Douglas Emmett Inc (DEI) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. (Operator Instructions)

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

Thank you. Joining us on the call today 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. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.

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.

(Operator Instructions) I will now turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. I am happy to report that 2017 is off to a good start. Thanks to strong fundamentals and supply constraints in our markets, office and residential rents continue to grow at a healthy pace. Demand drivers in our submarkets remain strong. L.A. County added 75,000 jobs during the 12 months ended February, dropping the unemployment rate to 4.8% from 5.4% a year ago. West Los Angeles again led the county in job creation with unemployment in February at only 4.1%, down from 4.7% a year ago. The job gains were spread across our diverse industry base, including education, health, leisure, hospitality and professional services. With the high barriers to entry in our submarkets, we don't face the threat of new supply that is impacting many other gateway markets. As we have discussed over the last few quarters, given the high occupancy and strong rental growth in most of our submarkets, our focus has shifted from growing occupancy to pushing rental rates. We are aggressively recapturing below-market space and relocating tenants within our portfolio to realize our embedded rent spreads more rapidly. While this strategy can initially result in slightly higher leasing costs and temporary occupancy loss, over the last 12 months, those impacts have been more than offset by an impressive 5.5% increase in the average in-place office rent across our entire portfolio. Essentially, all that increase is being reflected in our FFO and AFFO since we have kept our same-store expenses almost flat.

On the development front, I'm excited that we received final approval from the City Council for the construction of our 376-unit high-rise apartment building in Brentwood. We are targeting groundbreaking for later this year. Finally, I'm pleased that we acquired 2 more great assets in downtown Santa Monica.

I'll turn it over to Kevin to discuss those deals in more detail. Kevin?

Thanks, Jordan, and good morning, everyone. In April, we acquired 2 multi-tenant office buildings which raised our market share in downtown Santa Monica to 71%. The properties are a perfect fit for our portfolio. 1299 Ocean is a 206,000 square-foot oceanfront office building with sweeping views of the coastline from Malibu to the Palos Verdes Peninsula. The building also features private balconies and an open park plaza facing the beach. We paid just under $1,340 per square foot. We also purchased 429 Santa Monica for just under $890 per square foot. This 87,000 square-foot building is located only one block from the Third Street Promenade and 3 blocks from the new light rail station.

Both buildings have significant occupancy upside. Factoring in known move-outs, 429 Santa Monica is 70% leased, and 1299 Ocean is 79% leased compared to our existing Santa Monica portfolio which is over 97% leased. These 2 buildings were purchased by the same consolidated joint venture that acquired 2 nearby buildings in 2016. We continue to manage that joint venture and own 20% of its equity. The joint venture borrowed $142 million for the purchase under its secured nonrecourse interest-only loan that matures in July 2019 and bears interest at LIBOR plus 1.55%.

Our 2 residential developments are on schedule and progressing nicely. Jordan already told you about the approval for Brentwood, which will be the first high-rise residential tower west of the 405 in decades. And our Moanalua Hillside project, the first phase of 238 units is almost topped-out with deliveries scheduled in the fourth quarter.

Looking to the future, we expect more acquisition opportunities in our markets. Our liquidity remains strong with no debt maturities until August 2018.

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

Thanks, Kevin. Good morning, everyone. In the first quarter, we executed 188 leases for a total of 844,000 square feet, which is the third-highest quarter in our history. That total included a robust 292,000 square feet of new leases. Our leasing spread for Q1 were 29% for straight-line rent roll-up and 12.9% for cash roll-up. We are now achieving annual rent bumps averaging 3.5% in our new leases in Los Angeles. On a mark-to-market basis, our office asking rent exceeded our in-place rent by 13%. The lease rate for our total portfolio decreased 50 basis points to 91.7%, reflecting typical seasonal year-end move-outs and our focus on capturing embedded rent spreads.

In Westwood, we made meaningful progress leasing up the vacancy in our recent acquisition. Our other West L.A. submarkets remain fully leased at an average of just over 95%. Warner Center continue to show good net absorption, while Honolulu gave up part of the increases it made in the prior 2 quarters.

On the multifamily side, our 3,300 units were again fully leased at quarter end. Our multifamily asking rent rose more than 5% year-over-year. The annualized asking rent for our multifamily portfolio exceeded our in-place rent by $20 million per year.

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

Thanks, Stuart. Good morning, everyone. We are pleased with our Q1 results. Compared to a year ago, in the first quarter of 2017, revenues increased by 15.4%. FFO increased 9.9% to $83.7 million or $0.47 per share. AFFO increased 11.6% to $6x9.7 million or $0.39 per share. Comparing our same-property cash results in the first quarter of 2017 to the first quarter of 2016, revenues increased by 4.2%, reflecting the increases in our average in-place office rents that Jordan discussed.

Operating expenses increased by only 0.2%, reflecting our focus on controlling expenses. Overall, same-property cash NOI increased by 6.1%, and core same-property cash NOI rose by 5.4%. As we mentioned last quarter, noncash FAS 141 revenues for our residential portfolio were $840,000 less than in Q1 '16 and will be about $3 million less for 2017 versus 2016.

G&A for the first quarter included onetime payroll taxes from the option exercises we previously disclosed. As we did last year, we issued approximately 1.1 million shares in April under our ATM, which offset the decline in fully diluted outstanding shares resulting from the option exercise. Including the onetime payroll tax impact, G&A was still only 5.2% of revenues, well below our benchmark group.

Finally, turning to guidance. We have raised our guidance for FFO to be between $1.89 per share and $1.95 per share and for AFFO to be between $1.54 per share and $1.60 per share. We have reduced our occupancy guidance by 50 basis points, reflecting the significant vacancy in our recent acquisitions and our efforts to capture embedded rent spreads. As usual, our guidance does not assume the impact of possible future acquisitions, dispositions or financing. For more information on the assumptions underlying our 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.

(Operator Instructions) The first question is from Blaine Heck at Wells Fargo.

Jordan, I just wanted to get your updated view on the stock price. You guys were up 17% last year, another 3% to 4% this year. You've commented before on how you think the stock trades at a wide discount to private market values. I guess, just how are you seeing that today? And have the increases in the share price made you at all more comfortable with possibly issuing equity or is that still kind of out of the question?

That's a big question. Well, for starters, I still think there's a good spread, although less now than it was if you're going back a year or so between where the stock trades and the private market values. In terms of issuing equity, if we -- there's a lot of things that we could need equity for and we have a lot of options in terms of what we could do to do that. Issuing equity in the public market is only one of those. We can JV or sell buildings, and we also have a lot of good cash flow, but that's all going to be more driven by our needs or what we have coming up. This small issuance you saw before that we did was to -- was in parallel to what we did last year when we exercised those options. And there aren't a lot of options left so I don't expect that to happen again where we have some balancing off like that, that we have to do because by exercising options we actually reduce the outstanding shares. Is that... I mean...

Yes, that helps. I guess as a follow-up and I know we get into this every call, but can you just give us an update on what you think your investment capacity is, I guess, before getting to leverage levels that you're uncomfortable with?

Well, I mean, I understand why you keep asking that question. I get it. It's a worthwhile question. And we have to keep looking at what our leverage is and where we're comfortable and what we have coming up and what we want to spend money on. Our leverage levels right now obviously don't make us uncomfortable, and I hope that we have a lot more acquisition opportunities coming up. As we said, we also have sources of equity to match that. Right now, I think we're leveraged around 37%, which is certainly not an uncomfortable territory for us, but also we need to look at what other opportunities we have in the future and what we want to have cash available to do.

The next question is from Nick Yulico at UBS.

On the Santa Monica acquisitions, can you just talk about what the initial yield is and what you think the stabilized yield will be once you lease up the vacancy?

Well, the initial yield's very low because they're not very well occupied, right? I think one -- I mean, one's 79% and what's the other one?

It's 70%.

The other one's 70%. But I think they're going to stabilize in the mid-5s. I mean -- and that stabilization doesn't even take much in the way of rent growth. I mean, those are stabilizing in the mid-5s just as we lease them up. I'm very pleased with those acquisitions. The Santa Monica and the triangle in Beverly Hills have been -- especially its downtown market in Santa Monica have been 2 of our best markets and have been 2 of the best markets literally going back almost to my whole career in this business. And at this point, in downtown Santa Monica with these acquisitions, which were key acquisitions, particularly 1299, we're up to 71% of that downtown market. That's spectacular. I mean, that's a core great investment for us that will carry us and support this company in a superstrong way for the very long term. They're great long-term investments in great buildings.

Okay. And then I guess on your same-store expense growth continues to be very low. And hopefully, you can talk about further opportunities there for additional expense savings. I mean, is that -- does that continue to remain -- a very positive driver of your same-store NOI growth as you get into the rest of this year and next year?

Well, every year, we start out thinking expenses should grow 3%. And every year, we seem to find a way to get them below 2% and lately, less than 1%. That's being driven by just continually driving our focus in all areas of expenses and also continuing to take advantage of our size. And there's a lot of opportunity to take advantage of our size, but each opportunity has to be focused on and done right and kind of rolled out through our system before you start seeing the savings, just like the stuff you guys heard about last year that had to do with utilities. But each step in the system can always be improved on. And the way you see that, our investors see that is in that same-store expense growth where we -- whether it be changing the way something is processed to making things more efficient, making things move more quickly, lowering the cost of turnover. I mean, there's just a lot of areas you're going to be focused on, but to do it right, each one takes time. And as they roll out, you've been seeing that happen over -- literally over years as each area gets addressed. And by the way, after we address an area and then as we grow and as technology improves, we come back and can address it again and again. We've done that, whether it be with utilities or the way our parking works or even areas like insurance. I mean, all those areas get relooked at constantly. And in one sense, I always have the feeling like, at some point, we can't continue kind of outperforming in terms of controlling our expenses, but each year -- and you've got to give a lot of credit to our operating group on this -- they find a way to do it, and the expenses are extremely well controlled. And so I certainly hope that will continue, but I'd hate to plan on that or rely on that continuing.

That's helpful. I guess just to follow-up quickly on that. I mean, you talk about trying to churn the portfolio a little bit more to capture embedded -- some more rent growth opportunity, mark-to-market opportunity. Does that affect your expense growth at all?

Well, I'll tell you, that's been -- when we came into the -- came in and looked at our numbers and we saw how much we were kind of growing on the revenue side and then we saw the occupancy, we looked very deeply into that. And it was interesting to discover that while our history as a company has been to focus aggressively on occupancy. We've always been very focused on occupancy. And why is that pretty simple? Because turnover costs tend to be large enough so that it's very hard to find a trade where turnover makes sense in exchange for rate because turnover means, whether it be TIs, commissions and certainly some downtime. We've gotten to the point, particularly on the Westside, where occupancy is so high and the rent spreads are large enough and we can roll some in quickly enough and we've got such good control over the costs that we're now able to do these deals -- and if this lasts forever, I'll be shocked -- where formerly if someone came to us and they were a little weak or they needed a little help or they wanted to contract, we'd say, well, you will owe us for that space and we'll see if we can find a tenant, but you also... Okay. Now we're much more inclined to say, no, we're not making a deal. If you're going to default, default. We'll deal with it. We'll get whatever you get. Or we're saying, all right, you want to move out. You want -- you're in 10,000, you want to be in 4,000, go into this space here, sign a new lease. You're all set here. And we'll take this space back and you can do a buyout. And then we take responsibility for the space. Well, those deals are becoming pretty meaningful. It's not something you can do unless you're in a market as good as this one. And they have -- the return is tremendous. I mean, your negatives are, you're going to have some additional TIs, and you're going to -- because it's on 2 spaces -- and you're going to have some short-term occupancy loss, right, because as people are moving. But you get termination fees. You end up with 2 long-term tenants that are healthier. You have more long-term occupancy and you have much higher rent across the board. And that's why we were sort of trying to point out in my part of the script. It might have even been in the supplemental about the 5% growth. So that's a real strong driver of that number.

The next question is from Manny Korchman at Citi.

Jordan, just as you look at these acquisitions, especially given the opportunity to lease them up, how did you weigh doing them within your JV structure, especially with a partner that you've already done deals with versus capturing or retaining the upside fully for Douglas Emmett and the shareholders and then perhaps JV-ing or finding sort of the equity elsewhere in a more stabilized property within the portfolio?

So when we originally went in to focus on this, let's call it the larger deal that Blackstone was bringing all these properties out, that deal was too large for us to do by ourselves, and we went out -- and there's actually multiple partners in these deals. There's only one that we announced. And we found some partners who said, can you do this with us because it's going to take a lot of equity. They came back and said yes and we were prepared to do it and then what happened was instead of -- whatever you plan, that will be the one thing that doesn't happen, right? So then what ended up happening was they sold the buildings one at a time. And when that happened, I mean, the QIA and the other partners have been very good partners and they said, okay, it's going one at a time. We'll do it one at a time. We were ready to do the whole thing. And I said, I'll tell you what, we'll set this up and I'll give you the best benefit, the best opportunity to buy these buildings even though they're going one at a time. I can't promise you anymore that we'll get them all because in bulk you get them all at once, but you'll have the best opportunity to get these buildings that can be given, okay? And we made the same list of buildings, which was the list of buildings which we thought we were going to buy originally. So as that list of buildings has been coming out, we -- it's not a question of should we do it here or there? That's our commitment to them. That we will do this with them. And they wanted to do it. Now in fact, what you're pointing out has been -- it's no longer a theory, right? So a lot of deals that we've done have been spectacularly successful. I mean, you guys can even track what's going on with leasing in Westwood and some of the other stuff we bought. And so it's been very successful and everyone has been saying, that's cool that we're getting our piece and we'd even like to have more. And on the other side of the coin, we've said no, no. In our original deal, we weren't going to go below 20% and we're not willing to go below 20%. We'd like to have more, too. So we sort of balanced at what everybody deserves, expected, wants. They've been very good partners. And we will continue that way for the remainder of the Blackstone deals.

And then maybe if we weigh that against the comments you made earlier in the call about trading rent growth for occupancy growth, how does that then fit in with having 2 majorly or largely vacant buildings or buildings with large vacancies, excuse me, within Santa Monica. So now you have a tenant that you're trying to push rents, you're saying take it or leave it essentially, but then you also have another building with a vacancy that you're trying to lease up. So how do you weigh all that together?

So with the 2 buildings you're talking about, we've owned for a grand total of 2 or 3 weeks. So we haven't been in that sort of contradictory position for very long. But considering that the rest of our space in Santa Monica, I think, is 97% leased, which is like 100%. I mean, there's no space, right? It's more of a benefit to have this space. Certainly, if there's a tenant in the portfolio that wants to evaluate this space, then we'll look at that and we'll look at the economics of that deal. We don't have -- not only do we not have a lot of vacant space -- I mean, this doesn't mean we don't have any, but we don't have much vacant space across the portfolio, neither do others. So it's become a very, very tight market and controlling this vacant space is going to be very good for us. I doubt that it will remain vacant for very long, but it's nice to control this space. So the fact that we're able to do these deals, where we move people -- we move people out and increase the overall rent even if before it's the end of their lease is one of the facts that gives us the confidence and gives our investors the confidence to take on largely vacant buildings because we have a very good feel for what's going on in the market and the capacity out there to lease these up.

The next question is from Jamie Feldman at Bank of America Merrill Lynch.

Broker reports this quarter pointed to negative net absorption across a bunch of the L.A. submarkets. Can you just help us think through is that something to worry about? Or is that more temporary? And what gives you comfort that the cycle is going to continue on pretty strong here?

Jamie, it's Kevin. We've looked at this, too, because there's a lag between tenants taking space and it showing up in the brokerage reports and same with the lag of tenants announcing that they're moving and it's showing up. And east Santa Monica is a great example where there was a ton of leasing activity in the fourth quarter, and none of that really got reflected in any of the year-end numbers because they said, well, nobody is in occupancy yet even though the space is off the market. So this quarter, it just so happened that some of those tenants were moving, but tenants haven't moved in. And so we don't have a sense within our portfolio overall that things are decelerating. I think it's just one of those quarter blips where we've got a lot of noise in the numbers. And then we've also got a lot of landlords that have remeasured their space. And those [Bowman] numbers are circulating out into the reports as well, and it's causing noise within when you look at submarkets from quarter-to-quarter, there's changes in the overall inventory in the submarkets. So the numbers aren't quite as precise right now as we'd like them to be.

Okay. But overall, you don't see any hiccup in any of the submarkets?

It's funny because you're asking the same question that everybody -- it's certainly got to be a question on people's minds, right? I mean, our markets have been moving in a strong pace for a number of years. We're hearing about slowdowns in some of the other gateway markets. And so everyone's extremely sensitive to what's going on in our market, right, and because our market showed strength for so long. I have to say, we have no new supply. Everything's moving along at a very strong clip right now. And we really don't see any threats to the industries driving our market, to new supply coming into our markets, short of something happening with the national economy. And if you look back at the history of these markets, you have to go very far back to find an industry-specific or market-specific thing that would have happened that would have impacted us separate from the national economy. I mean, you could argue the aerospace in the early '80s, something like that, but it's been a long time that most of the downturns that we've suffered across these markets have been the result of national downturns, not something happening specifically here. And as we sit here now, we don't see anything here that would get in the way, of which we admit and everyone should admit has been a very long trend of rental growth, but we don't see anything that would get in the way of that, short of a change in the national economy.

Okay. I'll ask it one more time, just kidding. And then just second, so what's the next hurdle here for the Brentwood development before you can break ground?

Well, we have to now complete plans and go pull our permit, which we're allowed to pull now because we have this approval. And we're moving at full speed ahead at this point that I think we feel like we'll break ground fourth quarter of this year actually. And I see these meetings going on in our big conference room with a million people in it so they must be getting something done.

The next question is from Craig Mailman at KeyBanc.

Just curious on, with you guys more actively looking to take back some space, can you just kind of talk about which submarkets you may be more active in? And is this maybe the reason behind the sequential drop in Sherman Oaks?

We're more active on the Westside. Sherman Oaks/Encino is a very good market, but because we felt a little bit of a downturn last few quarters, I don't think we're doing a lot of it there, maybe a little bit of it there where there's real opportunity, but I think we're doing more of it on the Westside.

Was there anything in particular that drove the sequential decline out there then?

Stuart, you might be able to answer this better.

Yes, we -- I mean, we saw some kind of medium and small tenant move-outs, nothing in particular. Obviously, disappointing to see another down quarter there, but everything we're hearing from leasing there is a lot of activity, a lot of requirements in the market. So we're pretty optimistic of getting some deals done out there, and we're continuing to work through it.

And as Stuart said, the pipeline is very strong out there, and we're still pushing rents out there, too. So we're not -- we still feel good about the market.

That's helpful. Then maybe just for Mona, can you just give us your updated thoughts on kind of what the plan is with the swap that's maturing in November?

We're in the process of looking at refinancing our outstanding debt right now. We haven't finalized that. And it's not in our guidance for the year. But as we get closer to finalizing that new debt, we'll make a decision on what to do with the swap.

Do you have any sense of kind of where price stock is relative to the in-place?

Well, the -- what happens is and as we've discussed before, when we have -- our debt goes out obviously substantially beyond where our swaps expire. And we do that on purpose because we start focusing on refinancing debt 2 years before it's due. That way we never get called or backed against the wall or anything like that. As that debt expires, the net debt, we'll say, it goes on the list. And we start working on that refinancing. I mean, in terms of the pricing there, I mean, we're working on some debt now. And when we announce that deal, we'll be able -- you'll have a very good feel for the pricing, but I don't want to announce the pricing on that right now. But I think in terms of just spreads on debt, you can do your own calculations about where LIBOR is because we swap over LIBOR. It's down a tick, still very good. It's very good and probably spreads have tightened up a little bit, not a ton, but a little bit.

The next question is from Alex Goldfarb at Sandler O'Neill.

So 2 questions here. The first, Jordan, as you guys -- obviously, you've really solidified your building holdings on Santa Monica. Are you finding that as you increase your dominance in a market, you -- there may be less competition from competitors looking to acquire because they may not have the same leasing leverage as you guys have or everyone is seeing the same dream so people -- it doesn't change the fact that it's from a leasing perspective maybe a new entrant doesn't have the same leverage, just everyone still wants to own a piece of it and therefore, we should -- pricing continues to escalate?

I hope it's the first one where we're scaring people out of the market. So far, I haven't felt the wonderful feeling of having scared people out, being able to buy buildings at a discount. So far, everything we try and buy, the bid is intense and my hair goes a little grayer. So hopefully, people out there are getting the word that it's hard to compete with sort of L.A. local group that already has their platforms in place. And you have to have a real good and strong operating platform to be competitive here and to manage your buildings in a way where they're highly profitable. But I got to tell you, everything that comes up just seems to just get -- it's the regulars and then there's always some other people that it gets attention from, different people each time that -- there doesn't seem yet to be any kind of free ride. I wish what you're saying was true, but it isn't.

I didn't expect it to be true. So I was expecting to hear that prices continue to go up, but 70% concentration in Santa Monica seems like pretty tough to compete if you're another landlord. So following up then, as pricing does escalate...

Other landlords take a note on that. Get out of our way.

But in all seriousness, Jordan, following up on that, just given where pricing is going, do you guys start to think instead of buying traditional office buildings, you have the folks who bought the Macy's box over at Westside Pavilion, maybe they'll convert it to office. Do you guys start to think down the conversion route that instead of paying the prices that the assets are now commanding or existing assets that maybe it's worth buying assets that are conversion candidates?

I don't know that there are -- I know the Macy's deal you're talking about is an interesting deal. I don't know how many -- I mean, that's a conversion to sort of large, open, super high ceiling, maybe trying to attract sort of large tech tenants. I don't know that there are -- for what we do, where we try and get this -- go after the small tenants and try and bring down the cost of leasing and turnover, drive rental rates, I don't know that there are a lot of substantial conversion opportunities in our market, particularly in the Westside, where it would obviously could make a lot of economic sense. What we are looking at because of just the strength of the economy -- and you guys are seeing it, of course, is opportunities for us to get more out of our property, whether it be building a residential project like you see us doing in Brentwood or the way you see us doing over at Moanalua or doing adding amenities to an area where we have a very intense ownership and where we think we can even up-class the area even more and drive rents even harder. So there are areas where we can spend capital not buying buildings where we think we can get very high returns on that capital, rehabbing buildings, redoing communities, adding residential areas where we already own land or adding in other ways other product types where we already own land. And we're focusing more and more on that. And as you guys know, we have 4 lobby projects and repositioning projects of buildings going on right now. We have 2 big residential construction projects going on. So there's a lot going on in that area, and that capital, I think, is going to -- the returns on that capital are going to be reflected extremely well. I mean, better than buying a building, which is a great long-term investment, extremely well, but it will be reflected outside of the range of where you guys look, which is, gee, I don't know, one quarter. But it will be reflected over the next couple of years because I think we'll get a lot of good returns out of it.

The next question is from John Guinee at Stifel.

Wonderful quarter. Very impressive. A question more for you, thinking on Page 22, looks like you're talking about $250,000 a unit for the Honolulu incremental investment. What do you think full development costs would be on that if you had to pay for the land? And then the same question for The Landmark. I'm sure these numbers are much more complicated than you presented on this summary, but your incremental cost is only about $350,000 a unit. What would be an appropriate valuation for the land -- the density created?

Wow, so to -- differently, so the one in Hawaii, we get the benefit of what's called the greater the facilities, although we are upgrading the facilities. We have the whole project there, but we don't get the parking. So we're building the parking -- and so in our project, we're building the parking and actually improving the parking across the board in that project and improving the rest of the project and adding some swimming pool and sports facilities and new leasing office, new entrance and stuff like that. So -- but that project is hugely benefited by the land essentially being free, right? We bought that project on a cap rate on the in-place rent that were there at that time. We're going to now pick up 500, potentially even plus, so at least around 500 units here where we had no real value attributed to the land or to those entitlements. The reason you don't see apartments -- for rent apartments being built in Hawaii or one of the main reasons is just land is super expensive. And when someone lays out the money to get land where you can build residential and then they layer in the cost of construction, they end up saying, well, the only thing that works is these high end for sale condos. And that's what you see happening out there. This project in Hawaii, the project is closer to downtown, are very well located. I think they're well located for sort of not in the classic sense, but just people that work downtown to be housed there. And so I think that, that move will be good for the community and we're good because of what we own in downtown Honolulu. The cost of the land though is hard to peg. I mean, Kevin, do you have a view on Hawaii?

Yikes, there aren't a lot of trades.

Yes.

Hard to get a good valuation on the land there.

Would make it that you wouldn't build. And when you come to the deal in Brentwood, that even more so because we don't even have to build parking. That whole site has 4 levels of parking going down. And because there was a supermarket there, we actually have enough parking for the entire building. No new parking to be built. That's amazing. So we're just building the tower straight down through that deck and up with those tremendous views. So what's the value of the first high-rise in 40 years west of the 405 with gigantic views of the ocean where you don't even have to buy the land, build the infrastructure on the site, build a below-grade parking. It's tremendously high. I don't want overly speculate how high, but hundreds of thousands of dollars per unit.

Okay. Then on the same subject development, I think in Greater L.A., and I've asked this a couple of years ago, there is a push for transit-oriented development, both office and residential. Anything at all happening in that regard in any of your current submarkets?

Well, yes. So the transit is up and running. And I mean, I use it with my kids to go downtown to go to Staples and do stuff. It's running, useful, beneficial, quick, predictable. It's good. Now so all that good. Mostly it's being used from people downtown to get to the Westside, right? Because that's kind of the traffic pattern. You didn't need transit to go where there's no -- to go opposite that. And so the only real negative to that transit has been that it has brought a dense, dense number of people into downtown Santa Monica. So where we're buying all these buildings is so dense with humans that they've switched over all the intersections to having red light for cars, green light for cars and then red for everybody and only pedestrians crisscross in every which way because they're trying to get the pedestrians across because they're always trying to cross and they block traffic from making right turns and left turns and then hold up the whole thing. Even that's not working particularly well. You can barely get your car into that kind of -- in that deep area where we own all these buildings, got to sort of park on the fringe almost. So it's like that old joke about restaurants where that restaurant is so busy nobody goes there anymore because the wait is so long. I mean, it's crazy down there. I know people. I know the City of Santa Monica is focused a bit on a project they're working on -- which happens to be right behind the project we just bought, the one -- 429 Santa Monica. The whole block behind us is controlled by the city where they're building a big project, a museum and a hotel and super pedestrian friendly, open terraces type of thing. And it was one of the reasons we thought that buy was going to be such a great buy because that block, which has been a little bit sleepy over there on Fifth and Fourth is going to be kind of dead center of what's going on down there when they finish this project. I know that people are focused on accommodating those pedestrians and dealing with it. Going up Olympic, obviously, there's that project where the Pen Factory was that's being built. I think it's built. And it's mostly leased at this point. There's some work that's being done kind of in West L.A. going along Olympic further. I haven't seen a lot really in office. It's mostly been residential, but it's going on and will take a while.

The next question is from Jed Reagan at Green Street Advisors.

Congrats on getting the City Council approvals for Landmark. Just a follow-up on that. I guess just kind of back to Jamie's question. Is there anything at this point that could derail that project from moving forward? I mean, be it a petition from local residents or a [CCOR] challenge and then can you talk about expected yields on that project at this point?

So it was challenged by a group that challenges everything that's done in the area. Not a group, I think, with much of an agenda beyond trying to hold us up for some fees. At the core of their challenge, they feel that the equipment building the building, we didn't properly evaluate the amount of smog and refuse coming out of the tractors or something, which actually is not even a thing that's supposed to be evaluated. We saw that they were going to do that the whole time. So I don't know. You could have the insanity of that being successful, although that would rank very low on my list of what could go wrong. There's nothing stopping us from building right now as we sit here, and we are moving forward and building. And as I've said, we plan to start fourth quarter. I suspect that in terms of the homeowners -- the homeowners group spoke on the groups because there were 6 groups that I would -- in theory, we impact. And they spoke on our behalf at the City Council hearing in favor of our project. So this is not coming from any of the established locals that have a real dog in the game. This is coming from a complete outsider group. So I don't have concerns that at this point there's much that could stop us.

And that challenge is still outstanding at this point?

It will be outstanding for a long time. The way those challenges work is they try and disrupt either whether you need to raise equity to build the building or you need to get financing to build the building. They try and disrupt that process. That's not a problem for us, so it doesn't disrupt us. And so we are just letting it sit out there.

Okay. That's helpful. And then I guess any comment about how the acquisition pipeline is looking in West L.A. and your other markets at this point? I mean, is there -- are there still opportunities out there from Blackstone or others or is the -- has stuff kind of diminished at this point?

There are.

Jed, there are definitely opportunities, and we're very, very excited about the acquisition pipeline.

And your question is right because I'm surprised that there are still a good number of opportunities that Kevin and the whole group is working on, including some Blackstone.

Okay. That's helpful. And then just a last one for me. Can you talk about just the type of rent growth you're seeing across the West L.A. submarkets these days? And I guess, are you seeing any change in the tempo of demand since the beginning of the year?

Well, our leasing department is clearly seeing very strong rent growth since we're willing -- essentially, when a tenant shows a little bit weakness, we go, fine, get out, we'll rent it to somebody else. So I think they're exhibiting a lot of confidence in terms of what's going on there. Rents are still moving. And as I said earlier, I understand why you're asking the question, but they're still moving at a good clip and demand is very strong. I mean, it's strong to the point where there's tension in the system from tenants, particularly larger tenants, about just getting or holding onto their space or getting enough space to expand when they're already large.

The next question is from Rob Simone at Evercore ISI.

Just kind of circling back on development briefly. Can you guys touch on or update everyone on the conversion project in downtown Honolulu?

So that's funny that you asked that because before this call, Kevin said, dial down their expectations. You're putting too much pressure on me. Kevin wears a Hawaiian shirt every Friday to keep everybody focused that I'm so anxious to do that. He's working -- look, the guys there are working constantly and trying to make that happen. And you got to give them the time to make it happen. I am sure we will eventually succeed. Did that answer...

(Operator Instructions) We have a question from Mitch Germain at JMP Securities.

Just curious, Jordan, I missed a little and I apologize, but did you talk about the bidding process for the L.A. assets? I mean, was it kind of the typical players? Was there any -- was there a significant amount of foreign capital? Just being curious about your thoughts there.

Well, in particular for those Santa Monica assets, it was the typical plus, plus. There's a lot of bidders on everything, and there were more than a lot of bidders on those deals in particular. I mean, 1299 is a high enough profile asset that has to have the attention of everybody no matter where they are if they've ever considered owning anything in L.A. And it did. So it was a ridiculous number of people working on it.

We have a follow-up question from Jamie Feldman at Bank of America Merrill Lynch.

I'm sorry if I missed it, but did you guys comment on -- I know, Kevin, you had mentioned there's still a lot of acquisition opportunities in the market. When you look at all those opportunities, are those most likely in the JV based on what you're seeing or not?

It's going to kind of be case-by-case. As Jordan said, we identified a group of assets when we raised our capital for the EOP offering, and we have a moral obligation to those guys to follow through and offer them up a first look at that. On other assets on a going-forward basis by other owners, we'll have to evaluate whether we think that's the right opportunity for the REIT or whether we should do it in a partnership with JV partners.

I have to say -- and I know people keep asking about our obligations and everything. These guys have been great partners. I mean, if there was something we were doing, they want to do it. And some of these deals are definitely high-yield deals. They're very good deals. Just to protect the relationship because it's so good and we want them to be happy, we would evaluate doing that. It's not just a case-by-case. If it makes a lot of money, we do it. If it doesn't, do it and this and that. It's nothing like that. We want their experience to be good and to be very successful because they've been great partners to us. So if something came up and they said they want to do it, we'd have to very seriously consider, okay, we should do this with them because they've been good partners, and they want to do it.

Okay. That makes sense. If you were to do more through the JV, would you have to add more capital or you redistribute the equity you already have in there?

Well, don't even suggest that to them. I mean, we would want to add more -- you're trying to squeeze us down to a smaller percent of the thing? We're struggling to hold our 20% here, and you want to do deals where they're the only ones that add capital? We would for sure at least have our 20%, at least have our 20%.

Okay. And then do you plan to fix the debt on the 1299 around the deal you just did?

Yes. That's -- those are in sort of a group of buildings that have been bought by that entity and we're -- there's a couple of more things that are on that list. We'll see if we get them or don't get them. And when that's done, we'll turn that into a typical pool the way we go out and finance buildings and we'll finance it long term. We're just waiting to get a -- get kind of get into established portfolio because you get much better financing on 4 buildings over 2 or whatever, wherever we are now. And so now that's a 4-building portfolio and an outstanding one.

But in the near term, you're not going to hedge it or anything?

No, we'll just go right to doing the permanent financing.

The next question is from Manny Korchman at Citi.

It's Michael Bilerman. So Jordan, just recognizing the rent growth potential and how good the operating fundamentals are and your sort of outlook for that and all the operating synergies you get from owning more and more assets. I guess, you're talking about all the frenzied bidding and the number of parties coming out. I find it hard to imagine that there's no asset or larger-scale asset that you'd want to be able to monetize and return some of that capital to your balance sheet for further opportunities.

So as you know, we sold a building 5 or 6 months ago, I would say. Well, I mean, look, we own 69 buildings. I mean, we all consider small ones from that perspective. But as I've said and you're just -- as you're pointing out again, there are ways for us to get equity that can be very efficient. And you're saying, sell a building, it could -- that's the equivalent of saying, you could just reduce our equity exposure to a building, you can reduce our equity exposure to a market and move it to another market. You could bring a partner in and say, okay, let's take a look at whatever the market may be. Let's take a look at Hawaii. Okay, we have -- I'm totally making these numbers up, totally making them up. We have $1 billion in Hawaii. We want to have $500 million in Hawaii, but we like where we -- we like our plans. We like where it could go. Okay, you could bring a partner in and you could pull some equity out. And you have equity to put into some other stuff to further grow the company. And you're still managing these assets that you think are good, right? So it's not just selling an entire building. There are a lot of other opportunities to get equity out of the portfolio. And one of the reasons that those opportunities are so financially attractive is because we already have great relationships with people that are interested in doing that. So that's why we keep mentioning that, that's one of the things on our list of opportunities for raising equity.

And I guess, is there not an asset that where the bidding and the price that someone's willing to pay far exceeds what you view the -- what it's worth both from a portfolio standpoint and just price per pound. If people are so desperate to be in your market and pay up for future fundamentals, it would seem to me that, that would be an opportune time to -- you reduce the bottom quartile of your portfolio, the bottom 10%, just keep on rotating so that what you're left with is even better.

I don't feel that way, no. And I understand about kind of recycling capital. I'm not sure recycling capital in that way, especially for a company that's as intensely focused on long-term holds in markets and gaining market share in markets as we are is a very efficient a way to do things. Now if you decide you're going to move out of an entire market or you want to reduce your exposure to a market, I've described that. If you want to leave an entire market, you could sell and leave an entire market. But to sell 1 building in a market that we're focused on and in particular, we're actually trying to grow in some of these markets, most of these markets, it wouldn't make sense because -- I mean, you're talking to the guys that just won the bid on the last 2 assets that came for sale. So we obviously, yes, there's a lot of bidders out there, but we still think that where stuff's trading is a good deal or we wouldn't have bought it.

Arguably, you have more synergies than others and better market intel than others so you probably have the ability to outbid someone else based on the value that you can create from your platform.

Yes. So if you have a large position in a market, part of the reason for that large position is our platform in that market. So dismantling that platform would be to give up that edge that we would have in bidding for other buildings.

Why were those 2 buildings 30% vacant in such a hot market?

Two different operating strategies, they have different companies running the buildings. I don't know. I can't tell you why they -- they certainly could have leased those buildings to 100%. It's not like there's no tenants out there. Why didn't they choose to? That will be their own reason for knowing they're selling it or whatever the reasons are, maybe even -- and could be great reasons. If you ask -- the next question is, well, why aren't you nervous that you're going to suffer the same fate of, whatever, 30% vacant buildings? I'm extremely confident that we will not suffer the fate of 30% vacant buildings. I think those buildings will toe up to the line the same way as the rest of Santa Monica, and we'd get up to the 97% at a nice efficient clip. And by the way, we told you guys the same thing about Westwood, and you're already seeing that happen.

You feel like the market is going to see a positive net absorption in terms of tenants to take up that space? Or is that just people shuffling around, potentially coming out of some of your existing buildings which are basically fully leased?

I don't -- I certainly don't feel, which is what you're suggesting, that it's a game of musical chairs. I think if you ever wanted to compare it to that, it would be the harsh version where there's not 1 fewer chair, but 2 or 3 fewer chairs. And you've got guys swirling around trying to figure out where they're going to sit because that's what's actually going on down here. So I don't feel like you would be robbing from Peter to pay Paul at all. I think you could lease those buildings up lickety–split and you will not see any diminution in the occupancy of the other buildings.

Great. I'd love to see that in your conference room maybe swing around a chair, pull one out and see who gets left standing.

Well, you could come to one of my kids' birthday parties. You don't even have to do it at the -- in the conference room. We'll play real estate version hardcore musical chairs. And we'll pull 3 of the chairs and really make people fight.

The next question is from Jed Reagan at Green Street Advisors.

I guess just quick follow-up guys on that last question. Is it going to take much in the way of repositioning capital to -- on the Santa Monica assets to sort of get the lease-up you're looking for?

No. And remember those are in that JV, so whatever capital we drew already, it's already in the fund and prepared to be spent. So if you will, it's baked in and already actually even contributed. But I know on a broader scale, which is out there, that now between 1299, 100 Wilshire, 233 Wilshire and 401 Wilshire, those are the 4 buildings that you could have your office in where you're not only just in an office building, but there's a lot of those when you see the ocean. You could look right down at the beach from a number of those floors in those buildings. And we kind of said, that's sort of a beachfront group. And we're actually doing work to the lobby of 100 Wilshire, 401 Wilshire. 233 was recently done. And we do have schedule to do some work to 1299 to sort of sync it up and tie it in with those 4 buildings altogether, kind of moving together because you see that when the tenants that are looking to be in that sort of top class space tend to always be looking in those 4 buildings.

Okay. Appreciate that. And I guess while I've got you, you didn't comment earlier on the yield expectations at Landmark. Anything to add there? Is it just too early at this point?

Well, I know we've told you guys that we thought we would be building it for over a 7% cap, and I haven't looked hard enough at those numbers to want to update it.

This concludes the question-and-answer session. Would you like to make any closing remarks?

Well, thank you for calling in, and we look forward to speaking with you all again next quarter.

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