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Edited Transcript of DEI earnings conference call or presentation 12-Feb-20 7:00pm GMT

Q4 2019 Douglas Emmett Inc Earnings Call

Santa Monica Mar 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Douglas Emmett Inc earnings conference call or presentation Wednesday, February 12, 2020 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jordan L. Kaplan

Douglas Emmett, Inc. - President, CEO & Director

* Kevin Andrew Crummy

Douglas Emmett, Inc. - CIO

* Peter D. Seymour

Douglas Emmett, Inc. - CFO

* Stuart McElhinney

Douglas Emmett, Inc. - VP of IR

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Conference Call Participants

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* Alexander David Goldfarb

Piper Sandler & Co., Research Division - MD & Senior Research Analyst

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Daniel Ismail

Green Street Advisors, LLC, Research Division - Analyst of Office

* David Bryan Rodgers

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* James Colin Feldman

BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst

* Jason Daniel Green

Evercore ISI Institutional Equities, Research Division - Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Piljung Kim

BMO Capital Markets Equity Research - Senior Real Estate Analyst

* Richard Charles Anderson

SMBC Nikko Securities America, Inc., Research Division - Research Analyst

* William Andrew Crow

Raymond James & Associates, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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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. Please go ahead.

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [2]

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Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Peter Seymour, 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 like to turn the call over to Jordan.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [3]

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Good morning, everyone. Thank you for joining us.

A successful fourth quarter capped off a very strong year and a great decade for Douglas Emmett. During 2019, we grew our FFO by 6.3%, our AFFO by 18%, our same-property cash NOI by 7.5% and raised our dividend by 8%. The straight-line value of our office leases signed during the year was 28% greater than the prior leases for the same space.

We significantly strengthened our balance sheet during the year, refinancing approximately $2 billion of debt, which added almost 5 years to that debt's average term. At year-end, we had no floating rate debt and no maturities before 2023. Our weighted average interest rate is only 3%, and our pool of unencumbered assets has increased to 41% of our office portfolio. We purchased a fantastic multifamily asset in Westwood and completed a very successful lease-up of our first multifamily development in Honolulu.

Taking a moment to reflect back on the entire decade, we grew our office portfolio by 38% from 13.3 million to 18.3 million square feet. We grew our multifamily portfolio by 45% to over 4,000 units. We grew our FFO per share by 65% and our AFFO per share by 95%. As a result, our total shareholder return for the decade was 304%, 45% higher than the RMS Index and more than double the SNL U.S. office REIT Index.

Sustainability remains a key commitment for us. In 2019, we reduced our electrical usage per square foot by another 2%. This is our 12th consecutive year of reductions bringing our total savings to more than 22%. As most of you know, there was a fire last month at our Barrington Plaza apartment property. We currently expect that our insurance will cover our damages.

Looking ahead, Douglas Emmett has never been better positioned. Our balance sheet is stronger than ever. Our supply-constrained markets continue to have robust tenant demand from a diverse set of industries and our unique operating platform, dominant market share and development opportunities have us very excited about growth in 2020 and the decade ahead.

Now I'll turn the call over to Kevin.

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Kevin Andrew Crummy, Douglas Emmett, Inc. - CIO [4]

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Thanks, Jordan, and good morning, everyone.

In November, we acquired 16% of the equity in one of our unconsolidated funds, which own 6 Class A office properties totaling 1.5 million square feet in our submarkets. The net purchase price was approximately $91 million, which we paid through a combination of cash and operating partnership units. We now own 89% of the equity in what will be treated as a consolidated JV.

As Jordan mentioned, we completed the successful lease-up of our 500-unit Moanalua development this year. Our 2 multifamily development projects in construction are also progressing well.

In Brentwood, we remain on track with the construction of our 376-unit high-rise apartment tower, which, when completed, will be one of the most exceptional residential developments in Los Angeles. In Honolulu, we are developing 500 apartment units at our office conversion project.

We are currently building out 4 floors and expect to deliver those units in 2020. In addition to the growth from our development efforts, we expect more acquisition opportunities in our submarkets in 2020.

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

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [5]

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Thanks, Kevin. Good morning, everyone.

In Q4, we signed 178 office leases covering 791,000 square feet, including 326,000 square feet of new leases. Leasing spreads for the fourth quarter were 28.6% for straight-line rent roll up and 8.6% for cash roll up. We increased the lease rate for our total office portfolio to 93.3% and our occupancy to 91.4%. We were pleased to see that the lease rate in Warner Center moved up 220 basis points from a year ago and our Hawaii portfolio occupancy finished the year at 94.3%.

For all of 2019, we achieved straight-line rent roll up of 28% and cash rent roll up of 10%. On the multifamily side, our portfolio remained fully leased at quarter end. Over the past year, we have increased our multifamily portfolio by 16% or 566 units while increasing our monthly rent per unit by 6.3%.

Before I turn the call over to Peter, we'd like to address the split roll initiative expected to be on the November ballot. For those of you who are not focused on California, split roll is the term used to describe the ballot initiative to have commercial, but not residential, property reassessed every 3 years for property tax purposes.

Under current law, property taxes for all property types are increased upon sale and increases are limited to 2% thereafter. Proposition 13 is very popular. All prior attempts to weaken Prop 13 have failed, and we feel that this initiative will also be rejected. Indeed, even before the substantial voter education program has started, nonpartisan polls show only 46% support for split roll. Despite the low likelihood of passage, some of you have asked about the potential financial impact to Douglas Emmett. There are just too many variables and unknowns to quantify an impact at this time. In addition, it is a highly political issue and speculation is not productive.

Having said that, we can provide some observations. All properties in California already get reassessed on a sale. So split roll is not expected to impact asset pricing, NAV or sales transactions. Accounting assessors who are responsible for valuations have said that they would not have sufficient resources and it would not be practical to implement split roll.

Although the rules involved are not clear, buildings with small tenants, which we think should include most of our buildings, would not even be subject to reassessment until mid-2025. Virtually, all of our LA office leases require tenants to reimburse us for expense increases. Moreover, some analysts expect that split roll will trigger rent increases to transfer some or all of the burden to tenants.

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

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [6]

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Thanks, Stuart. Good morning, everyone.

We are pleased with our Q4 results. Compared to a year ago, in the fourth quarter of 2019, we increased revenues by 7.8%. We increased FFO 7% to $110 million or $0.54 per share. We increased AFFO 12.8% to $91 million. We increased our same-property cash NOI by 7.3%. For all of 2019, we increased revenues by 6.3%. We increased FFO 6.3% to $425 million or $2.10 per share. We increased AFFO 18% to $365 million. We increased our same-property cash NOI by 7.5%. At only 4% of revenues, our G&A for the fourth quarter remains well below that of our benchmark group. As Kevin mentioned, we increased our stake in one of our previously unconsolidated funds to 89%. And it is presented on a consolidated basis as of November 21. The effect of this transaction included recording a gain on our investment of about $308 million, which affects net income but not FFO.

Finally, turning to guidance. We are assuming same-property cash NOI growth will be between 4.5% and 5.5%, and the average office occupancy will be between 90% and 91%. Overall, we expect 2020 FFO of between $2.23 and $2.29 per share. As usual, our guidance does not assume the impact of 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And today's first question comes from Jason Green with Evercore.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [2]

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Just curious what you're seeing on the rent growth side from Hawaii office. We're hearing that year-over-year rent growth could be in the 20% to 30% range. Just curious if that lines up with what you're seeing.

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [3]

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Jason, yes. Look, there's a lot of things going on downtown that have been very good for that market, not just what we're doing with our conversion project there. We had -- Hawaii Electric just signed a large lease down there for almost 200,000 square feet to consolidate their space, like Pacific University also took almost 100,000 feet downtown recently. So a lot of things putting pressure on that market and rents are definitely moving up.

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Jason Daniel Green, Evercore ISI Institutional Equities, Research Division - Analyst [4]

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Got it. And then just on the multifamily cash NOI going negative in the quarter. I guess what should we read into there? Is that purely a function of same-store occupancy dipping? Or is there another component that we should be thinking about?

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [5]

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It's Peter. Look, we always have some noise quarter-to-quarter. We had reasonable first 3 quarters. We're disappointed with this quarter. The issues are concentrated at a couple of properties, and we're focused on improving those results.

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Operator [6]

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And our next question today comes from Alexander Goldfarb with Piper Sandler.

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Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [7]

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So definitely appreciate you guys being upfront on the Prop 13. But just sort of curious, as you're seeing the opposition to the split roll build, are you seeing it more come from the business community, given it would seem like they would obviously shoulder a huge burden of this? Or are you seeing most of the opposition being driven by the real estate industry?

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [8]

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It's really broad-based opposition and thanks for pointing that out. Yes. The business community I think is going to come out in a big way against this. You have a lot of large land owners in the state that have own land here for a long time. So it's not the real estate companies that have to be on the front lines for this, thankfully. We'll have broad opposition to this.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [9]

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I'd like to add. I think you're actually already even seeing homeowners say, forget about it. I don't want to hear any trickery about modifying Prop 13. So I've actually heard a lot from homeowners say, oh, I already know I'm against that, that what you wouldn't classify as business owner, real estate owner or whatever.

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Alexander David Goldfarb, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [10]

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Okay. And then on the acquisition front, just as you guys are looking at what's brewing for this year, do you think that you will -- there's a potential to add to your multifamily in Hawaii? Or do you think most of your acquisition activity will be in LA?

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Kevin Andrew Crummy, Douglas Emmett, Inc. - CIO [11]

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Well, I think on the multifamily side, the challenge in Hawaii is there just aren't that many large projects that are institutional. So that -- we're adding to the portfolio there through the 1132 conversion. And the acquisition pipeline in LA is -- it's looking pretty good. We -- I think I had mentioned last call that we were looking at a couple of OP Unit deals. And that -- those tend to take a little longer. They're harder to make. You're dealing with long-standing partnerships, sometimes multiheaded decision-making. So -- but I feel pretty good about the pipeline.

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Operator [12]

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Our next question today comes from Craig Mailman at KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [13]

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Just curious, I appreciate the comments on the Barrington and the insurance coverage. But if the City Council were to kind of get rid of the exemption on some of these older vintage buildings not having sprinklers, I mean how much could that cost you guys in CapEx and kind of downtime in some of these buildings?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [14]

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Well, let's start out with we would appreciate that. So we want to sprinkler the buildings. We've wanted to sprinkler the buildings for a long time. And we've been sort of trapped between conflicting rules coming out of the city in terms of to actually sprinkler the buildings, what you have to do and then some of the housing ordinances. So they -- to figure out what the cost would be, we would need to know what did they put in place that allowed us to do it because that could cause things to bear a lot. They put something in place that makes it cost-effective. And I suspect, in the end, they will, I hope they will, then it would be probably all around a good thing to do. If they should put something together that's so expensive and still doesn't make any sense and there's just no way to really get there in any kind of reasonable way, then they'll still have problems getting people to do it.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [15]

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Okay. Okay. Then just second, on the acquisitions. Just curious, is everything that you guys are looking at kind of new properties to the portfolio? Or could there be more kind of increased ownership with some of the JVs?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [16]

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They're both -- both could happen. That's a great question. But both could happen.

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Operator [17]

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Our next question today comes from John Guinee of Stifel.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [18]

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A couple of questions. First, the $308 million gain on the consolidation of the JV portfolio. Does that trigger the need to do a 1031 Exchange or a special dividend? That's one question.

Second question, deal traded in Warner Center, 513,000 square foot campus at Warner Center, any thoughts on that trade?

And then the third question is, can you -- there's -- just for the first time in a while, a lot of product under construction in West L.A., including, say, the west edge of Olympic and Bundy. Can you talk a little bit about the new product under construction in your backyard?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [19]

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Okay. So the first -- an answer to the first question is, that's just a GAAP accounting gain that you're required to do and you consolidate. No tax impact, and it's stripped out also for AFFO, FFO and all of that. So that's -- I don't -- I almost want to say unfortunate that it has to run through our income statement, but it does, and that's just the impact of consolidating.

Second one on Warner Center, that hasn't closed yet, so we'll let that one play out. We don't want to comment on other people's deals.

And the third one, you want to...

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Kevin Andrew Crummy, Douglas Emmett, Inc. - CIO [20]

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Regarding the new construction, John, most of the new supply has been in markets that are adjacent to ours. So you've got some things going on in Hollywood and in Culver City. You've got Google's campus, which is in the Westside pavilion, which is now called One Westside, which is 100% leased. I think the project that you're referring to is the Martin Cadillac side.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [21]

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That's right. That's what I think it was, too.

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Kevin Andrew Crummy, Douglas Emmett, Inc. - CIO [22]

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And that's a mixed-use project that's primarily multifamily with a small office component and a retail component to it.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [23]

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It's got a supermarket, mostly multifamily and very small amount of office. It wouldn't click in my mind as something that we would say was a big-off competitor. And the whole Westside needs more multifamily. More multifamily, whether we're doing it or someone else is doing it is good.

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Operator [24]

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And our next question today comes from Nick Yulico of Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [25]

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Just looking at the lease expiration schedule over the next 4 quarters, you have higher than normal in the Westside in the fourth quarter of this year, over 500,000 square feet. Can you just describe whether that includes some sizable tenants? And kind of how the conversations are going on that space?

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [26]

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Yes, Nick. No. It's not 1 or 2 very large leases. It's spread across the portfolio with a number of leases. So pretty normal for us, nothing unusual. And we're actively working on those renewal discussions and feel good about how those are going.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [27]

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Okay. And then just another question on Honolulu. Can you give us a feel for how this is working from an accounting standpoint, taking -- going from an office to the multifamily building? I mean is the entire building being capitalized right now?

And is it possible to get a feel for the NOI of that building -- as an office building, so if we were to just value it separately as a multifamily building, we could do that?

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [28]

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Well, just -- I mean from an accounting standpoint, as -- we're doing this in phases, right? So it's going to be -- we're maintaining office tenants on many of the floors throughout this project. And then as we complete the residential units, those will come online and begin to roll through the multifamily side of our P&L. We do begin accelerated depreciation on the floors that we plan to demo. So those will start running through or have started to run through depreciation.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [29]

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Yes. I think -- so the -- if you're saying the income and expense of the office building still run through our income statement, the answer is yes.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [30]

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Yes.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [31]

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And I think where the impact is, which what Peter just mentioned, has more to do with when you make a conversion like this -- but this all runs through depreciation. So I don't think you're seeing it in our -- in any of our FFO, AFFO numbers. But you write-off chunks of the building that's now being converted over and you capitalize what you're spending to turn it to an apartment. But the operations of it as an office building, and by the way, when we start running the units as apartment buildings, will flow through our income statement.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [32]

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Right. And then is it possible to -- just to get a feel for the ballpark what the NOI of the building is from an office standpoint? So if we wanted to take it out from an NAV standpoint and just value it as a future apartment building, we can do that?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [33]

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Not easily. No. I mean it's not -- we don't typically take single buildings and say, here's what's going on in the building other than when we buy it. We have tried to get some numbers and thoughts about what kind of returns we think we'll get out of that process. And we've said in the past that it's -- what we said in the past is we think, in general, we'll be developing the building, including whatever value, and everyone could subscribe different values, but whatever value you want to subscribe to the building as it is now, and then what we have to spend and convert it to an apartment building. We think we'll be developing it as an apartment building at an acceptable, not a knock out of the park, but an acceptable developer cap rate for an apartment building.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [34]

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Okay. I mean, I guess the $80 million to $100 million that you have on construction costs, I mean what is the -- I guess what is the return we should think about on that as we're getting to a multifamily type of NOI for that building?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [35]

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Well, okay. So I don't want to get into evaluating individual buildings. But I will say, the return on that simple number would be extraordinary, but that's not probably the way it should be calculated. The way it should be calculated is what's the value of the office building today, then when we add this money, then what all in do we have in it. And then with everything in, now I'm saying to you, I think it will be to the acceptable level of an apartment development, which is enough, but it's a cap rate around $6 million.

But I mean that wouldn’t be on just the $80 million to $100 million, that's also saying we have an office building there that has value today. So it's that plus the money that you have to do the cap rate on.

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [36]

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And of course, Nick, the whole reason we started this was to improve the office market down there and which -- and we kind of already told you about what's going on with rents and office. So that's going exactly how we hoped or even better, frankly.

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Operator [37]

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And our next question today comes from Manny Korchman at Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [38]

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Stuart or Peter, the average office occupancy dip in guidance versus where you ended the year, is there anything specific driving that? Any large tenants moving out or anything like that?

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [39]

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Well, as you said, it is an assumption for the average for the year. We generally have more expirations impacting Q1 in any given year versus the remaining quarters of the year. So we do expect an early dip this year, and then we should be making good progress over the rest of the year to build back up.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [40]

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And Stuart, in your opening remarks, I think you commented that on Prop 13, you don't anticipate any changes in the transaction market as sold properties being mark-to-market anyway. Is there the potential that, that properties will come to market ahead of the proposition being voted on, just as people worry about their -- maybe just not even in their cash flow, but their conversations with their tenants going into this? So private owners may want to get out and sell to a more institutional owner like yourselves?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [41]

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Manny, this is Jordan. That would be such a great day. I can't tell you. But we're not seeing it. I mean we would love that. We're not seeing any uptick in transactions around that proposition, which would be a great day if there was, but there isn't.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [42]

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Right. And Michael has one as well here.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [43]

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Yes. Jordan, just in terms of -- and I know you can't expect -- sort of isolate how much this could impact. But I guess what percentage of your portfolio is already at market? Based on all the deals that you've done, new tenant buildings you've bought, I would assume it could...

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [44]

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I -- that's a hard question to answer for a few reasons. One of which is, and I've said this before, what everyone in the outside world thinks as market has nothing to do with market when it comes to Prop 13. Prop 13 has its own definition. And if you read it, you'd be as cross-eyed as you are when we're looking at the way we do cap rates versus where the public market does cap rates. So for starters, the number you will come out with is probably a very different number than you guys would think of. And then you have, and as I said, you have a -- I mean we've continued -- over the past few years, we've been doing Prop 8s. And I can't -- it's very hard to know because I don't think that proposition functionally works.

It's very hard to know how or what would happen if you ever want to postulate that, number one, that it passed, and then someone actually tried to do it. So it's just -- there's just no way to figure out a real number. You know better or as well as anybody, what the general growth of the company has been and all the buildings we bought recently. And I just gave you a quote about how much we've grown the portfolio. And you know that we had a chunk in the IPO.

We've been -- we've added another, whatever it was, 45% or whatever I said, since we went public. So all -- you have all that, but you still don't even have the other side, which is where would they come out on those. And on all those properties I just mentioned, including IPO properties, we've won Prop 8s. We've won Prop 8s, meaning that we've won contemporaneously arguments where that we've said your volume was too high.

So it's just too hard to figure out where that will come out.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [45]

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Right. And I think you framed it right because it even in implementation, it takes a long time. Assessors can't -- don't have the staff yet to do it, and you'll be able to recover a lot under your leases from the tenants, right? So from a financial impact, I think the market may be overreacting that there's this massive FFO disruption. But I think you live in California, and I know it's beautiful, and I know you're looking at the water and it's 80 degrees.

Do you think –- right, right. I get the allure of where you live and where your assets are, and I'm jealous in the freezing cold. But do you think it leads to -- if it does pass because there's polling at 46%, that polling could go up, too. I mean there's some potential, even though it's failed every other time, that this is the one that increases out migration from the state and therefore, growth in tenants is reduced, right? That to me is the bigger risk than the FFO impact of a couple of pennies here and there.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [46]

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Well, I mean I don't want to get too political on this call. But I mean you're on the tip of the iceberg of the stuff the state of California is doing that creates issues. Now I'll give you another list of the stuff they're doing that turned us into an incubator state and draws population in.

But I mean Prop 13, the income -- the actual personal income tax rate, what's going on with the person -- the employment laws, how tough they make it to employ large amounts of people, how hard they are on mature companies that are actually employing a huge amount of middle-income people, which essentially almost get ejected out of the state. I mean the list goes on. If you're saying is this Prop 13 thing, on the long shot of it passing, I mean I assume there's somewhere where the camel -- you break the camel's back. But I thought that when they went to 13% income tax rate. I thought that on the last set of rules that came in to play for the employment thing.

But net, net, net, it doesn't seem to be happening. I know and I read the same stuff you do, the very loudness of wealthy people going, enough is enough. And they go, I'm making my permanent residence out-of-state, somewhere wherever they're going. But these are -- you read about like 5 different people, you go they're all leaving. It's a state of 49 people and growing. So if you say here on the ground -- if you want to know here on the ground, here's what we're seeing. We're seeing a light rail that doesn't even seem to have had any impact. The light rail has passed and there's still too many people downtown Santa Monica and all around the Westside. We're seeing the population continue to densify. We're seeing a shortage of housing at all level, even expensive housing, medium-expense outlet. So yes, the stuff they're doing should be impacting people saying enough is enough. But they're not saying enough is enough. There's more people coming in. I'm saying enough is enough. But if you're saying for the whole state, we're not seeing that. Would this do it? I don't think it's going to pass, and I don't know what the straw is that breaks the camel's back.

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Operator [47]

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And our next question today comes from John Kim of BMO.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [48]

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Your 2020 earnings guidance includes the impact of the fire at Barrington. But I'm wondering if you could quantify what the impact would have been had you kept that asset in your same-store pool to your same-store guidance?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [49]

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Well, it's -- we took it out of same-store guidance because we think our loss is going to be insured. But what happens is in the insurance, the way the insurance pays and the rules around collecting insurance and accounting around collecting insurance would make the number fluctuate a lot. Like it comes in, in a completely different way than what you would normally say of apartment doing same store.

So we took it out to let it settle out and not because to not have the insurance proceeds work the same-store numbers, which, by the way, normally, I would say, they literally can work on to the plus and the minus. I mean it's not biased in one direction or another.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [50]

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But the delta, could it have been -- you would have fallen below the bottom range of your guidance of 4.5% to 5.5%?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [51]

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I'll say again, insurance proceeds can have both a positive and negative impact. There's no way to put a range on a same-store number when insurance comes in and doesn't come in, it will -- it can change the number. I mean you could equally ask the question, would it impact that your range was too low? I mean that's the result you get out of that stuff.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [52]

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I hear you. Okay. And then, Jordan, you gave your views on Prop 13 and Prop 8. I might as well go to Proposition 10. Do you have the same level of confidence that...

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [53]

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Do you want me to give you my whole slate of voting? Because...

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [54]

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Yes. Go through all the proposition from 1 to 20. Would you...

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [55]

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Well, you're talking about the Rent Control one. I think that's -- there's so little energy behind it. It's kind of a one man, one mission thing, this guy out in Hollywood. But the -- it was soundly defeated last time. And since then, literally, the state legislator, the governor all got behind the statewide Rent Control ordinance, which has been put in place. I mean even politicians are saying, "Hey, come on, you haven't even given our thing a chance to work." And if the other one kind of came on the scene with low support, this one is coming on the scene with even lower support with very little backing and very little energy.

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Piljung Kim, BMO Capital Markets Equity Research - Senior Real Estate Analyst [56]

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So you're not feeling the burn?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [57]

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No. Well, I'm reading about the burn and seeing his election results, but I'm not feeling it when it comes to the residential rent control.

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Operator [58]

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Our next question today comes from Dave Rodgers of Baird.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [59]

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I wanted to go back to the office occupancy that was asked about earlier, understanding that there's a dip in the first quarter, but you ended the year I think over 93% leased. So can we dive a little bit more into maybe do you expect to do some more redevelopments which could pressure that number this year? Is it more -- is it fewer retentions? Or is it just kind of slower lease-up? What's embedded? Because you guys have made some pretty good progress in recent quarters in terms of the lease-up.

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [60]

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Yes. So when -- it's Peter. When you have the kind of lease-up that we had, the number of new leases that we wrote, it sort of it automatically implies that you have existing tenants where you'll see some of those move-outs. And that's what typically happens in the first quarter. It -- the assumption is not affected by estimates of the impact of redevelopment. This is just the straight -- we had this very strong leasing year. And we normally see a bit of a dip in the first quarter, and then we build back up over the course of the year.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [61]

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Okay. And then let me ask, I mean, maybe straight about the redevelopment side. Jordan, you've updated us in the past. A quick update on kind of where you're at. And do you plan to add more assets to that in 2020 from the office on the Westside?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [62]

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Well, it's definitely kind of we were crowing about in the last year or so. It's mostly done, and we're now on to additional assets. And of course, we've moved the Barrington Plaza up on the list, and we know that that's certainly a 2020, 2021 project, but that's a program that has legs for -- we don't -- we didn't roll off those last 7 and just say, good. We're done and do that hand swipe and walk off the table. I mean we just -- we're going to be rolling with that for years and years and years. I mean it's just -- until the market really changes, we're -- those, which I wish it was more capital, but those make tremendously high returns, those repositionings that we're doing. So we're not letting loose of that.

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David Bryan Rodgers, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [63]

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And the volume of activity kind of in 2020 versus 2019, is that pretty similar? Will that be a steady state...

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [64]

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Dollar volume -- Yes. Dollar volume, yes, in the number of buildings. I think it's probably fewer buildings and -- but dollar, we're kind of -- I think we are keeping pretty consistent.

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Operator [65]

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And the next question today comes from Rich Anderson of SMBC.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [66]

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So on the Brentwood high-rise development, is that is that an early 2021 delivery or something like that? And if -- regardless, how much have you spent so far in the, call it, $200 million total cost?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [67]

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Rich, our construction is going to go all the way through to the end of 2021. And I don't have the number of what we've spent so far, but we can get that to you.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [68]

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One more on that. Is there an ability to -- can you do some sort of sight unseen type of leasing? Or how do you foresee that asset coming to market? Will there be 0 occupancy out of the gate? Or will it be something much more substantial than that?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [69]

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Well, our MHA -- our recent MHA development, we did have some pre-leasing that happened before the thing even open. There was a lot of interest in that. I suspect this will be the same. This is going to be kind of an iconic high-rise, new high-rise on the Westside we haven't seen in a long time. So I suspect there'll be strong interest, and we'll hopefully have a waiting list or do -- be able to do some pre-leasing before it opens.

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Richard Charles Anderson, SMBC Nikko Securities America, Inc., Research Division - Research Analyst [70]

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Okay. And then looking back a year, your guidance for same-store was 5% to 6%. You ended up 7.5% I think this year, so a good beat and raise type of year. This year, 4.5% to 5.5%. Is there anything about how 2020 looks versus 2019 that would preclude a similar type of event? Or is there something that maybe would get in the way of your ability to sort of see your internal growth profile improve over the course of the year?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [71]

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I -- I mean I don't want to limit our upside. We're trying to give you a reasonable range going into the year. I mean every year, we work to beat all our numbers. And I think that certainly, we hope to beat these numbers, too. But I also think the range we gave you is a reasonable range for what we see going into the year.

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Operator [72]

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Our next question today comes from Blaine Heck at Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [73]

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Just following up on that last question. So you guys had a great quarter from a cash same-store NOI perspective, mostly driven by the 6.5% increase in cash revenues. Can you just talk about the drivers of that growth though? I know you've got some occupancy growth in there and rent growth has been strong, but it seems like the burn off of free rent must have been a big driver, I guess. Is that right? And if so, should we expect cash and GAAP same-store NOI to sort of converge in the next few quarters? Or does that cash benefit from that free rent burn off stick around for a while?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [74]

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Well, yes. I don't think we -- I don't -- I haven't heard -- and to be fair, we haven't gone in and analyzed exactly that point. But I haven't heard any discussion that the same-store growth came from free rent burn off. I think it comes from just very strong fundamentals: fundamentals in leasing that have converted to occupancy and fundamentals in rental rate growth and getting higher bumps in leases and all the stuff that hopefully drives that. I mean there's always another half of the equation, which is what are you comparing to, the fourth quarter or the last year or whatever.

I think when you go not noisy past to not noisy current is when you get your best and fairest comparison. Sometimes we've had wildly swinging numbers because we've had prior years that were noisy, so the comparison got screwy. I think it was not noisy to not noisy. So it was just a comparison of fundamentals.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [75]

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Okay. It just seems like the -- I guess the 5.5% difference between GAAP same-store NOI and what you did on cash same-store NOI is a little elevated from what you usually do. But I guess we can go through the details off-line.

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Operator [76]

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Our next question comes from Jamie Feldman of Bank of America.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [77]

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Can you guys talk more about the transaction to buy out your JV partner? What was the yield on the deal? And then just why is your partner selling? And do you think we'll see more of this? It sounds like we will see more of this based on your answer to a question earlier, but maybe why are your fund partners looking to cash out?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [78]

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So we had come to the -- very close to the end of that fund. That was a place where we thought there probably was also some refinancing opportunities. But frankly, people came to us and said, we're ready to get out. We've made pretty good money. They got a pretty good yield. I don't think we said what their yield is. I don't know if maybe we should say it. We're not saying it. All right.

So they got a pretty good yield. And we have been buying interest all through the last decade. And then -- so when we were buying the rest of people out, we just went out to the -- because we were already up to 70%, so we went to the last few and said, if you want to sell, we'll buy your interest now. And pretty much they said, yes. I mean they -- we bought them out at exactly the -- the thing gets market valued every year -- at the end of the year with appraisals, and we bought them right on the dot of that number of their equity count. And one guy said, I want to find any way to -- so it was multiple partners, not just one, but one guy said, "I want to find any way to stay in the market. Would you mind like keeping the thing open?" And we switched it to our new JV structure, which is our other large JVs from the fund structure which we had, had because that one was 10 years old. And he said, "Go switch your structure. I'm good with that and doing your 30-year deal, I want to be in it." And so we said, okay. You stay in. And the others went out, and we all bought our interest to what we could get.

So it ended up like 89% - 11%. And it's a good vehicle. We -- hopefully, we'll now use it going forward to do some other stuff because I think our partner wants to continue doing stuff and growing their position.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [79]

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So sorry, so the new structure is 30 year and...

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [80]

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Yes. It's just like the other -- it's just like the others, the JVs, the last 2 big JVs that we did. So it's all on the modern terms that we've put in place, and it's ready to go. I mean we can use it to buy stuff. We don't have any proclivity towards that or any of the others. They're all structured the same.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [81]

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Okay. And then how large is the investment pipeline you're looking at today in terms of both acquisitions and buying up more JVs? And how would you finance it?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [82]

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Well, I think I don't -- OP Unit deals are tough. I think it's overweighted by OP Unit deals in terms of the acquisition pipeline. So those -- obviously, those have trouble going into the JVs. And it causes obviously how well -- how little I like -- we like issuing stock, right, I mean, and how much we just like solutions. So those are tougher. I don't feel like I -- and from an earlier question, when it was asked whether this -- here in California, whether there was going to -- there were people who are trading ahead of the potential split roll, I thought, I mean that would be a godsend, I mean, but it hasn't created additional straight-up sale deals.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [83]

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Okay. And then last for me, just what are you guys thinking on rent growth in your markets? Like how do you think this year is going to compare to last year across the submarkets?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [84]

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It depends on the markets like -- which is correctly, you asked the question. I mean as you know, Hawaii, very strong -- Hawaii's the laggard. Westside, very strong. Parts of the Valley is still very strong. And Warner Center actually finally showing some good positive movement. But probably the strongest is Hawaii at the moment, but certainly, the Westside is very strong.

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James Colin Feldman, BofA Merrill Lynch, Research Division - Director and Senior US Office and Industrial REIT Analyst [85]

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Do you think like Westside and Valley will be similar to this year or better or worse?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [86]

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I think parts of the Valley had been mimicking the Westside for a while. But as you get further out from Encino, Sherman Oaks, I think it's been slower than the Westside. But by comparison to its past, it's running like the roadrunner. I mean the whole thing has picked up quite well, and I saw a lot of people's note, saying, wow. They're finally getting ready to cross that 90% mark. I think we're up at 89% there.

So that's what matters. Occupancy matters. Our occupancy matters across the market. Occupancy matters in your portfolio. And that's what changes to what rent rates are doing. If you look at these other markets, you're like deep in the 90s. Of course, rents are moving.

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Operator [87]

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Our next question comes from Bill Crow, Raymond James.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [88]

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Speaking of joint ventures, I think it was probably 6 or 8 quarters ago, we were talking about the potential JV of Hawaii assets. And I'm just wondering whether that's off the table, whether you're still thinking about that in kind of bringing the cash back to Los Angeles.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [89]

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Well, I mean on our -- it has always been the case when I've been asked about Hawaii. I mean Hawaii is obviously very strong now. But we've always said Hawaii is a place where we feel like this is where we want to characterize and get our growth going forward primarily out of a market, which I feel is a 30-year market, which is this Westside market where we have in L.A., where we have a huge amount of our assets.

Hawaii has created -- and what's going on there has created a lot of investment opportunity, a lot of capital investment opportunity. And we've always said that, that is an opportunity to do a JV or do some other structure like that because we want -- obviously, that's a great place to stay involved. And it was never -- and it's -- as before, it's still a good opportunity to do that.

We -- the timing has to be right, the structure has to be right. We have to be able to demonstrate quite clearly to our partners or whoever we would bring in on that this is why we like this, this is why it works. We don't want to sell it. We don't want to do anything that looks like a fire sale or discounted sale. But we also want to make a deal where it works out good for everybody, for the JV partners and for us. So that's tricky, but that's definitely a market where we think we could pull that off one day. I'm not saying on this day, but one day.

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William Andrew Crow, Raymond James & Associates, Inc., Research Division - Analyst [90]

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Okay. One more for me. Barrington Plaza, that was a site of another major fire not that long ago and a lawsuit and everything else. Is there any risk or reputational risk or longer-term impairment because of the sequence of the 2 fires and all the publicity and press they got?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [91]

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Well, I guess the answer has to be yes. Although I don't know that we're seeing it, I have to say, look, we were advocate of sprinkler-ing the building at the last fire, we're advocate of the sprinkler-ing the building today. This is adding pressure to the City Council to create a path for these buildings to be sprinkler-ed because you're sort of trapped between the rent stabilization ordinance and the permitting process for sprinkler-ing an entire building. And we hope that, that is also our path.

I don't think -- and well, maybe it's a matter of a new cycle or whatever else, I don't think -- I actually don't think there's long-term reputational risk vis-à-vis these buildings. But I guess you got to play that out and see what happens over the next year.

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Operator [92]

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And our next question comes from Daniel Ismail of Green Street Advisors.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [93]

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Great. Just a few quick ones for me. Can you provide an update on where in-place office rents sit relative to market these days?

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [94]

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Yes, Danny. It's about what it's been. We're a little over 10% on the mark-to-market.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [95]

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Okay. And then you were fairly busy this year refinancing debt and doing other things on the balance sheet. Do you see the -- do you see 2020 ending in the same spot where you guys ended '19 on a debt-to-EBITDA basis?

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [96]

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Debt to EBITDA.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [97]

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Or net leverage.

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Peter D. Seymour, Douglas Emmett, Inc. - CFO [98]

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Okay. That bring that leverage to 0.9 or 8 or something like that. I think we have chances -- we have a chance of improving that. I think our earnings are going to go up. I don't see a dramatic increase in the amount of debt that we have. So we have a chance of improving that number.

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Daniel Ismail, Green Street Advisors, LLC, Research Division - Analyst of Office [99]

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Okay. And then just last one actually for me. Given the expirations this year, can you discuss the type of leasing economics you guys are expecting in '20? Specifically, do you expect a tougher or a stable year for leasing concessions?

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Stuart McElhinney, Douglas Emmett, Inc. - VP of IR [100]

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I don't think the expirations are that abnormal for us, Danny. I know that there's a little bit of chunkiness in Q4, but it looks like a pretty typical year for us. We've done a very good job I think of keeping our leasing costs stable at levels that are well below our peer set, which is really a function of our tenant size. I don't see any of that changing. The trends look very good. We're still getting robust demand. I wouldn't see that we'd see a major change in the concessions.

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Operator [101]

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And ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

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Jordan L. Kaplan, Douglas Emmett, Inc. - President, CEO & Director [102]

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

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Operator [103]

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Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.