Douglas Emmett Inc (DEI) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Q3 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 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 could 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. During the third quarter, we sold an additional 6.6 million shares under our ATM for $250 million and completed our debt-reduction program by paying off a $342 million loan bearing interest at 4.46%. Overall, we reduced our pro forma net debt to enterprise value to 32% and lowered our weighted average annual fixed interest rate to 3.08%. Over 1/3 of our total office portfolio is now debt-free, and only about $650 million, less than 18% of our pro forma debt, matures before 2022.

Our office fundamentals remain strong, with same-property cash NOI up a healthy 5.3%, as we continue to experience strong rent roll-ups. We are pleased with the underlying strength of our multifamily portfolio, as rents for new apartment leases were up a robust 4.3% over the expiring rents. In Hawaii, last week, we welcomed the first tenants to our newly completed apartments at Moanalua. The rental rates exceeded $5 per square foot. As you may recall, Moanalua has been subject to a regulatory agreement requiring half of the existing 696 units to be income-restricted in exchange for certain tax exemptions. Because that agreement expires at year-end, we are also in the process of repositioning the existing Moanalua buildings. In the long run, we expect the shift to market rent will increase multifamily revenue by over $1.2 million annually and the operating expenses by about $800,000. The expenses will impact us at the beginning of 2018, but it will take some time to transition the income-restricted units to market rent. We are already seeing rising vacancy in those units in anticipation of the 2018 rent increases. This, along with construction disruption, increased vacancy at Moanalua during the third quarter.

One other Hawaii residential property is experiencing short-term vacancy caused by lower enrollment at a nearby university. Vacancy in these 2 Hawaii properties reduced the leased rate for our entire multifamily portfolio to 98.5%, even though our Los Angeles multifamily properties remained over 99% leased. These issues and higher utility rates have impacted our 2017 guidance for FFO and same-property cash NOI. And, as you know, our previous guidance did not include impacts from completing our debt repayment program.

Our balance sheet is stronger than ever, and we have identified a number of investment opportunities to foster our continued growth. First and foremost, we plan to acquire more office properties and to continue residential development on land we own. But we also have plans to significantly increase rental rates at existing properties by repositioning buildings and by investing in community amenities to transform submarkets where we own large concentrations of assets.

I will now turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone. As discussed on our last call, in July, one of our joint ventures purchased 9665 Wilshire in the heart of the Beverly Hills Triangle. I walked through the details of that transaction in the last call, so I won't spend more time on it now.

Our acquisition pipeline remains active, and we expect more trades in our markets before year-end. At our Brentwood development, we have completed the entitlements and plan to start construction of our 376-unit tower in the next few months. This is the first high-rise west of the 405 Freeway in over 40 years, so we've decided to upgrade the amenities to match its uniqueness. This decision, along with escalations in construction costs, have increased the estimated project budget to between $180 million and $200 million.

As Jordan mentioned, the first tenants moved into our newly completed apartments at Moanalua last week. Even with major construction continuing, we had preleased 30 units at above pro forma rents, with average rental rate exceeding $5 per square foot. We expect to deliver all 238 units of Phase 1 by early 2018. Phase 2, including 237 additional units and a new fitness center and pool is on track to open in late 2018.

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

Thanks, Kevin. Good morning, everyone. We signed 199 office leases for a total of 710,000 square feet in Q3. Our leasing spreads for Q3 were a healthy 23.2% for straight-line rent roll-up and 8% for cash roll-up. These numbers would have been even higher but for 2 factors. First, a disproportionate amount of our leasing was in Honolulu, where there has been less rent growth than our portfolio as a whole. Second, we had rent roll-down from a number of expiring long-term leases, where rent had grown by an average of 42% from the prior peak in 2007 and '08. Our occupancy in Sherman Oaks/Encino at the end of the quarter reflects a 50,000-square-foot downsize. We backfilled 1/3 of the space shortly after quarter-end. Based on this and other strong activity in Sherman Oaks/Encino, we expect it to recover soon. We were pleased to see Century City bounce back into the mid-90s.

Overall, the annualized value of all our in-place office rents per square foot has increased by 6.1% over last year. On the multifamily side, our in-place rents per unit have increased by 3.8% compared with prior year.

In Santa Monica, it is especially noteworthy that we recaptured 12 pre-1999 units in just the first 3 quarters of this year compared to 7 in all of 2016. As you may recall, rent control has prevented us from raising the rent to market on these units since 1979. Looking ahead, although we lose current income while these units are being refurbished, the long-term benefits are significant. On average, we have been able to raise the rents at each of these units by over $50,000 per year. As of September 30, we still had 214 pre-1999 units remaining.

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

Thanks, Stuart. Good morning, everyone. Overall, compared to a year ago, in the third quarter of 2017, revenues increased by 8.7%. FFO increased 8.2% to $90.8 million or $0.48 per share. AFFO increased 8.9% to $74.8 million.

Comparing our same-property cash results in the third quarter of 2017 to the third quarter of 2016, office revenues increased by 4.9%, reflecting higher average in-place office rents, while apartment revenues increased 2.4% despite the vacancy in Honolulu Jordan discussed. Operating expenses increased by 4%, reflecting significantly higher utility rates, even though our sustainability programs have continued to reduce consumption. Overall, same-property cash NOI increased by 4.9%, and core same-property cash NOI rose by 5.5%. Our G&A for the third quarter was only 4% of revenues, well below our benchmark group.

Finally, turning to guidance. We are narrowing our full year guidance for FFO to be between $1.89 per share and $1.91 per share. The $0.01 decline in the midpoint and lower cash NOI guidance reflect higher overall utility rates and residential vacancy in Honolulu. In addition, our previous guidance did not include impacts from completing our debt repayment program. As usual, our guidance does not assume the impact of possible future acquisitions, dispositions or financings. 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 we have will come from Craig Mailman of Keybanc Capital Markets.

Jordan, just curious, you guys have issued a fair bit of equity here in the last 2 quarters and lowered leverage. I'm just curious, is this just a new normalized leverage level you want to be at? Or should we expect you guys to lever up here in the near term in this kind of near-term capacity?

I would say this, and I said some time ago that I was -- we were comfortable with our leverage level really just in the 30s. I think that we have a lot of good opportunities, and we wanted to do some work to create some real capacity. And we've done that, and we've completed that program. And I just want to be real clear about that. As we look forward now, we're comfortable, we're more than comfortable in terms of where we are on leverage. And I think it's worth mentioning, since you're asking that question, that we plan to refill the ATM, not because we have any near-term plans to use it, just because we feel like we finished the program we did. And we want to have it out there and available. So we'll be filing and doing that sometime in the next, I don't know, short term. As we go forward now, we feel pretty good about all the various kind of avenues we have to draw equity, debt, whatever the case may be, to continue growing on all the fronts that we're trying to grow on.

That's helpful. And then you had mentioned kind of more office acquisitions teed up and maybe in some apartment developments. Could you just give us a sense of maybe what the pipeline looks for -- looks like on the acquisition side? And how much development you guys want to get started here on apartments in maybe the next 12 to 24 months?

Well, on the acquisition side, there's still -- and I'm going to give credit to Kevin and his group, there's still a really good pipeline of deals, literally, whether it be normal cash deals; OP Unit deals, office deals in West L.A.; I mean, some good deal in the valley. I mean, he's got them going all over. And obviously, you know how focused we are on Honolulu in terms of adding an office building there, which seems to be getting some traction. So that pipeline feels pretty good.

And maybe just a third one. Can you go through the $60 million increase at Brentwood? Kind of how much of that is the better amenities versus construction costs and if you feel like your yield outlook has changed at all with the extra money being spent?

Craig, you're using up everybody's questions. Now we're going to have, like, other people on the list drop off going, "That was my super-good question I was going to ask." So, all right, I'll go -- because I saw some notes on that. Well, I'll go through -- I can go through that with you. So for starters, it is an increase from our other estimate, but to be perfectly fair, our other estimate was an estimate we've been sitting on for a while and was really before we had our entitlements. And once we got our entitlements, we really got very focused to it now -- this is what we can build. Now what should we build? The project we're building is going to be better than a 7 cap rate project, just as we were discussing before. So you would say, "Well, the increased cost. Why is there an increased cost? How could you still be better than a 7?" And it's very simple. We're building the project at the cost that we think is the best project to get -- to build to get the best return. We've always been very comfortable above a 7. We could build the cheaper project, but we don't think that's as good a fit to this site, and to our entitlements, and to where the market is, as what we have now decided to build and planned out. And so we did that. We planned that building. We've gotten some real estimates from construction companies, and now we're giving you a number that is more in line with all of those things taken into account.

Next, we have Emmanuel Korchman of Citi.

It's Michael Bilerman. I wondered if you can maybe peel back a little bit on some of the Brentwood. I know you sort of gave sort of a little bit of an overview, but when you first disclosed this project, you were at $110 million or an incremental $290,000 a door. And then, in the second quarter of 2015, you sort of lifted at $20 million to $130 million, and that was, call it, $350,000 a door. And now we're sitting here at $190 million or $0.5 million a door, and over that time, rents in the marketplace, because you have an asset right there that you've disclosed, have gone from like 2,300 a foot to, call it, $2,700 a unit -- sorry, a month. So it just doesn't seem, I guess, what are you targeting -- the rents you would have to target to offset what is a 50% increase in cost? We're not talking about $5 million or $10 million. We're talking about $60 million. Can you delve a little deeper into what you're underwriting and the comfort level you have that you're going to be able to attain that type of return?

Yes. So let's start out when we started out the project, and I think even maybe you or somebody asked us, and we were saying we think we can get better than $4 a foot. Now we think we can get better than $5 a foot in terms of rent. And in fact, we're even targeting a little higher end. What's adding a lot of that additional cost is, we've substantially boosted the amenities of the project. And we think we can compete at a higher end of the market down there. But if you're asking me, if you're saying to me, have costs gone up, just in general, separate from amenities, well, yes, of course. I mean, construction costs have gone up. If you -- I don't know, what was the first [step] you were going back to 3 years ago? 4...

When you originally made the estimate, you were at $110 million or $290,00 a door.

When was that?

That must have been in 20 -- you must have first disclosed the project in late '14 and then -- but in 2Q '15, which is 2 years ago, you had increased it $20 million to $130 million. That's the last estimate you had out there. $60 million is not a small -- it's not a small number. And so trying to bracket it for us, to really understand what went into the $130 million versus what went into $190 million. How much is amenities? How much is construction cost increases? And how much of it is just maybe your capping interest in that number? I'm not sure for the delay in the project. How much is the park? I mean, $60 million is a big number.

Yes. I'm not disagreeing with you, but to be fair, we were kind of looking at the project before, not knowing what we'd be able to build, not knowing the size that we'd build, how much square footage we would build, the whole thing and saying, about this a unit, just to build this and target this market. I mean, I'm not trying to defend or not defend the number. But you're comparing a number that a construction company has gone through where we've gone out and done bids to a number that was, I guess, on a per foot basis, to build an apartment building. So it's hard to break it down at the level that you want to break it down.

Well, I guess, just what went into your (inaudible).

I would say this -- if the point of your question is, in the last 3 years, have construction costs gone up? Yes, they have gone up. And I'm sure that's a part of it. And I also know a part of it is the extra amenities we decided to add and all the other work we're doing around the site.

What are you achieving per rent at the existing multifamily asset that's next door?

Michael, it's Kevin. I don't really think that's a fair comparison because that was the last high-rise project, which was built 40 years ago. And so they're different animals. And so, for example, that project doesn't have laundry in the units. And we will have laundry in the units. We've got floor-to-ceiling glass on this project. We've got balconies that we've increased the size on to make them more functional. So it's not something that somebody looks at. It's something that somebody can use. So there really -- it's not a fair comparison between those projects. You really have to look towards other projects in the market, like an 8500 Burton or a 10000 Santa Monica or some of the high-rise downtown to really come up with the type of amenity package and experience that we're going to develop on this site.

And that's what we did, actually, and we designed to that quality.

And so you're still going to target a 7% yield on incremental capital?

Actually, I'm saying we'll do better than a 7% cap rate on all capital.

Next, we have John Kim with BMO Capital Markets.

Jordan, I think you mentioned in your prepared remarks that you're looking to invest in amenities to significantly increase rents. Is that on the multifamily side or on the office side?

I think that was on this project -- wasn't that -- that was on this project.

I think he's talking about building rehab (inaudible)

Oh, oh, yes. Okay. So community amenities. Is that what you're asking about?

Yes.

John? Yes. So -- and we have been doing that. So the park is a great example of that, that was brought up a second ago. So that would be a very large investment just for that apartment building. But if you look next door, we have, what, 700-plus units next door. We own, I don't know, well over 1 million square feet of office within walking distance of that park. So that's an investment in that area. We've also, we're also doing something similar in downtown Honolulu, where you've heard that we have a plan to buy a building, take it out of the market, generally improve the amenity base in downtown Honolulu, reduce the amount of excess office space on the market and convert it over to residential. So those are kind of market-impacting things that, frankly, have those and some of the rehab stuff that we're doing on individual buildings have the highest returns in terms of the cash we lay out and the return we can get because it doesn't take a very big movement in rent in the buildings in the area to have to create a huge return against these moves, which cost anywhere from $5 million to $15 million.

So you're saying this is primarily multifamily or both?

No, I misunderstand because I was answering the multifamily question for so long. You're talking about communities where we have very high percentage of ownership, where we have decided that we can change the amenities in those communities and improve the rents that we get in our projects without directly redoing one of our projects, like the park.

On a similar note, Warner Center, the occupancy really hasn't moved up since Westfield recently redeveloped their asset there. Is that a surprise?

John, I think we've actually made a lot of progress there over the last couple of years. We've seen it move up kind of from the low 80s up to about 88 today. So we've been pleased it's making progress. We still have a ways to go. We're working hard. I think with the Westfield project has been a benefit there. They have a lot of restaurants and stuff open. And they have further plans to invest across the street from us. Those are kind of longer-term plans. But we still continue to like the long-term outlook for that market.

Okay. And then Jordan, you also mentioned that 1/3 of your office portfolio is now debt-free. Should we read into that you're looking to potentially look into the unsecured debt markets?

It's funny that you asked me that because when I said that I thought I wonder if everyone will think that I'm shifting over to an unsecured market because you have to create a situation like that to do it, but the answer is no. No. Having the debt-free buildings, to me, is like storing capital as cost-effectively as possible because then, when we want to use it, we could, like, you could buy a building and add that building into the financing, and, therefore, you can draw your capital out that way instead of just having cash sit on your balance sheet. You sort of get your borrowing rate as opposed to the rate the banks give you.

I see, okay. And then just one last question. The Moanalua project, will that be FFO impactful next year as far as converting the units into market rents? Or is that more of a 2019 impact to FFO?

The expenses will have an impact in 2018. On the revenue side, it's going to be a bit of a slower transition.

So FFO neutral in '18?

So you're saying, as the regulatory agreement rolls off at the end of the year, are we going to see a big impact in terms of the income-restricted units rolling the market? And I think we'll see an impact because we get hit with the expenses right away, but we have a lot of units to roll to market. I mean, we don't want to just vacate the building. We're already seeing -- I mean, we had not planned January 1 to just go to everybody -- whether they -- the income-restricted units and say, "All right, you're all out. Here's the new rent," or "Here's the new rent, and we know that's going to blow you up." We had not planned to do that. We are seeing people actually preemptively knowing it's coming, move out, and it's one of the reasons we're seeing that substantial vacancy in Honolulu, one of the big reasons, because we maybe could have messaged to them a little better. We're not going to be that heavy-handed with this. We'll let it roll over time in terms of rolling out and moving the rents up. But we are no longer restricted, so that's good. So net-net, in the end, we're -- it has a positive impact. But we had not planned to be very heavy-handed about it, although the tenants themselves, I'll call it, preemptively or with the expectation that rents were going to move out, have been moving out quickly -- more quickly than we anticipated.

Next we have Alexander Goldfarb of Sandler O'Neill.

So just I'll try to stick to the 2-question limit. It's just part of what we do. Let me go first to the bigger one, and then I'll go to the smaller one. You've gone through this process with Brentwood and, obviously, the year is in the budget, the budgeting that went through. You've had now experience working with Hawaii and the demands out there. You mentioned looking at your portfolio doing a lot more apartment development on existing land. What are some of the lessons that you learned? I mean, like the Brentwood apartment, we all know LA is really tough to build in, but I mean, that's been a topic on this call for years. As you go forward, do you think that we should all expect that the projects that you guys announced are going to take a similar time? Or are there some lessons that you learned here that can expedite some of these development projects?

I think that we -- of course, we're learning a lot with every project that we do. And that learning will improve the process for us. But will we roll out on an expedited timeframe more of these buildings? I don't know the answer to that. We may not do that. We may just take one at a time and let them roll through the system slowly. That's just a function of our own kind of cautiousness. Could we double down and now start using -- start trying to build in some of these other locations and working the entitlements the way we did for the last 3 years on this? We're probably already doing a little bit of that. But at the same time, we aren't planning to just start stacking things up in a very tight way in terms of construction. We want to let these play through. We have 2 projects playing through right now. We're going to let them play through. We're going to learn all the lessons there are to be learned from the process. But we do have a lot more opportunity.

But it sounds like, realistically, it's maybe a project or 2 every -- maybe 2 to 3 years. It's not like suddenly, you're going to get a pipeline where you have 1 or 2 of these per year.

It's hard to say. As I said, we're going to play these through and make decisions about how hard we want to push on this program. And I do think, well, let's put it this way. These 2 we're doing are very good projects. They're going to be very good in the end. I think they're going to be successful. So that argues, to your point, to put pressure on us to speed up that process. But arguing against it is all the other things we have going on and not wanting to kind of speed things up to the point where we trip ourselves. So we got to just decide on the right pace for that stuff and a pace that works for our company and a pace that works for the communities and the politicians and everybody that's involved in making it happen. And we'll do that.

Okay. Second question is, the Hawaii project that you're switching from, rent control to market rate, I think you said you're going to get a $1.2 million revenue pop, but expenses are going up $800,000. Why are the expenses going up so much? Or is part of that some CapEx in there?

No, it's just that when these regulatory agreements -- that one we were subject to is for very, very -- it was there even when we bought the building. They give you -- they eliminate property taxes and GET. And I think the combination of those 2 things, which we're going to start paying now, is around that number, maybe it's a little less. I mean, but it's around that number, and then you look at just moving those units to market, and we gave you that number.

Okay. I would have expected the revenue pop to be meaningfully more than the expense pop, but okay.

Well, I mean, we'll see how that all plays out. And maybe as I said in the prepared remarks, we're also now redoing those buildings. So there's a lot going on, on that project, and it's creating a lot of noise for us in general in the system because it's a big project.

And next we have Jamie Feldman, Bank of America Merrill Lynch.

When you think about the -- what changed in your guidance, whether it's the higher utility expenses or the Hawaii occupancy, I mean, as we look ahead to next year, is this stuff you think that'll fade? Or are we looking at just the higher expense, lower margins going forward? And it sounds like you're going to get the $800,000 tax hit starting January 1 without the revenue coming online at Moanalua. Or is it the wrong way to think about it?

I think that's the right way to think about it. I think that Moanalua is an example from the last caller, when you go, are you going to keep going on these things? There's always unintended things to happen at these projects when you start this much construction and start disturbing the site this much. And so, for instance, at Moanalua, look, at the end of the day, we are going to create a lot of value out of construction we're doing there. And at the end of the day, having the regulatory agreement rolls up, it's going to create, I think, not only just a spread in revenue but the ability to just to grow our rents there, which has been problematic in the past. So all very good long-term things to invest in making happen. But I think the expenses are going to hit us right away because we're off the agreement. And I don't think we're -- I mean, at least, the tenants may move themselves out faster, but we don't plan to be heavy-handed with the tenants in terms of the transition on the lower income unit so that the larger income is going to take some time to get in. In terms of the long-term look at vacancy in Hawaii, these are all things that are temporary or can be explained in the way we're explaining, that I don't expect to stick. I think Hawaii, in general, is very, very underserved in terms of the units that we own there, and that without this specific noise that we see going on, some of it that -- most of it that we're creating, I think it's a market that tends to be extremely, extremely full. There's very high demand for these units. Now the utilities is another story. We've been doing a very good job at reducing our utility consumption. I would say, a very, very good job. But at the same time, and particularly recently, they have raised utility rates substantially, and that's impacting our office portfolio. So that impact, we do have more moves we're making in terms of reducing our utilization. But it's a very big job to offset the increases. I think the last increase was 10%. And I think they're going to continue increasing. So we're fighting that off. Each increase, we can put more stuff in, we can fight off some of it. But yes, the increase in utility expenses is impacting us.

Okay. And does any of that -- can you pass any of that through to tenants?

We can, and we will be. But then, as people's base year rolls, then we end up owning it.

Right. Makes sense. And then, I guess, just thinking about market rent growth. Any -- just latest thoughts on what net effective rents are doing in the market across your major submarkets? And can you talk about your 2018 mark-to-market or your portfolio mark-to-market as it stands today?

Well, I don't know about 2018 because we're still in '17. But I can say that in terms of just rent growth in general, obviously, Honolulu is going a little slower. The Valley is seeing more -- also seeing modest growth depending on where you look there. And the Westside is getting very strong growth.

Like, you mean flat in Hawaii and the Valley?

The Valley's not flat. The Valley's still seeing growth. But I would say Hawaii is definitely flat. I mean, that's why we're looking at doing this project, to take one building out of the market. I mean, we've just been flat for too long, and we shouldn't be because the economy over there is very good. There's just -- literally, I think there's one building too many, as trite as that sounds.

Okay. And then for the Westside, how much would you say rents are up even in the quarter?

I don't know. Do you have an answer to that?

No, I think it varies by market.

Next we have John Guinee of Stifel.

Great. Is this the [Mac Callie] call? Sorry, hey, this is interesting. Half your leases, half your office leases are about 1,500 feet or less, so basically about the size of your larger units in your new development. In your office leases, you're spending about $5.82 per lease year on releasing costs. Two questions. One, is that $5.82 skewed towards the larger rolls? Or do you spend that kind of money on the smaller units, office units? And then, two, do you have any idea what you're spending per lease year on CapEx in your apartment portfolio?

So on the office side, yes, the answer is yes. The TIs are skewed to the larger tenants. I think the number -- about half our tenants are about 2,600 feet or smaller. That's about the median size. But you're right, we spend more TIs on larger guys and less TIs on smaller guys, as you'd expect.

And the apartment CapEx, that we can tell you. What's the number? It's right here? Yes, for the 3 months, for the 9 months ended September 30, we've spent $320 per unit.

For an average unit of 1,000 square feet?

Well, those -- no, those apartment units are average about...

About 800 feet on average.

Average about 800 feet, yes.

Next we have Nick Yulico, UBS.

On the re-leasing rent spread in the quarter, you cited it was affected -- partially affected by some expiring leases signed during the prior peak. Would you quantify what the rent roll-down was on those leases, which submarkets they were in? And were there any similar vintage leases that could be flowing through in coming quarters?

Nick, the leases, I think, were spread mostly on the Westside where we had larger rent growth throughout the term. So we have some of those longer-term leases that were signed at the peak, had 4% increases annually or even 4.5s to 5s on some of those. So 10 years of those increases, like I said, you can get it up to 42%, I think, on average on those few leases that rolled off. So even though we've had really strong rent growth, coming off such a high ending number is hard to overcome, and it skews kind of the overall average for the quarter. But the numbers overall have been very strong. We still did 8% cash, 23% straight-line. And we think that, that metric is going to continue to be very strong. It's just choppy quarter-to-quarter depending on the roll. There may be -- there's still a few of those vintage leases that will roll, but the good news is, I think, we're past most of them. And as we're here in 2017, so we should be getting through most of those in the next year or so.

Okay, that's helpful. And then at 1299 Ocean in Santa Monica, which you purchased earlier this year in a JV, I was looking to get an update on the top 2 floors of the building that are vacant. There was some talk in the L.A. brokerage community that you might be moving your headquarters there. Is that your plan?

Yes. Yes, it is.

And, I guess, how did you weight taking that space versus leasing it since, I think, this is some of the highest rent space available in all of Santa Monica. I guess, I'm wondering how you decided to take it rather than lease it and get those economics.

Well, I mean, I hope that all the buildings we own along Ocean are the highest rent space available. I agree with that. We've outgrown where we are. We, just like all the other tenants here on the Westside, are very particular about where -- what market we're in. We want to be down here. And frankly, that was the only space that could fit us. I mean, we don't want to be in someone else's building. So that's where we fit.

And I guess, so how was that sort of envisioned when you purchased the building with your partners and the cap rate you paid? I mean, how did that factor in, I mean giving up the 2 top floors, which is great space. How does that affect things?

Well, they're happy to have a very good tenant in there. Maybe I don't understand -- you mean, did -- they obviously knew we were doing it. But I don't understand that question.

Well, I'm just wondering, I mean, how is it -- I mean, are you paying full market rents on the space? How does that work for the ultimate yield you achieve on the building with your partners?

I mean, we went through with our partners, we said we will take these floors. They said, "That works for us," and we did all our runs based on that deal, and that's the deal we made. I mean, if you're asking me to like give specific rents or stuff we don't talk about, exact rental rates, it wouldn't be good for the company to do that. But it was obviously a deal they were comfortable with.

The next question we have will come from Jed Reagan of Green Street Advisors.

I think just a quick follow-up on question Jamie had earlier. I think, Stuart, you mentioned there was sort of a range of rent growth you're seeing in your submarkets in West L.A. Could you just kind of bracket how much growth that is, maybe on a year-over-year basis?

It's tough to say, I think, depending on the market, there are some markets that are probably better than double digits and some that are in kind of the mid-single digits. And like Jordan said, Honolulu is probably flat, and the Valley is at modest growth so you kind of have a pretty wide range there, depending on a market you're in.

So maybe sort of high single-digits on average type of thing?

I don't know how precise...

Average across the whole thing?

Yes.

Middle, yes, somewhere in there. I don't know, 5, 6, 7, somewhere in there, yes.

Okay, that's helpful. And I think, just earlier in terms of the Moanalua incremental costs you're spending on the existing buildings, just what is the total expected spend there?

Well, we have it in the thing. What is it?

Well, we gave you the cost -- Jed, you're asking about the total cost the project. We've given you that on the new development.

No, I'm talking about existing building, the capital you're spending on the new buildings that are going to be sort of reinvested with this regulation.

We haven't given a number on that, Jed.

I'm just trying to get a feel for what your yield on that capital is if you could even just ballpark that?

So on the capital, I got to say, I think we went in -- we already told you, we're already leasing, and we're very happy with the rents that we're getting in the new project. So we felt like we could do work to the other buildings. I know they're going in and I mean that's why we're kind of -- we're certainly in a sense at the moment punishing that project because we have not only got the new construction, we're going with the new -- ground up buildings, but now we've gone -- we're going through the rest of the project with the construction crew and saying, "All right, let's start getting these buildings looking more in match or in tune with what we have there. Let's add some amenities up here." Because clearly, with these improvements, you can pick up a pretty big rent spread. I mean, I think the existing stuff is in the 2s, right, in terms of the dollars per foot that we're getting. And the new stuff is over 5. So I mean, I don't know whether we're spending $5 million, $10 million, $15 million to redo all these other 600, 700 units. But there's a lot of room to pick up money, pick up a very solid return on those units by upgrading them, getting them a lot closer to the new stuff that we're building.

Okay, I appreciate that. And then, I guess, in terms of the capital that you're investing in the community amenities and redeveloping select assets, can you give a sense for sort of the total cost we might be talking about for that program and what sort of return on cost we might be looking at there?

The ones that we've looked at, where we've said, if we spend this, like we do in a building, redoing one of the office buildings, it's been in even more than high teens, like could have been in the 20s, okay, in terms of return on your money. In terms of -- that would be rehabs of buildings or community projects where we think we can move rent, $0.05, $0.10, $0.15, $0.25 a foot a month. In terms of the total cost of the project, I know -- for the 4 office buildings we're redoing right now, it came in for the total around $50 million, but the -- some of that is a partnerships or JVs where they have prefunded the cash. So the impact on us is obviously a lot smaller number.

And the community stuff, is that material in terms of cost?

I don't think -- all of this stuff tends to range from the $5 million to $15 million range. So I don't know that any of it is going to be that noticeable in cost to hitting our balance sheet.

And after that, those 4 buildings you mentioned, is there 5 or 10 or 20 more after that? Or does that sort of wrap it up?

No, there is more after that. And that's one of the things we're mentioning about going in and redoing our existing office buildings, and we are experiencing good returns from doing that kind of work. There are more after that, but I'll still say, we need to get through some of these and get them done and get the actual, not pro forma performance, actual performance on the books and hitting us. And so that's why same reason, we're not pushing to continue the construction. And we're not trying to -- we do have more buildings that we could rehab that the think we could have a difference, but we want to do these, see if our assumptions are right, see what kind of returns we get out of the capital we spend before we keep going.

And next we have Dave Rodgers of Baird.

Maybe Jordan or Stuart, in your 3Q investor overview, your occupancy for your West L.A. assets or what you called the [EILA] portfolio, the premium that you have today over the market is kind of as low as it's ever been at least, according to your chart. So just to dovetail onto the last question, are those renovations and rehabs kind of driving that? Is that function of just pushing rents maybe harder than markets? Just love to get your view of if that stabilizes and begins to widen out again.

Yes. A lot of that is we've been pretty active on acquisitions over the last 18 months, 2 years. So those higher occupancy or higher vacancy acquisitions we've been doing are in that number. And we've become a larger -- certainly a larger share of the market over the last 2 years as well. So you have some vacancy coming in through acquisitions and just harder to outperform as you're larger part of the overall market.

And the second part of that is: are these renovation programs taking a decent amount of space off-line? Or are they all occurring with space fully available?

I don't think the renovation programs are taking any space off-line. The projects we're looking at are -- these are not defensive moves where we have vacancy and we think we need to reposition this to get this building full. These are moves where we are highly leased in these buildings and we think we can significantly move rates up, whether it's a new lobby or kind of repositioning the way that your arrival experience works in a building or something like that. And we see other buildings in the market that are getting significantly higher rents, and we think, "Let's spend a little bit of capital here and move rents up significantly to reposition this building." But these are essentially full buildings on the Westside we're talking about for the most part.

Yes, although, I got to say, look, the construction we're doing at Moanalua shouldn't have vacated other units either, but we are feeling, from the construction, vacancy there. And then it got off, obviously, the regulatory agreement rolling off is creating more vacancies. So that's -- I mean, when you go in and you do construction in a building -- particularly in a full building because, by the way, Moanalua was full, too. You better be prepared for vacancy just because it pisses people off that they are there while you're doing the work.

That's fair. Second question for me. You rolled forward the lease expirations in the supplement 3Q '18, fairly decent-sized rollover in Santa Monica with a pretty high rent relative to kind of what's before that. Anything in 3Q '18 in Santa Monica to watch for? Anything you can specifically talk about -- whether that was an acquired asset or one of your existing?

Nothing noteworthy to point out. I would say that, oddly, where we see kind of higher expiring rents is also there we are seeing higher rollup. So we're tending to have better roll-up in our stronger rent market. So we kind of had a question last quarter about increasing expiring rents coming forward. I would actually assume our rolls will be stronger in markets where you have higher expiring rents.

But don't assume that.

Next we have a follow-up from Jed Reagan, Green Street Advisors.

Maybe just a follow-up on that. Any kind of known move-outs as part of that, part of those expiries? And maybe just, in general, in the next year so any kind of lumpy or move-outs that you're tracking?

We always have -- you saw this quarter, we had a tenant downsize by 50,000 feet out in Sherman Oaks/Encino. Really happy we already back-filled 1/3 of that early here in Q4. So that's very normal for us. We'll have a tenant of that size rolling every quarter or a tenant or 2 of that size rolling every quarter.

Okay. And then it looks like there's been quite a bit of movement into Culver City here recently and development hitting both there and in El Segundo. I'm just curious how you're thinking about dynamics over there kind of affecting your core West L.A. portfolio and whether those would be submarkets you'd be interested in playing in.

You know what, I haven't seen that. I don't know. I mean, you're saying tenants moving to Culver City and El Segundo are vacating space here? Because we've seen a lot -- we saw a lot of migration back into that area around 26th Street where Boston Properties bought Yahoo! Center because there was vacancy there and people came back in from Playa Vista and areas around there because they were able to get space again. I don't know that -- what tenants have moved there. I don't know.

I think, Apple, Amazon and HBO have been a few that are expanding over there.

Well, I mean, Amazon went into the studio, and they're doing a long-term lease on the studio and taking some office space associated with that. HBO is moving into a build-to-suit over in Culver City. But Culver City really doesn't have that much space where you can build. Down in [the Gundo], they definitely have the ability to add space, but we're not seeing a ton of Westside tenants that are moving into El Segundo. That's been more of an incubator space for some of the technology tenants. SpaceX has been a big driver down there but it's not really within our core tenant base.

Jed, I think just like with [Playa], these are larger tenants that tend to make those moves because they can't get the space on the Westside that they need. So doesn't really impact our kind of core smaller tenant here. We don't see the smaller guys moving away from the Westside market.

Okay. And these aren't -- doesn't sound like these are areas that you're looking at more closely now to expand in?

I don't think -- well, there was a big trade in El Segundo. So we actually did do a lot of work there and looked at that market. And we're not there. In terms of Culver City, they're smaller buildings. I mean -- I mean, I've seen buildings there that I think would be good to own, but it just doesn't have a lot -- they just don't have a lot of office space there. It kind of all revolves around what used to be MGM Studios, which is now, what, Sony Studios or...

At this time, we're showing no further questions. We'll go ahead and conclude the question-and-answer session. I would now like to turn the conference call back over to the management team for any closing remarks. Ladies and gentlemen.

Well, thank you very much for joining us, and we look forward to speaking with you again next quarter.

And we thank you, sir, and to the rest of the management team for your time also today. The conference call has now concluded. At this time, you may disconnect your lines. Thank you, take care, and have a good day, everyone.