. But when they're going down, you can slow that slide down a little bit. And when they're rising, you can push it a little bit with all the economics that go into the package of a lease, whether it be bumps in the lease, not giving concessions, holding down TI and turnover costs. We're able to be very rational and fair in terms of those numbers.

Okay. That's helpful. And just last one, it looks like you had a nice pick up in Warner Center last quarter. Hoping you can talk a little about the activity you're seeing in that market these days, and what you think could be a realistic occupancy goal for the end of this year?

I'm happy about the pick up, and I'm happy -- Warner Center has definitely been kind of up and down. Am I stealing your answer? No, I'm not. Okay, we had kind of broken up the questions. I can't remember if this is Stuart's (laughter).

I don't want to make predictions about where it's going. Although, I still feel great about the market. I feel we have a good pipeline still. And as when I told you last quarter, you're seeing it reflected in the activity that's happened there. There is a lot of capital going in to that market.

I don't know the next time you guys are out here. You go out and take a tour and that whole mall is open and all the apartments. There's even more construction, but what was under construction has been completed. It's filling very fast. So the density of population, the amenities, people's desire to be in that area is improving every day. And you're seeing it. We saw some of it in our pick up, and we feel good that over the hall you're going to see even more of that.

Okay. Thanks a lot.

Thanks.

Ross Nussbaum, UBS.

Hey, good morning, guys. I just want to clarify something that was said earlier. That $0.03 of FFO accretion, did that number include straight-line rent in FAS141 mark-to-market, or is that more of a pure-cash NOI kind of a statement?

It includes our ownership percentage after you back out the minority interests. So the assumption is that the straight-line rents in the FAS141 are consolidated in. And then, depending on what our ownership percentage is, you would back that component out of the minority interest to get to the $0.03.

Right, so the quote unquote, the AFFO accretion after all the non-cash garbage and the CapEx obviously is less than $0.03? Okay. Second question. Your G&A expense was up 11.6% for all of 2015. You're now guiding to -- at the midpoint you're guiding to about a 10% increase in 2016. And I guess I'm struggling with why the G&A of this Company is going up double-digit percentages? What's going on behind the scenes that's causing that?

So we'll start with 2015, and we had anticipated that there would be some amount of an increased during Q4 and in fact that's what we saw. But overall our G&A was still in line with our expectation and still relatively low compared to our peer group. So it's running around 5% of our annual revenue. Then if we look at our guidance for 2016, there is an increase -- although there really isn't anything -- any one material item that's driving that increase. The expectation is still going to remain around 5% of our annual revenue. So we still feel pretty good about it. It is still low compared to our peers, and we're feeling good about our cost management internally.

But is it comp that's going up more than 10% a year at the Company? I mean that's -- in theory, one would hope that your G&A as a percentage of revenues or NOI would go down over time as you get economies of scale. So I guess I'm surprised that -- what would be driving your G&A up double-digits at this point?

I guess so there's no one factor. One of the things that is driving it for 2016 is we restructured our Board compensation. That used to be a longer-term compensation plan, and now we're going to see the impact in each individual year. And so that expense hitting in 2016 is driving it up a little bit.

Okay. Appreciate it. Thank you.

John Guinee, Stifel.

Great, thank you. I get everything about this deal. It makes perfect sense to me. I get the $0.03. I get the leverage kicks up just a little bit. I get the rental rate growth barriers to entry. If somebody's looking for a value office space contiguous to your markets or they're looking for newly built space, how far do they have to go? How far is drive-time? Is it LAX, is it Culver City, is it Hollywood, is it downtown LA? Where's new product at a reasonable price?

Wow. New product at a reasonable price? There's some new -- do you want to answer, Kevin?

It's tough, because when you go down to Playa, you're talking about larger floor plate, more campus style projects, which are as expensive on an asking-rent basis as we see in, say, East Santa Monica. The stuff over in Hollywood that's going up is also in the $5 full-service gross plus range. So I guess reasonable is in the eye of the beholder. But that's what they are getting in Beverly Hills for some rents.

They're not building, really, in markets like El Segundo and nobody in their right mind would drive south of the airport, from our tenant base, with a 4000-foot tenant, would take a drive all the way down to El Segundo to save money.

I don't think there's new reasonably priced. The little bit of new, Kevin just mentioned. But when you say reasonable priced, you say go there and really bring down your cost of occupancy, that would not be true.

Okay. Thanks a lot.

All right.

Brendan Maiorana, Wells Fargo.

Thanks. A couple follow-ups. So, Jordan, I think you said -- although I may have misheard, $175 million of cash on the balance sheet? I think there's a little over $100 million I think listed as of 12/31? What's the difference?

The deposit for the Westwood deal.

Okay. Got it. And your retained cash flow per year is, I guess, based on kind of your guidance, your retained cash flow above the dividend is probably $75 million year or something like that?

No, we haven't given that out. Although you guys have a lot of the AFFO information on us and you know our dividend.

All right. Fair enough. And then, last one I had. So your current fund, FFO was up a lot in the quarter. It looked like maybe there was some adjustment that happened on operating expenses. What happened in the quarter, and can we expect that to continue? Or is that a one-timer and it'll go back to kind of the earnings power that it has been over the previous quarters?

The one thing to just keep in mind is because of the size of the funds, they're just a little more sensitive to fluctuations. So you're seeing a swing. There are some factors that affected the funds for this year. In the fourth quarter in particular, we had a concentration of property tax refunds that hit.

Okay. So that's why it looked like OpEx went from around $7 million a quarter down to $2.7 million, and that should resume to a more normalized pattern going forward?

That's right.

Okay. Thanks.

Thanks.

John Kim, BMO Capital Markets.

Thanks. I just had a follow-up on your guidance. What have you projected as far as acquisition related expenses, this year? I imagine it's going to be a pretty large number and you don't deduct it from your -- or sorry you don't add it back to your FFO?

Well actually, last year we had acquisition related expenses and we just had to expense and accounting for that. I have -- in the olden days the accounting for that was you took and put them with the deal, now you expense than like right when they are happening. So they don't necessarily line up, much less in the quarter. They cannot even line up the year of with what the actual acquisition, which I thought was kind of odd.

We have budgeted additional expenses for acquisitions, but we haven't given that detail in our guidance. They're hard to budget for because in the olden days go I think I'm going to buy blah, blah, blah and then I'll put the expenses with it. And these, it tends to like -- I give you -- we working on something and have some expenses and then didn't buy it that quarter. Then two quarters later you bought it, and those are like all in the rear view mirror, those expenses. They didn't even get matched to it.

So the $1.8 million that you expensed last year --?

We have a big chunk of acquisition expenses that actually flowed-through 2015. They're already gone. You would think that the closing this and it would I'll go together, but it doesn't work that way anymore.

And then do you get any reimbursement from your partner as far as acquisition fees or any other kind of transactional or leasing fees from your partner?

Well, yes, we do get reimbursement for what the cost that you would expect, and we'll be operating properties.

But nothing related to the transaction related expense?

Well, yes, I mean if you have transaction fees, then everybody pays their portion.

Okay. Thank you.

All right.

Jamie Feldman, Bank of America Merrill Lynch.

Thanks, just a quick follow-up. Can you just talk about the pace of leasing in your portfolio as we start the year, given stock market volatility and questions on the economy? Have you seen any meaningful change?

That's a great question, and believe me we are watching for it, but the answer is no. I mean, it's funny. If you turned off the stock market, you go these are great days around here. Other than watching what is going on with the stock market, in all areas of tenant demand, tenant attitude, deal flow, movement and the economics of the leases, rental rate, et cetera up, up and up. All good.

You kind of see what is going on with the stock market and you wonder whether the stock market is vibrating to some different type of the thing that's going on out there. It's just of hard to know. But no we're not seeing -- what we're seen in the stock market, we're not seeing in any of our underlying fundamentals of operating our properties.

Okay. And have you seen -- has anyone delayed decision any leasing decisions or fallen out of bed?

Jamie, we're pretty fortunate in that, one, we've got a very, very small tenant base. So, if the 2,000-foot guy delays his decision, it doesn't really trickle up through our numbers. And two, we've got a very, very diversified tenant base. And so when you look at sectors that might be potentially backing up in the economy, be it energy or banks or technology, there's no overweight to any one of those particular sectors within our market.

Thus far, the media companies, which is the tech has been fueling our media companies, the Hulu's and Netflix, et cetera, our production companies are very, very busy providing content. And that flows through to the caterers and the accountants and the other people within our portfolio. So thus far, we're feeling pretty good about the demand that we're seeing.

But even with all that and saying it wouldn't trickle up, we are not hearing about delays. Matter of fact, if anything, I'm getting calls every now and then and people be saying, hey, I was mistreated. I thought I was getting the space, someone got the space. It always turns out, we said to them, we have someone else for the space. And they don't -- didn't move fast enough and someone else got the space. We are not seeing, hey, I'm going to hang back, at all.

Okay. All right. Great. Thank you.

Okay, that looks like it was our last question. So I would just like to thank everybody for being on the call with us, and we look forward to speaking with you again in a quarter.

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