Douglas Emmett Inc (DEI) 2016 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 call over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Mr. McElhinney, the floor is yours, sir.

Thank you. Joining us today on the call are 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. 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. Thank you. I will now turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. We had another good quarter thanks to strong fundamentals and supply constraints in our markets. Office rents in our core LA markets continue to grow by double-digits rate year-over-year.

Unemployment in Los Angeles county has dropped 200 basis points during the last 12 months and now stands at 4.8%. West LA unemployment is even lower at only 3.6%. Our same-store cash multi-family revenues were up 2.9% over last year. Apartment rent growth seems to have slowed. Though the slowdown this quarter was exaggerated by some temporary softness at one property in Hawaii.

As Kevin will describe in more detail, our second quarter was busy. Since our last earnings call, we sold down a portion of our initial interest in the Westwood joint venture, purchased a building in Brentwood, and agreed to sell a building in Sherman Oaks. We also closed two new loans at very attractive interest rates and now have no material debt maturities until August 2018.

During the quarter, Ken and I, and a few others, exercised the options that were approaching the end of their 10-year life. The associated tax withholdings reduced our fully diluted share count by approximately 1.4 million shares. During July, we offset that reduction by selling 1.4 million shares through our ATM program. We do not plan to sell any additional shares.

Overall, I'm excited about our outlook for the remainder of 2016. I will now turn the call over to Kevin to provide some color on our recent activity.

Thanks, Jordan, and good morning, everyone. As Jordan mentioned, we had another active and successful quarter. In May, we sold an interest in our Westwood joint venture, which reduced our capital interest to 30%.

In June, we closed a seven year-interest-only non-recourse $360 million loan. The interest rate is LIBOR plus 1.55%, which we effectively fixed at 2.57% for five years. A portion of the proceeds were used to pay off a $256 million loan scheduled to mature in April 2018. As Jordan said, we now have no material debt maturities until August 2018.

In July, we purchased 12100 Wilshire in Brentwood for $225 million or $616 per square foot. With a 77% leased rate after no move-outs, this acquisition is the kind of multi-tenant lease-up opportunity we love. Our buildings in Brentwood average 98% leased in June and we're excited by the upside in this building.

12100 Wilshire is owned by a consolidated joint venture that we manage. We expect to retain 20% to 30% of the equity in the venture. In connection with the acquisition of 12100 Wilshire, we closed a 3-year non-recourse $90 million interest only secured loan. We intend to leave the interest rate floating at LIBOR plus 1.55% while we stabilize occupancy.

Lastly, we have entered into an agreement to sell 168,000 square foot property located in Sherman Oaks for $56.7 million. The building is our eastern-most property in Sherman Oaks and is less synergistic with the rest of our portfolio. We expect the sale to close during the third quarter. With that, I will now turn the call over to Stuart.

Thank, Kevin. Hi, everyone. We had a robust leasing quarter signing 197 office leases covering 773,000 square feet, including 283,000 square feet of new leases. The lease rate of our office portfolio remains flat at 92.1%, while occupancy moved up by 30 basis points to 90.7%.

Rental rates continue to rise across our entire portfolio. Our cash rent roll-up this quarter was positive 13.57% and straight line rent roll-up was 30.1%. 85% of the leases we signed in Los Angeles last quarter had fixed annual rent bumps greater than 3%. Our portfolio leased rate exceeds the relative market lease rate by an average of 187 basis points. On a mark-to-market basis, our office asking rents at quarter end exceeded our in place rents by 15.1%, up 20 basis points from last quarter.

On the multi-family side, our 3300 units were again, fully leased at quarter end. Rents continue to rise. Though as Jordan mentioned, debt growth has slowed. At quarter end, the annualized asking rents for our multi-family portfolio exceeded our in place rents by $17.9 million per year, about half of which related to our 229 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. I will begin with our results and then provide a short update on guidance.

As Jordan mentioned, we are pleased with our Q2 results. Compared to a year ago in the second quarter of 2016, revenues increased by 16.7%. FFO increased 15.3% to $81.8 million, or $0.46 per share. AFFO increased 11.4% to $66.4 million, or $0.37 per share. Comparing our same-property cash results in the second quarter of 2016 to the second quarter of 2015, revenues increased by 1.7%. Expenses decreased by 3.1%.

Overall, same-property cash NOI increased by 4.1%. Core same-property cash NOI rose by 5.3%. We are very pleased that we reduced our same property operating expenses this quarter. A large portion of the reduction was driven by utility savings from new software and systems installed as part of our ongoing sustainability efforts. Some of these savings were passed through to our tenants, reducing tenant recovery revenues. Same property revenue growth this quarter was impacted by the reduction as well as by the timing of prior year CAM reconciliations. G&A for the quarter was $9.4 million, only 5% of revenues and well below that our benchmark group.

Finally, turning to guidance, we are increasing the midpoint of our guidance by $0.01 and now expect FFO to be between $1.76 per share and $1.80 per share and AFFO to be between $1.40 per share and $1.44 per share. For more information on some of our assumptions underlying guidance, please refer to the schedule in the earnings package.

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

Thank you, ma'am. We will now begin the question-and-answer session.

(Operator Instructions)

The first question we have comes from Craig Mailman from KeyBanc Capital Markets.

Hi, guys.

Good morning.

Just a question on the disposition. It seemed like last quarter you were maybe a little bit less willing to pair some of the lower growth or less synergistic assets. Can you just talk about the decision to pull the trigger here in Sherman Oaks?

Well, this is Kevin speaking. I don't think last quarter that we were less willing to do disposition. We just were in the marketing phase. And we're currently not closed with that transaction, so there's not a lot that I really want to comment on it, other than to say that we're pleased with the transaction.

And on a going-forward basis, you can expect us to look at our options at every asset, as we always do. But at this time, when we're actively buying, I wouldn't expect that we're going to have an active dispo program just given the concentration of our properties.

Okay. And then just a follow-up here. I think last quarter you guys had discussed maybe kind of being comfortable with that $400 million to deploy into new acquisitions. Just curious what you're updated thinking on that is, given the ATM issuance and then the proceeds of the sale?

We're still comfortable with the $400 million. The $400 million is a combination of what we think can put out and what we think would be prudent to put out on looking at everything we have in our future, both cash coming in and cash going out. And we're still -- I'm still pretty comfortable with that number.

Great. Thank you.

Thanks.

Next we'll have Jamie Feldman, Bank of America Merrill Lynch.

Thanks. Can you talk about the acquisition pipeline and what you guys are seeing out there and what may come to market?

Well, we expect a lot of -- I'll be disappointed if more properties aren't sold in our core markets this year. So we're expecting that there should be continued activity between now and the end of the year.

Okay. And then in terms of submarkets, are there certain -- like how far afield would you go from where you are right now?

You mean going into new markets?

Or different submarkets around LA? Is there any place you would try that you're not in now based on what you're seeing?

I'm thinking in -- I think in the markets we're in, there's going to be trades. So I don't even think at the moment we're going to have to look outside of those markets.

Okay. And then, Jordan, you commented in the press release about a 59% AFFO payout ratio and prospects for distribution growth. Can you comment a little more on what we might be able to see here in terms of a bump?

Well, obviously we have -- the Company has a lot of strong cash flow, true cash flow. So when we look at dividends, and I think to be fair, while the Board discusses it every quarter, they really take a very hard look at it for the dividend that would be paid in January if they're thinking about making a change.

I think they're looking at what dividends would -- obviously they don't want the dividend to acts a gate in terms of letting the stock roll out. So they don't want it to be too low. I know that they also -- we all agree that we would like to see some regular growth in the dividend year-over-year to the best of our ability to maintain that.

And that's all tempered by the fact that we are -- the Company even beyond the dividend generates a lot of cash flow and we've been able to put that cash flow to good work. So they look at all of those things and come up with whatever they want to increase it by.

What payout ratio would you be comfortable operating in?

I don't think that while we're able to use cash to also buy assets that payout ratio is as important as the other two things that I mentioned. I don't think I'm comfortable with the low payout ratio because we're using the cash.

But I recognize it's a very low payout ratio. But if it turned out to be a low return on the stock price, and they thought that brought the stock price down, I think that would be more motivating to more dramatically increase it.

All right. Great. Thank you.

All right.

Next we have Blaine Heck of Wells Fargo.

Thanks. Just a follow-up on the investment pipeline. Can you maybe give us an idea on the amount of opportunities you guys may have looked at before acting on 12100 Wilshire?

Before? Well, I mean the major -- there have been a couple of other trades that we weren't successful on in the market. Yahoo! and Wells Fargo. I think that both of those came out after the 12100 --

I don't know. What are you looking for?

Just trying to see kind of a general idea of what the opportunity set is out there on the market at this point.

There's deals. We feel like there's deals coming out this year. I mean, like more going forward. There's some that -- there's obviously been more than usual trades this our markets this year. We've gotten our fair share and there's still more coming and there's something we haven't gotten.

Okay. Fair enough. And then just a follow-up on the 12100 Wilshire. Is there any renovation that needs to be done on that asset and kind of what are your leasing prospects like for the space that's vacant at that property?

There's -- the building is in extremely good shape mechanically. We have some money in for cosmetic and there's some corridors and some stuff like that we have some money in to finish a program that's already well under way.

In terms of leasing, there's obviously vacant space. But the leasing activity on the building is good to excellent. So, I mean, that's something that we feel very good about. And the space that's available in the building is good space.

So it is, as Kevin said in the prepared remarks, it's a perfect Douglas Emmett get it for a good price per foot, lease-up opportunity. Make these the fundamentals and operating platform and create real value. It's like a prototypical version of that.

Great. Thanks, guys.

All right.

Next we'll have Manny Korchman of Citi.

Thanks, guys. Jordan, if we think about the couple of deals you've done with similar [soft of structures], did you give any thoughts on taking this one in wholly-owned and using your equity which has had a pretty strong run to do it for Emmett itself rather than with a limited partner?

So that's kind sort of kind of two questions. So the first part. I would like to own as much of these buildings as we can. So I always think about taking 100% or a large percent.

Now, I will say even beyond the cash constraints, we have a group of partners and we have some sort of non-regular binding but agreements with them that this set of opportunities they are going to have an opportunity to participate in. And that's why we have been saying to you guys we feel confident and comfortable that in terms of equity and having good partners in our deals that have a long-term view. We feel comfortable we're going to be able to continue buying using them.

Now, the second part of what you're saying is, hey, maybe your stock is so high that you should just be issuing equity and using that instead of using our private equity platform. And while I'm very pleased that the stock has moved up, I still don't think that this -- I still think the stock is a significant discount to the value of the Company. And in particular to the value of even what we're buying at this time.

And I do think the buildings are going to end up -- that value is going to be realized and recognized in the Company over time and they're just fantastic long-term investments. But the trade of issuing the stocks and then still buying these buildings at these prices, I don't think that matches up very well.

Although I understand with accounting, almost anything can be made to look accretive. I still think we're better off keeping the shares out there fairly well balanced, not increasing them, and making use of our partners in order to gain greater market share and control these great buildings.

Maybe just a very quick follow-up, I hope. How do you manage the fact that you own so much of the market but now one of your buildings is in a JV and any potential conflict that could come especially with a significant lease-up needed at that building?

So the conflicts which obviously we get asked that a lot. Generally the way our operating platform works and you have to keep in mind, these aren't like New York buildings with million square foot tenants, right. So it's much more of a flow business, small tenants.

So it's not like you even could do any steering that would be impactful anyway. Not that we do, we don't. But the way the buildings are operated, they're operated on a geographic basis. So the same team that, for instance, runs Westwood and leases Westwood would lease the Westwood deals in the JV and the Westwood deals that are wholly-owned.

And the way they're graded and viewed is all about how they're doing in that market and their flow in that market. And the same thing with the portfolio manager. The most senior engineer that has that whole portfolio, et cetera. Okay. And then the building separately because we do surprise inspection.

We do a lot of things where we grade the quality of the buildings. That's always done on a building-by-building basis for the individual team that's at that building. So in terms of operationally, there are really no conflicts.

Obviously in terms of debt, each piece of debt is handled, and we're doing our best on each piece of debt. That gets the same team, but there's no real conflict there. The place where things are segregated is there is always sort of a separate -- there's a separate accounting team for the JV assets. It's a different group from the group that does the accounting for the public company and then obviously it all rolls up through Mona.

But we need to do that because they tend to have maybe different types of questions than you guys do, and we have to have people available to answer those questions. And as surprising as it may be, they even have more questions than you guys do. They call mid quarter and all of the rest of it, so we have to be able to answer all of those.

Thanks.

All right.

We have Steve Sakwa of Evercore ISI.

Thanks. Good morning.

Good morning, Steve.

Hi. Jordan, I just wanted to go back to the kind of small equity issuance. I know it's not a lot of money. But and I understand you guys needed to do as management team what you needed to do with your options, and that just has kind of a life of its own.

I guess I didn't quite understand the kind of offsetting need to then issue equity to get the share account back up. Was there something mechanical I'm missing here? Just help me understand that.

Well --

Or did you just like your stock price and you wanted to issue equity?

No. It was actually kind of a fair treatment of what's going on. I mean, it hasn't been our intention to buy in any kind of significant block of equity. It's not our intention to issue equity. So because when the way dilution is counted is though the entire value of that spread is settled in stock.

But then the Company has to make a payment, which can be up to 50% of the value that has to be done in cash to Government for the taxes. Because the way the Government looks at it is just like they're paying salary, right.

You've effectively bought in a block, and I thought, well, let's balance that out and put it back out there so to get things back even again. Kind of following the purity of not making a decision about issuing and not making a decision about buying back. We're going to let that thing go on its own.

So is it fair to assume that as this happens in the future, we should see a similar sort of action on your part?

That's hard to say because I have to look at what's going on at that time. So we might be at a time when I go, it's a great time to buy the stock, so let's let the transaction stand as it is. Or it might be a time that we go, no, let's just follow this process that we're following.

Okay. And I realize given the size of your tenants there isn't necessarily a big forward pre-leasing market, but maybe just give us a lay on the land in kind of leasing environment today and the discussions you guys are having for kind of back half of 2016 and maybe beginning parts of 2017?

Hey, Steve. It's Stuart. Leasing environment is very good. Demand is strong. Lots of good activity across the board. So no signs of slowing. All is going well, so we're feeling good.

I don't think there's -- I don't think the nature of what we're doing, because the way you asked the question is are you starting to focus on larger tenants or something, I think tenant size, the flow is outstanding. And you saw that in the numbers that we published. And I think tenant size and all of the rest of those stats are -- we're expecting to have stand through the rest of the year.

I guess maybe just as a follow-up, Stuart, just given that you've got more vacancy up in Warner Center. Can you just sort of comment on what you're seeing up there, tenant demand, the pipeline, and kind of your expectations for filling that vacancy over the next maybe 12 to 18 months?

I think activity remains good out there. Obviously we've talked a lot about Warner Center and the need to make up some ground there. We've been disappointed it hasn't happened faster. We're continuing to see activity and working through that space. Obviously we're not giving any timelines for lease-up or anything for submarkets.

Okay. Thank you.

Thanks.

Next we'll have Alexander Goldfarb of Sandler O'Neill.

Good morning out there.

Good morning, Alex.

How are you? Just a few questions here. First off, can you just give a little bit more color on the apartment weakness? And then specifically what was going on in Hawaii? And how much of this is resulting from that Hawaii property you mentioned versus general apartments slow down?

Obviously in apartment land this quarter, there's been a lot of sort of I don't want to say bearish, but sort of negative commentary. So just trying to dissect the two between your LA portfolio and that Hawaii property.

Yes. We have kind of see a slowing of apartment rents. And you have seen that over the last couple of quarters. This quarter the kind of the exaggerated slowdown was attributable to the one property in Hawaii that we mentioned.

There was some noise in that one property with some student move outs and some military move outs there. You saw kind of a lower run-rate last couple of quarters which we would have expected to be more in that range than the lower number we saw this quarter.

Okay. So in the following quarters for the year, we should expect more slowdown or do you think it will stabilize from here?

I think it stabilized kind of up from where we were this quarter. But we're not expecting it to go back to the kind of 5% or 6% we were seeing for years prior to a couple of quarters ago.

There might be -- you can correct me if there isn't, there might be a low -- I thought some of that -- we had the school kind of went through a transition, so we lost some students from that. Then there was also military deployment that they're able to cancel their lease kind of instantly.

So I feel like that flowed a little into the next quarter, so there still might be some noise from that in the quarter that we're in today. But other than that, then everything -- kind of back to what you saw in the previous run-rate. The lower previous run-rate.

Okay. And then second question, Jordan, now that you have BXP in the market and LA seems to be a popular market for outsiders to come into, does this change anything in the way that you see acquisitions or leasing? Just given that people from different markets have one approaching to leasing you guys have a different approach and then the same on the acquisition side?

Maybe it changes the way that people do their underwriting based on comfort level of lease-ups versus taking on any vacancy risk et cetera. Just curious if this changes the dynamic in the market both in acquisition or leasing or if LA has always been sort of an active market and therefore you don't see any change?

Well, I don't know that those are totally mutually exclusive. LA has always been an active market. You put an institutional building up for sale, you're going to bidder [suits], so it's not going to be one bidder. That's never been the case.

Now, is the fact that Boston Property is here going to change that dramatically, I don't think so, but I don't know. I mean, that's hard to predict. I mean, they've all -- obviously we, they, we're all in agreement, we like the future prospects for LA. And we've felt that way for a while and I think they obviously feel that way too.

They are -- they're a large tenant company. We don't tend to be a large tenant company. So how many times are we going to intersect in terms of bidding against each other? Probably a few times. But maybe mostly not. But we'll see what happens.

Okay. That's helpful. Thank you.

Jed Reagan, Green Street Advisors.

Hi, guys. On the slowing apartment rents, just a little more color on that. What do you think is driving that? Is that nearby supply that's impacting your portfolio? And then can you maybe quantify the magnitude of changes that you're seeing there on the rent side?

Well, you've kind of see our growth. We've given you guys the growth the last couple of quarters. So we dropped from 5% to 6% a year on the asking rent side down to the 3% to 4% range the last couple of quarters.

I think the slowing this quarter beyond that like we said is attributable to the one property out in Hawaii. So I don't see any other major factors playing into that.

I have to tell you, we're talking about generally pretty high numbers. So the 5% to 6%, it's hard to believe that was even sustained for as long as it was. Just kind of the natural inertia and momentum of just rental rates. And I actually think even 3% to 4% on an annual basis is pretty strong movement in an apartment portfolio. And hopefully, I'm going to say hopefully, a more sustainable number.

Okay. That's helpful. I guess but no -- no discernable changes in local supply picture?

Well --

Or demand equation changes.

Well the local supply is increasing. But as a percentage of the total supply, I don't know that the increases are extremely meaningful. I mean, it's increasing because people are -- I mean, we're just very, very underserved in Los Angeles in terms of housing and almost at every level.

I mean, workforce housing. New entrant, apartments, small apartments, larger ones, retired. Just sold the house level. All levels. We're just very short of housing.

And then is that causing folks to heading to downtown, is it Playa Vista, Marina del Rey, that sort of thing?

You saw all of the product that was added downtown. All of the product that was added out in West Valley area where Warner Center area stuff. And why that all was going on, you've also been watching our rents continue to move up until just recently. They were moving up 5% to 6%. That is as loud as you can be about how underserved these general broader market is here in terms of housing.

Okay. Thanks. And then can you give a little more color on the Brentwood acquisition in terms of the average tenant size and mark-to-market rent in that building? And then is there a going in cap rate you can quote on that?

Jed, on the average tenant size it's very much in line with the rest of the portfolio. It's a multi-tenant building with lots of tenants in it. So it looks kind of just like the rest of the portfolio.

Mark-to-market is the same. It's about the same as our portfolio currently. About 15%. And what was the last part?

He wanted to know cap rate. In terms of cap rate, going in not very meaningful. And obviously as you know we're not in love with quoting cap rates because of the vacancy. But I think it will stabilize in the mid 5s, maybe even a little better than that.

Okay. That's helpful. Thanks.

All right.

Kyle O'Grady of Stifel.

Great. Thank you. Two questions. First, I saw an investment sale brochure recently for a small little office building in Warner Center which I think implied some up zoning going on at Warner Center, that general market. Is that an accurate statement that they're up zoning certain blocks there?

Well, it's accurate that happened already. Some time ago the zoning was increased. But zoning has never been gaining in terms of development in Warner Center. And they're trying to steer with zoning more concentration, more amenities.

They want to create some pedestrian. And you're seeing a lot of the results of that. I mean, look at what Westfield has done out there. Look at the apartments that have been developed out there. It's a very active -- you're not seeing anything on the office front because, quite frankly, rents just don't justify it.

But it's an extremely vibrant area and you're seeing it on all other fronts, like housing and retail and amenities. Rents do justify it because of population demand. Just population increases in the area. And you are seeing a lot of development in that on both those fronts.

Perfect. Okay. And then the second question is if I look at page 11 of your supplemental, which is very helpful by the way and I look at the consolidated JV and I carve out that little 50,000 square foot Honolulu building, it looks to me like the first full quarter is about a 4.7 GAAP cap rate and a 3.0 cash cap rate. Is that the right math?

Yes. That's a good question, John. Maybe we can take it off line and we can walk you through that.

Great. Okay. We'll just chat a little later. Thank you.

And next we have Rich Anderson of Mizuho Securities.

Thanks. I don't know if this is meaningful, but the sell down of Westwood interest to 30%, what was it before that and do you have a -- maybe I should know but what's the dollar amount of that sale?

All right. It was 60% ownership initially and our initial investment was $240 million.

Okay. So 60% to 30%. Okay. So you're cutting -- so 30% of $240 million, right?

Not -- it's not that easy of math unfortunately. So we can walk you through it, Rich, if you want to give us a call.

I'm not talking about the total. We can talk about it offline.

All right. Just in terms of investment, we're left with $240 million investment and we sold down a $240 million investment. So let's call it start at $480 million, sold down to $240 million.

Okay.

And that's 60% capital investment to 30% capital investment.

Okay. But that's not the equity part, that's the total investment?

That is the equity part.

Okay.

That's the equity. That's our equity capital.

Your equity is $240 million. Okay. Because that was the number I was always thinking but you didn't quite get there initially. Okay. I got it now. I remember.

In terms -- I know you don't like to talk about cap rates and I'm thinking about Sherman Oaks, you're not going to give any color on that. But I mean what do you think of generally about a stabilized cap rate in that area versus some of the -- like the Brentwood's of the Westwood's of the area. Is there a meaningful spread in terms of how buildings trade between those two markets?

Well, cap return are a hard way to compare markets because of the variability of income and above and below-market rents. But I think there's a very fair to say there's a meaningful spread in dollars per foot value of buildings in those markets versus the west side.

What would you define as meaningful?

Well, I'm not trying to price the two markets, but meaningful. I mean, more than $100 a foot.

Okay. All right. Good enough. Thanks.

All right.

And next we have a follow-up from Manny Korchman of Citi.

It's Michael Bilerman.

Hi, Mike.

I don't know if this is for Jordan or Mona. Can you walk through the math on the option exercise just in terms of the gross number of options, the exercise price, what was being counted in the diluted share count before? How it went down by 1.4 million and then the cash outlay and the number of shares issued ultimately the Company made?

Okay. There were a lot of points in that roll-forward there. Let me just step back and try to walk you through it. So there was about 1.4 million shares listed net impact. Are you asking for the total number of options that were initially exercised? Is that what you're asking for?

Yes. I just want to better understand like we know the 1.4 million net. But we also heard Jordan say there was a cash outlay for the taxes. I assume from the diluted share count previously. I assume previously there was some count for these options?

So that was -- so if you -- I mean, I know I'm going to give you very round numbers. Generally --

That's fine.

It was about half. So if there was a net negative impact of 1.4 million shares on our diluted share count as a result of the cash portion that was gone to taxes, that means that we retained roughly 1.4 million shares.

So that would mean the net -- the net value because it's just a profit part of the options was 2.8 million shares among everybody, although half of that was settlement cash which was paid in taxes. Is that your question?

Well, there was how many gross options? Because I would assume in the diluted share count previously you would have accounted for those options. I assume they had a pretty low strike.

That's right.

Or even before.

The way the diluted share count works is they calculate the number of shares of stock that would have to be given to settle the profit portion. So if you have an option at $20 and stock is at $30, they figure out how many options it takes to settle the $10 spread, the profit spread. And that's what is in our diluted share count.

That portion -- that profit portion, because I know that taxes were around 50% and that was roughly 1.4 million shares, generally that portion was 2.8 million shares of which half was settled in cash of -- and because half was settled in cash, it lowered the diluted share count. I can tell you on the other side of that we have retained the options. There isn't any change there. We've retained the stock.

Right.

So you take that other half and then if you go to the ATM and you issue the 1.4 million, you get yourself back to even. Is that your question?

Right. I'm talking about -- right. The Company from a cash per perspective is back to even and back to a gross share count that is the same and then the number of shares that you did receive as you exercised the option was how much?

It was roughly 1.-- it's about half. I can't -- I feel like the taxes were 51% or 49% or something like that. It was about half. So it's about 1.4 million shares.

Right. Because your tax is on the total value of income?

Yes. Ordinary income. It's the ordinary income rates, state and Federal, just like your paycheck.

Yep. Okay. Thanks.

All right.

At this time we have no further questions. We'll go ahead and conclude today's question-and-answer session. I would not like to turn the conference back over to management for any closing remarks.

We're glad to have spoken with you today, and we look forward to speaking with you all again in one quarter. Thank you.

We thank you, sir, and to the rest of the management team for your time today also today. The conference call is now concluded. At this time, you may disconnect your lines. Again we thank you, take care, and have a great day.