Douglas Emmett Inc (DEI) 2017 Q4 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 would now like to 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, and Happy Valentine's Day.

We had a very good year in 2017. We grew our FFO by 8.9% and our AFFO by 10.9% and just raised our dividend by 9%. Even after investing over $300 million in acquisitions and development, we reduced our share of debt by over $400 million and lowered our weighted average annual fixed interest rate from 3.28% to 3.09%. With the exception of the loan on our development project at Moanalua, our next term loan maturity is 4 years away in 2022.

We purchased 4 office buildings and increased our market share in our submarkets to 28%, leased the first 60 units at our Moanalua apartment community and fully entitled our 376-unit high-rise apartment tower in Brentwood.

On the sustainability front, we reduced our electrical usage per square foot by another 2.6%, our 10th consecutive year of lower consumption. Over 95% of our eligible office space is ENERGY STAR certified.

The fundamentals in our markets remain strong, with robust demand across a diverse set of industries. As we have often discussed, this demand is not being offset by new office supply. The entire construction pipeline across all our submarkets is less than 50 basis points of existing supply. Stuart will discuss our leasing spreads, but suffice it to say, they reflect our strong market fundamentals.

Looking forward, we will need to steer through a few headwinds. Disruption from construction and the recapture of previously restricted units is temporarily impacting our Hawaii residential portfolio. The benefits from our sustainability programs are being offset by higher utility rates. And the rising minimum wage, which hits $13.25 in Los Angeles this year, is putting inflationary pressure on payroll costs for us and for our vendors. Even though these factors impact our same-property growth, we expect very positive overall results in 2018.

I will now turn the call over to Kevin.

Thanks, Jordan, and good morning, everyone.

We continue to find good Westside acquisition opportunities. In December, we acquired 9401 Wilshire, a 146,000-square-foot Class A office property in Beverly Hills, for $143.6 million, pushing our share of the Beverly Hills submarket over 27%. The property sits in the heart of the Golden Triangle, across the street from Spago and next to the Montage Hotel. To fund the purchase, we issued 2.6 million OP units, used a small amount of cash on hand and assumed a $32.3 million loan.

As Jordan mentioned, our development projects are making good progress. At Moanalua, we expect to deliver the remaining units as well as a new fitness center and pool over the next year. Rents continue to exceed our pro forma assumptions at over $5 per square foot.

In Brentwood, we are gearing up to start construction of our 376-unit apartment tower. In December 2017, a consolidated joint venture that we manage and in which we own a 20% interest, borrowed $400 million under a secured nonrecourse interest-only loan maturing in December 2024. The loan bears interest at LIBOR plus 1.30%, which was effectively fixed at 3.47% for 5 years through interest rate swaps. The joint venture used a portion of the proceeds to pay off a $365 million acquisition loan facility.

Last week, we borrowed $335 million on a secured, nonrecourse, interest-only loan that matures in March 2025 and bears interest at LIBOR plus 1.30%. We have effectively fixed that interest rate at 3.84% per annum through March 2023. We used the proceeds of that loan as well as our credit line to pay off 2 loans totaling $426 million.

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

Thanks, Kevin. Good morning, everyone.

In Q4, the leased rate for our total office portfolio increased to 91.4%, and occupancy increased to 89.8%. We signed 194 office leases covering 699,000 square feet, including 321,000 square feet of new leases. We had excellent Q4 leasing spreads, which increased to 28.1% for straight-line rent roll-up and 12.2% for cash roll-up. For all of 2017, we achieved straight-line rent roll-up of 26.8% and cash rent roll-up of 10.7%.

On the multifamily side, our leased rate improved to 98.8% at quarter end. Our Los Angeles portfolio remains fully leased, and we made progress backfilling the vacancy at one property in Hawaii caused by lower enrollment at a nearby university, which we have already indicated is a short-term issue. However, we expect continued leasing headwinds at Moanalua from construction and from recapturing our previously income-restricted units.

In Santa Monica, we recaptured a total of 14 pre-1999 units in 2017 compared to 7 in 2016. On average, we raised the rents at each of these units by over $50,000 per year. As of year-end, we still had 212 pre-1999 units remaining.

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

Thanks, Stuart. Good morning, everyone.

We are pleased with our Q4 results. Compared to a year ago, in the fourth quarter of 2017, we increased revenues by 7.5%. We increased FFOs 13.7% to $95.4 million or $0.49 per share. We increased AFFO 21.8% to $76.1 million. We increased our same-property cash NOI by 4.8%.

For all of 2017, we increased revenues by 9.4%. We increased FFO 8.9% to $354.7 million or $1.90 per share. We increased AFFO 10.9% to $288.4 million. And we increased our same-property cash NOI by 5%. At only 4% of revenues, our G&A for the fourth quarter remains well below that of our benchmark group.

Finally, turning to guidance, for 2018, we expect FFO to be between $1.97 per share and $2.03 per share. Based on the strength of the fundamentals in our markets, our guidance assumes that we will continue to see good revenue growth even with the headwinds mentioned by Jordan.

Our guidance for same-property cash NOI growth is impacted by over 0.5% because we assume that CAM reconciliations and lease termination fees, which are difficult to predict, will be lower in 2018 than in 2017. 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) And our first questioner today will be Craig Mailman with KeyBanc Capital Markets.

I'm just curious. You guys had almost 11% cash rent spreads in '17. Just want to get a sense of what you guys are baking in for '18 here.

Craig, we don't give guidance on our roll-ups. It's very difficult to give that. So you see the numbers we did in Q4 are very strong. The trends, we think, remain very strong. No reason to think that we're seeing any softening there. So we remain bullish on the trends, but we don't give guidance on that. We still think there's great demand across a diverse set of tenants and industries, and so we still think the trends remain very good for roll-ups.

Okay. And then just on the Time Warner expiration in '19, just curious if there's an update there. I know it's in your kind of sold Burbank building. Is that long-term a disposition candidate? Or do you guys think that's a longer-term hold?

It's been a long-term hold. I don't think we're commenting on individual tenants. We don't comment kind of on individual tenant negotiations. So no update. But I can't really comment on a disposition candidate. I think it's something that's been in the portfolio for a long time. That's a great asset, very classic, more probably the best building -- one of the best buildings in Burbank. So...

And in a very -- and that market is a very good market.

And in a very good location as well, yes.

Our next questioner today will be Emmanuel Korchman with Citi.

I don't know who this is for, maybe Stuart there. Have you seen a difference in the makeup of sort of the potential tenancy in the newer buildings versus your heritage portfolio in terms of either user type or user size or any other characterizations?

No, not really. I think they're very consistent. The stuff we've been buying is right in our core submarkets. In many cases, it's next-door across the street from buildings we already own. I think the tenant mix is almost identical to what we kind of had in the legacy portfolio.

And then how -- I'm hoping you guys track this, but how much cannibalization, if you will, for lack of a better word, is there between those current assets and sort of filling in the vacancy in a building that you would have just acquired?

You're asking if we are taking tenants out of buildings we already own and moving them into the buildings we just acquired because they add more vacancy? Is that the question?

Not just because there's more vacancy, but just how are you measuring sort of that type of rotation, where the tenant is not renewing same space but moving into one of the buildings that were more recent acquisitions?

Well, we've done a good -- I will say this, I mean, in general, you can just see it because you can see our occupancy and our leased rate, right? So you can see we buy buildings. Our leased rate suffers a little bit from vacancy in buildings we buy. But as they move up, then it improves. But I would say that booking, and I guess, we're taking some tenants from other buildings. But overall, tenants are coming into the market and tenants are expanding. So it hasn't been really been kind of who's losing for us to win.

The one area, which we've talked about in other calls, which has been pretty good for us is, as we control more space in general, we're doing a better and better job of putting tenants in their right spot and rightsizing them into space that properly fits them without having to tear things up too much. And then, as you know, from the past, we've been pretty aggressive about just taking back space and re-leasing it. So saying to a guy, Okay, you can -- if the price point in this market is too high for you, how about this market? Move them there. We'll just take yours back because he couldn't handle his renewal. And then we then put someone else in there at a much higher rate. That's been a very successful program for us.

And the next questioner today will be Alexander Goldfarb with Sandler O'Neill.

So 2 questions. First, just going to the wages. We obviously have seen this trend from a number of the apartment REITs this quarter. You guys are just pretty sharp. You had in the fourth quarter in your apartments now expecting it in the full year. So was this more on the property level? Or is there some of it in corporate G&A because G&A is higher? And then do you think that this is the start of a trend so that '19 will see sort of a continuation of this? Or is this just a 1-year sort of catch-up?

Well, I think we did do more catching up this year than -- look, the thing has been moving up for a couple of years, and it's going to keep moving for 2 more years, is that what it is? Because kind of end of the day, they're trying to get minimum wage in this area to be $15, right? So they're moving up at a certain clip.

It doesn't work to just move at their number. You've got to kind of move ahead of it, a; and then b, you have to also -- you don't just move like the minimum-wage people. You've got to move all people above them or you're going to really aggravate them, that someone is making closer to their pay. So it has a ripple all the way up the chain impact.

I think we took on more of it in this round, kind of went early to go where -- to some degree, to go where we know we're going. But there's still some left probably over the next couple of years. I mean, they pushed very hard on the bottom, and therefore, everyone's having to absorb that impact all the way through their system.

Okay. And it's both corporate and property? Or it sounds like it's more at the property level?

I think that it's throughout. Yes, it will be felt more at the property level. It's obviously -- where we're particularly mentioning is in the same-store, which is where you're seeing it. And there, we're seeing it both in the office and the residential side. There's probably a lesser impact at corporate.

Okay. And then the second question is, Mona, you mentioned that lease terms would be down. But if you could quantify how much you expect them to be down this year. And then as part of that, last year you guys did some proactive space recapture. Is that all done so there's nothing else in your portfolio where you want to get out some low-paying tenants? Or do you think that we could see more of that later this year?

No, I wouldn't say that it's all done. I think that's a program that's ongoing. It's been successful for us, as Jordan has mentioned. But the tricky part about lease termination fees is that they're difficult to predict. And so we go into each year having a general idea of certain terminations that we expect to happen during the year. So this year heading into '18, there are less of those, and I think -- and part of that is probably coming off of the last couple of years, where we did have an elevated amount. So looking ahead, it looks right now like it's slowed down. It's really tough for us to be able to predict whether or not those go back up to the levels that we've seen in the last couple of years.

In terms of the impact, we gave you an all-in for lease termination fees and the CAM recoveries at about 0.5% on our same-store.

And the next questioner today will be John Guinee with Stifel.

Does this minimum wage increase help you guys in your comp plans? I couldn't resist. I apologize.

One thing that jumped out -- a couple of things that jumped out here, first is, it looks to me like your gross rents are only about $46, which strikes me as very low. One, is that an accurate number? And then two, it seems to me that your re-leasing costs have jumped over $6 per square foot per lease year, and that seems like a high number, given that you're not moving around -- you don't have a lot of full floor tenants. You're not moving around a lot of demising walls. Why is that number ticking up?

On the leasing costs, John, we've seen a couple of things. So rates are up -- as rates go up, our leasing commissions go up. So those are elevated. And as we're doing acquisitions, we find that there's a lot of space we have to spend higher TIs on as we're first taking over buildings as opposed to buildings that we've had in the portfolio for a long time.

We spend a lot of time and a lot of effort building out space that is a reusable, that doesn't force us to tear everything out every time for the next tenant. And that tends to be not what we find in buildings that we've recently acquired. So the acquisitions are causing that number to be up a little bit. But we can get that under control after a few years if we can get something into the portfolio.

And our next questioner today will be John Kim with BMO Capital Markets.

UCLA and Morgan Stanley expanded in your portfolio this quarter. Can you just comment on this? Are they expanding overall the footprint or consolidating space? Or any other commentary that you may have?

Well, we don't talk about individual tenants. When you first said that, I thought when did we say that? But it wouldn't be odd to expect UCLA to be a big tenant since we own most of the buildings in Westwood, and that's where UCLA is.

But you can see -- I mean, we do break out the number of leases there. So I think UCLA is up to 24 leases with us, and so they continue to expand that spread across a number of buildings and a number of different leases. And I think Morgan Stanley expanded and did one additional lease.

Okay. All right.

Can I ask a question about the impact of tax reform? I think your tenant profile is probably a little bit different than most other office REITs. But in your conversations with tenants, what's the mood like? Do you expect that this year will be a busier year in leasing? Last year, you were up 24% year-over-year. Any color you have would be great.

Well, wait, you said, tax reform but that's saying we're up 24% on leasing. So first of all, I don't think that tax reform is going to have any impact one way or another in terms of what's going on here, to the extent anyone's been able to decipher it. But in terms of kind of back to that, are you guys (inaudible) rolling up the leases? Is that what you're saying?

It was more about the tax reform was meant to benefit small businesses more than perhaps others.

Oh, yes. I think that -- I think, in general, because probably like you, being in a coastal state with higher state taxes and higher property taxes, it's been -- the tax reform's been a little bit of a mixed bag for California. On balance, maybe for most of our tenants, it's a little bit of an improvement in their tax situation. But I don't think it's driving anybody to really do much of anything.

Our next questioner today will be Rob Stevenson with Janney.

Can talk about what you're seeing fundamental-wise in the Warner Center/Woodland Hills market and where you're seeing sort of relative strength and relative weakness in those submarkets?

Yes. Pleased to see good activity, a good jump-up in the lease rate at Sherman Oaks Casino. We've been hearing good leasing volume there for the last couple of quarters, so good to see that move up. Warner Center, it continues to be us converting full-floor tenants to smaller tenants there, and that just takes time. So we're working through that process, took a step back this quarter. But the transaction volume there and leasing volume there remains good.

Okay. And then can you talk about the lease-up of the Moanalua -- or, excuse me, Moanalua apartments?

Moanalua.

Moanalua.

Moanalua. Are you giving any concessions to get those leases? And where are you rent-wise in the new units versus the competing product in the submarket?

Well, there's not really much -- we're putting brand-new product to market that really doesn't have anything that's competing with it. And as Kevin said, we're doing over $5 a square foot on the new product that we're putting out. So we're building kind of smaller-type units, smaller studios and smaller ones primarily is what we're delivering. So there's not a lot of brand-new kind of competitive product that you can compare to across the island. And I think that's one of the reasons that it's being so well embraced and leasing so well. And your other question was...

Whether or not you're giving any concessions?

No, I don't think we're giving any concessions on those leases.

No, those are real rates.

And the next questioner today is Blaine Heck with Wells Fargo.

Just starting out on guidance. Sorry if I missed this, but is there any way you guys can give us your same-store guidance broken out between office and multifamily? Is there any meaningful kind of divergence there?

Sorry, we don't typically break that out. But I think, Jordan had mentioned that in terms of the breakout between impact, the higher costs that we're seeing on the utility and the payroll side are impacting us really across the board. So it's not being skewed. We do have the headwinds that we talked about. Those are going to impact Hawaii and residential. But in terms of the breakout, that's just not something we typically provide.

Okay. And then second question, in looking at the expiration stage for the next few quarters, I noticed you guys have almost 100,000 square feet expiring in Santa Monica in the third quarter at around $80 a square foot. Are there any large leases in there? And it's obviously a high rent market. But is there any reason we should expect rents to come in at negative spreads to that $80?

We could see that, yes. So I don't think -- when you say large tenants, no, we don't really have any large tenants in Santa Monica, I think, the way you think about large tenants. I mean, for us, the full floors large tenant, maybe 20,000 feet. So pretty small, I think, by any standards, maybe larger than our average. And you could have some leases that are 10-year leases that have had 4%, 5% bumps in Santa Monica that could get up to some pretty astronomical rents by the end there. So it is possible to have leases roll down kind of on an individual basis.

And Brian, circling back on the same-store, and maybe just a couple more points to help you with that. I mean, overall our office growth has been solid, and we expect that to continue in '18. And our residential, we have seen a slowdown in our rent growth there. We were running around 5% plus, so expect that to head to maybe closer to 3%.

But again, in terms of our overall costs, we've been really successful in controlling those costs over the last 5 to 6 years. We're going to continue to try and work through that. But the utility costs and the minimum wage are going to have an impact. So hopefully that helps you to gauge a little bit more between the commercial and the residential.

And the next questioner today will be Dave Roger with Baird.

Maybe for Kevin or Jordan. Start out with the acquisitions, obviously positioned the balance sheet well last year. Another acquisition in the fourth quarter. How do you feel about the pipeline today? And how do you handicap the chance to put more money to work here pretty quickly in '18?

I think the chances are pretty good that we're going to put money to work. But the last 24 months have been pretty exceptional in L.A. as far as transaction volume, in L.A. in general and in our markets. And we've added, what, 10 properties over the last 24, months, 4 of them last year.

I don't want to give you guys the impression that we're going to be adding 5 properties every year, but we're certainly underwriting everything that comes to market, and we are very, very focused on what's strategic. And I said this before, but what's strategic to us are properties where we can use our operating platform to add value, so properties with either high vacancy or where the operating expenses aren't quite as we'd like them to be or properties that we can reposition. And so when those assets come up, we're going to definitely aggressively pursue them.

Great. And maybe on some redevelopment. You guys have started a little bit more on the redevelopment side with some office, whether it's lobby renovations, et cetera. How much downtime or maybe lost occupancy do you estimate that you had maybe in '17 with respect to that? And do you see that kind of changing meaningfully as you move into '18? Is that a ramping program for you?

It's -- yes, there's more and more buildings because we have programs going on in a lot of buildings where we're making change, where it be in the lobbies, exteriors or as you know, at Moanalua, where we're literally building on the same property where we're operating -- I don't know, whatever it is -- 700 units and we're building another 500.

And it's tough because, strictly speaking, most of what we're doing is not really displacing lease space. I mean, I guess, Moanalua did displace a certain amount of units in the whatever the classic side of the project versus the new side. But you do get noise. When we go into a building and we do enough, which I think is a great move, which will create great returns, you -- whether you create so much disruption that you lose a tenant that happens to be close to that or something like that, it does happen and it does create noise in that particular building for a while in terms of keeping it fully occupied.

But I don't think -- I hope it doesn't show up much in our numbers. I don't think it'll show up much in our numbers. But it'll definitely happen because we're working in so many of our buildings doing construction projects.

And the next questioner today will be Jamie Feldman with Bank of America Merrill Lynch.

I want to go back to just the leasing spread topic. So if you look at your 4Q '16 supplemental, your expiring rents were at $36.50. Now you're looking at $41.16 in 2018. So did you say you think you can maintain similar leasing spreads as you did in '17, like have rents moved that much? Or are you just saying you think they'll still be positive? Because it looks like you're heading into a period of much higher expirations than we've seen in the last few years.

Jamie, interestingly, when you look at our expirations, it tends to be the submarkets with higher rents that have had higher rent growth. So when we get a quarter where the expiring rent is higher, we actually tend to sometimes get higher rent roll-up. And when you get a quarter where you get skewed to more leases done in maybe a market like Warner Center or Honolulu, where we haven't had the same rent growth, we can have kind of a lower rent roll-up quarter. So just to elevate our expiring rents doesn't tell me that the trend in our roll-ups would be negative.

Okay. But it sounds like you have some outliers like the 3Q '18 Santa Monica at $80 (inaudible).

In individual leases, you can have certainly things that skew things, like you could have -- like I said you can have a high roll-up lease in Santa Monica that could be negative on an individual basis. And that's why it's choppy quarter-to-quarter, this metric, and 1 of the main reasons we don't provide guidance, it's very difficult to predict.

Okay. And I guess, back to Kevin. I mean, we've seen a move here in the 10-year. Some conflicting economic data. Just does it give you any pause on putting money to work here like after a pretty active couple of years?

Well, I guess, the 10-year has moved. It's moving in anticipation of the more robust economic growth, which should translate into better economic tenant activity and better rents. So it's something we're definitely keeping an eye on. And as we underwrite all of these properties, the cost of debt is going to be a factor. But at this point, it's not a factor that's causing us to pause in our desire for more assets.

And have you changed your rent growth outlook at all for underwriting? Or have your partners?

I think that we're underwriting it on a pretty consistent basis. So I don't want to get into the secret sauce on how we underwrite, but I would say you can expect more of the same.

The next questioner today will be Jed Reagan with Green Street Advisors.

So just I guess, following up on Jamie's question, on your office re-leasing spreads, can you -- I know you provided this metric in the past, but can you just update us where your rents sit versus market overall in your portfolio?

Yes, it's about 10%.

About 10%? Okay, that's helpful. And then in terms of the '18 guidance, can you give a sense of what you're assuming overall for expense growth in '18? I think on this call last year, you mentioned 2% to 3% rent growth assumed for '17. So just wondering how it might compare to that. And then specifically, if you can break that out between multifamily and office, that would be helpful.

We don't have a breakout between multifamily and office, but I don't think the typical 2% to 3% is going to hold. I think -- we think it's going to be higher than that. And that's what you have baked into what we've been showing you. So that's why when Mona went through that list because you're seeing it in same-store, is on the office side, we feel like we're getting very good revenue growth. We said on the residential side, not necessarily as good as it has been in the past but still good. But while we've been doing a good job of controlling costs across the board, those costs are impacting office and residential in both energy costs and in terms of wages.

And then keep in mind that this type of inflationary impact is also affecting our vendors, so it's not just internal.

5%, is that a reasonable estimate?

Well, it's reasonable in that it's higher than the 2% to 3% that I said we'd be higher than 2% to 3%. I mean, we haven't been giving guidance on what we're doing with expenses. And I actually, to be totally fair, don't know the number of our apartment versus offices. But I know it's higher because we've had to suck up these changes even though in the past we've been reducing our utilization, and it's been doing a good job of offsetting the increase in energy costs.

It's just like you would think. We deal with the Department of Water and Power. So it's just like with any governmental agency, they're doing a great job of outpricing any type of conservation that anybody could reasonably put in place. So we're fighting against that and I've already talked about the wage inflation that we're facing.

Okay, that's helpful. And then just last one for me. It looks like you've got quite a bit rolling in Sherman Oaks/Encino this year. I'm curious if there's any expected move-outs as part of that. And then can you give any sense of where rents sit in that submarket, kind of above or below market?

Yes, I think Sherman Oaks rents are -- expiring rents are below market at Sherman Oaks, so you can expect some roll-up there. Not as robust probably as on some of the Beverly Hills and Santa Monica type markets, but still a good roll-up there as we've had some decent rent growth in Sherman Oaks/Encino. But I don't think there's anything standing out in the roll that we're concerned about nor move-outs in Sherman Oaks/Encino that we're concerned about.

The next questioner today will be Mitch Germain with JMP Securities.

Kevin, what's the plan for the Beverly Hills Tower? Is there any capital that you're expecting to invest? Is there a near-term roll opportunity? What's the 3- to 5-year plan there?

Well, this property, unlike the other ones that we've recently been purchasing, was 99% leased. But a lot of the leases are significantly below market, so we've got a nice growth story within that building.

Every time we buy a building, we put together a capital plan, and we have one for this asset as well. It's situated on the corner of Canon and Wilshire and has a very big plaza. And it's pretty underutilized right now. It's got some planters that really prevent you from using it. And so we've got some money there to upgrade that and turn it into a better indoor/outdoor experience at the property.

Great. That's helpful. And then, any change in the bidding pool in the market? Are you seeing maybe less foreign capital? Or any takeaways there?

No, it's funny; there was a report about how L.A. eclipsed New York City on the amount of foreign capital that came into it last year. And I really think that's more of a function of New York transaction volume was down so far last year rather than increased foreign activity in L.A. I mean, especially in our markets, where like this last purchase that we did was 140,000-foot building, that's really tough for the foreign capital to underwrite both from a size perspective and just like digging into the market. And so I don't think we're seeing any more foreign bidders. And frankly, with some of these smaller assets, we get more competition from the high net worth investors than we do really foreign investors.

I think smaller deals are getting pushed. Small -- maybe the stuff we wouldn't necessarily buy anyway, are getting pushed out of sight by literally individual billionaires buying them that just live in the area.

And the next question will be a follow-up from Jamie Feldman with Bank of America Merrill Lynch.

I'm just wondering the magnitude of the drag from Hawaii in the asset repositioning. Like when that -- I assume that goes away in '19. So what's the impact on the '18 numbers?

The drag on what aspect?

On earnings. Like can you quantify pennies per share or some other metric? Just do you know how much the drag is?

No, it's not -- when you say drag on earnings, it's a drag on growth of earnings, you're saying, right? Because obviously, as we're leasing up the units, it's creating earnings. So you're saying -- so where we're always talking about that is when we're talking about same-store, right? We're not saying to you our earnings in our resi side is going down.

And Jamie, last quarter, we gave you some numbers around kind of the roll-off of that low-income agreement that we had there. So that is impacting our expenses this year right away. And I think we said last year that expense is probably up around $800,000 just on the tax issue alone at that property.

Okay. But what about on the occupancy side?

Well, we're going to have construction for another year, and so that's going to be a headwind as there's noise and kind of trucks and everything moving around. I think that's disruptful for the sort of the classic units that are there. And as we're delivering these new buildings, we'll have to continue to go through a lease-up phase. So far, that's going great. The demand has been good. We expect it to be good. But it'll take us certainly through the next year and then probably a few months after we've delivered the last. We'll be leasing all the way through as we're delivering these units.

Our next questioner will be Rich Anderson with Mizuho Securities.

I came in and out of the queue a few times, so I thought my question was answered. But maybe I'll ask it a different way.

Jordan, you said individual billionaires buying smaller buildings that happen to live in the area. And I'm curious, notwithstanding the comment about foreign capital, what about for transaction activity at sort of the intermediate or larger buildings? It's a more complicated market. It's difficult to get into, get past the velvet rope, so to speak.

I wonder if you worry about capital flows longer-term just because it's such a different market relative to others, be it regulation on taxes or building heights or whatever. Does it ever get to the point where capital from outside of the area just gets scared away and doesn't -- because when you have all these -- you mentioned 10 assets purchased over the past 24 months. There was a seller in those transactions as well. So I'm just curious if you worry about that at all.

No. I mean, the best way to answer you is no. I mean, well, there's a lot of bidders and interest and capital. Frankly, I wish we did scare them away more, but we don't, and they're all there. I think what actually we've created is a lot of very big funds that feel they're under-allocated to L.A., particularly the markets we're in and that are fighting to get their kind of piece of it, so that they have an allocation. And they're making it -- I mean, they're very aggressive. And if it wasn't for our very, very significant kind of operating platform edge, we would really be struggling against them.

I think there's plenty of capital trying to -- especially when now that you're going to the area, the more institutional buildings we're buying, there is more than plenty, like an overwhelming amount of capital available for those deals.

Right. And -- but you don't think rising interest rates obviously impacts maybe the broader swath of the nation, but maybe that you don't see that having an impact right now on cap rates?

Well, I'm sure that rising interest rates will have some kind of impact on cap rates. But I think most of what impacts cap rates is people's expectation for rent growth going forward. That's the giant thing. So if you have a well-occupied market, and you think you're going to continue to get good rent growth, it's hard to notice the impact of interest rates in that because people are buying all-cash with very low leverage, just like we are, too. So there's not -- and I don't think very many of the people that are managing large pools of capital are looking very hard at their leveraged returns, anyway. They're mostly looking at the all-cash IRRs.

Now that still has to be compared to 10-year treasury, what kind of spread are your investors looking for over the 10-year treasury. So that's still a little bit meaningful, but it's not nearly as strong a factor as where people expect rents to go going forward in terms of calculating new supply coming in into the market, expansion of the tenants in the demand side. I think that's the much larger numbers in the equation.

The next questioner will be Jed Reagan with Green Street Advisors.

Just so with the multifamily revenue growth slowing a little bit here in the past couple of quarters, just wondering -- and I'm sorry to touch on this, but is that all explained by the Hawaii dynamics you described? Or to what extent you're seeing some slowdown in West L.A. fundamentals on the apartment side also?

Well, as you said, we -- I think, in residential, I think the growth has slowed down. We were doing 5%, 6% for a while, certainly, 5-plus. And now we're around 3% or maybe we'll be a little above or a little below. But we're in that territory.

Probably for many quarters now, I've been saying I don't understand why where we're not at that number anyway. That would be a more typical number to expect. I think that the higher growth rates held up for much longer than I would have expected to. I feel like we went for like 5 or 6 years seeing 5% and 6% growth.

When you have that kind of growth in residential, it's very different from having it in office. In residential, a great portion of the portfolio you're able to turn every year. You get it right away. So that's going to create extraordinary growth.

Then if you want to go between Hawaii and West L.A., that's where you start talking about the noise that we're talking about having an impact on that growth versus West L.A., we don't have that kind of thing going on. So you're probably seeing a little stronger in West L.A.

But Hawaii has still been extremely good. I mean, the only way to really evaluate the -- what -- how does the demand look in Hawaii is just to look at what we've been doing. I mean, we brought those units out. We're almost leasing them as fast as we're bringing them out. And so they're leasing very quickly, and we're getting above our pro forma. We've already told you, it's over $5 a foot. I don't think anyone in Hawaii thought that was going to happen when we went into this project. So those are very strong returns for that project.

That's helpful. The West L.A. change, I mean, you'd chalk that up more to like a tick-up in supply or maybe demand growth slowing down with job slowdown? Or what do you ascribe that to?

I don't say tick-up in supply, and I'm not saying job slowdown. I think jobs are tight. I think it's just kind of moving back to its kind of mean or what its history. We were just very high before. I think we were oddly high before. And what I would expect is 3 to 4.

And there are no further questions, so this will conclude our question-and-answer session. I would now like to turn the conference back over to Jordan Kaplan for any closing remarks.

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

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