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Douglas Emmett, Inc. (NYSE:DEI)

Q3 2010 Earnings Call

November 3, 2010; 02:00 am ET

Executives

Jordan Kaplan - President & Chief Executive Officer

William Kamer - Chief Financial Officer

Mary Jensen - Vice President of Investor Relations

Analysts

Michael Bilerman - Citi

Alexander Goldfarb - Sandler O'Neill & Partners

James Feldman - Bank of America

Rob Stevenson - Macquarie

Chris Callan - Morgan Stanley

Brendan Maiorana – Wells Fargo

John Guinee – Stifel

Ross Nussbaum - UBS

Dave Aubuchon - Baird

Michael Knott - Green Street Advisors

Rich Anderson - BMO Capital Markets

Sri Nagarajan - FBR Capital Markets

Mitch Germain - JMP Securities

Steve Boyd - Cowen and Company

Operator

Ladies and gentlemen thank you for standing by. Welcome to Douglas Emmett 2010 third quarter earnings conference call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow management’s prepared remarks. At that time instructions will be provided to queue up for questions. At this time, I would like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Mary Jensen

Thank you. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer; and Mr. Bill Kamer, Chief Financial Officer. Please note that this call is being webcast live on our Web site and will be available for replay for the next 90 days and by phone for the next seven days. Our press release and supplemental package have been filed on Form 8-K with the SEC and both are also available on our Web site at douglasemmett.com.

During the course of this call, management will be making forward-looking statements. We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome 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 inevitably prove to be incorrect. As a result, our actual future results can be can be expected to differ from the expectations, and those differences may be material.

For a more detailed description of these risks, please refer to the company’s press release and the current SEC filings, which can be accessed in the Investor Relations section of the Douglas Emmett Web site.

Please note that the market data sources that are referenced in management’s prepared remarks are, CB Richard Ellis for the Honolulu and Los Angeles office markets, REIT for the Los Angeles office market, MPF Research for the Los Angeles multifamily market, and Property and Portfolio Research for the Honolulu multifamily market.

Once we’ve reached the question-and-answer portion, we request those of you who will be participating limit yourself to one question and one follow-up per person. This is in consideration of the others who are waiting on the line.

I’ll now turn the call over to Mr. Jordan Kaplan, President and CEO for Douglas Emmett. Jordan?

Jordan Kaplan

Thank you Mary and good morning everyone. Welcome to our third quarter earnings call. Happily, I have a lot of recent activity to share with you today. On the acquisition front, Douglas Emmett has been successful of buying in our markets throughout the economic downturn. To-date, we have added approximately 2.8 million square feet to our office portfolio since the beginning of the recession almost a 25% increase and we continue to pursue acquisition opportunities in our core submarkets.

As previously announced, we acquired a 100% ownership interest in Hawaii’s largest office project, Bishop Square on June 29. The third quarter was the first full quarter that Bishop Square contributed to our operating results. Transitioning this asset into the rest of our portfolio is going smoothly and we are very pleased with its performance.

On October 22, our fund acquired Wilshire Bundy Plaza, an office building totaling more than 310,000 square feet for a contract price of $111 million, or approximately $358 per square-foot. This project is located on Wilshire Boulevard in the Brentwood submarket; due to the fund structure, the company has approximately a 22% interest in this well located asset received some fees and has the opportunity to participate in the upside over an 8% IRR to the fund investors. This acquisition increases our market share within the Brentwood submarket to over 50% from 41%.

Our corporate headquarters was located in Wilshire Bundy Plaza for many years. So we have a very good understanding of the property. Our strategies to acquire well located Class A properties at a reasonable price due to vacancy or rehab opportunity, Wilshire Bundy is a perfect fit.

We also made progress toward achieving our financing goals. On September 30, we closed a $400 million floating rate seven year term loan that we swapped out at an effective fixed rate of 4.45% for approximately five years. We use this loan to repay the Bishop Square acquisition financing and the balance of the loan proceeds provides us with the significant amount of cash for future corporate opportunities.

We had multifamily term loans totaling approximately $388 million that were scheduled to mature on June 1, 2012. On Monday, we finalized the refinancing of those loans with 10-year loans maturing November 02, 2020. The new loans bear interest at a floating rate equal to LIBOR plus 165 basis points. We have entered into swap contracts that effectively fix the all-in rate to approximately 3.65% for seven years expiring on November 01, 2017.

As we continue to take advantage of the favorable interest rate environment, we hope to be making a series of refinancing announcements in the coming months. With that, I will now turn the call over to Bill Kamer, who will provide additional details on our third quarter activities. Bill?

Bill Kamer

Thanks Jordan. In the third quarter, the company reported FFO of $55.9 million or $0.36 per diluted share. AFFO for the quarter was $40.6 million or $0.26 per diluted share. This compares favorably to our results from a year ago of $47.8 million or $0.31 per diluted share and $35.7 million or $0.23 per diluted share respectively.

Same property net operating income in the third quarter of 2010 decreased 2.3% on a GAAP basis and 1% on a cash basis when compared to the third quarter of 2009. Same property total revenues in the third quarter of 2010 decreased 0.7% on a GAAP basis and increased 0.2% on a cash basis when compared to the third quarter of 2009.

The trend in our leasing fundamentals that we have seen in recent quarters is continuing. The third quarter was our sixth consecutive quarter of robust office leasing activity. We signed 190 new and renewal leases totaling roughly 681,000 square feet of office space compared to 167 new and renewal leases totaling 733,000 square feet last quarter. Our leasing volume included 70 new leases, new tenant leases, signed during the quarter totaling approximately 204,000 square feet.

190 leases signed in the third quarter averages to three leases signed every working day during the quarter. While leasing velocity has continued at a very healthy pace over the past six quarters, it has been slightly outmatched by space reductions predominantly from our larger tenants causing another occupancy decline in the third quarter. The lease percentage of our entire portfolio declined by 70 basis points in the third quarter to 88.9%. The occupancy percentage declined by 60 basis points to 87.4%.

For the REIT-owned office portfolio, the lease percentage declined by 1.2% to 89.9% and occupancies declined by 1% to 88.7%. While we had certainly hoped for stronger results, our leasing performance is consistent with our initial 2010 forecast. Therefore, we are maintaining our 2010 occupancy guidance indicating an approximate 200 basis point loss for the entire year.

Tenant improvements, leasing commissions, and other capitalized leasing costs on a blended basis, declined in the third quarter to $19.68 per square foot, compared to $20.38 per square foot for the second quarter of 2010. The percent leased in our multifamily portfolio remained flat at 99.3%, compared to the percent leased at June 30, 2010.

During the third quarter, our mark-to-market and rent roll metrics were as follows: On a mark-to-market basis, our in-place cash rents were 10.7% higher than our asking starting rents. On a straight line basis, the average rent from expiring leases was 3.4% higher than the average rent from new and renewal leases signed for the same space. On a cash basis, the ending cash rent from expiring leases was 12% higher than the beginning cash rent from new and renewal leases signed for the same space.

Now turning to our financing activities. In conjunction with the acquisition of Wilshire Bundy Plaza on October 22nd, the fund assumed an amortizing term loan with the current principal balance of approximately $56.4 million and a 5.67% interest rate. This loan matures on April 01, 2016.

We have been working on three different types of mortgage debt to ladder both our debt maturities and the duration of fixed rates. The first is our traditional five to seven-year LIBOR floating rate debt in the bank syndicated market that we generally swap out for around five years. The second is seven to 10-year fixed rate life company debt, which is particularly compelling due to current rates and significant interest from the life company market. The third is exemplified by the financing that we closed on Monday.

Fannie Mae Debt on our multifamily assets on a 10-year LIBOR floater that we can swap out for varying periods, in the case of our recent financing, seven years. As previously discussed, we obtained a seven-year $400 million term loan that we closed on September 30th at an effective fixed rate for five years of 4.45%. On Monday, we closed $388 million term loans and entered into new interest rate swap contracts that effectively fix the rate of those loans at approximately 3.65% for seven years.

We have made net cash payments of approximately $11.9 million to terminate the existing interest rate swap contracts that was scheduled to mature on August 1, 2011 relating to the $388 million loans. As a result of these terminations, we anticipate that there will be a one-time impact in FFO of cash and non-cash interest expense totaling approximately $13.9 million in the fourth quarter of 2010.

We are revising our full year 2010 FFO guidance. The new range is $1.19 to $1.23. Our previous range was $1.24 to $1.28 per diluted share. This guidance excludes any impact from future acquisitions, dispositions, equity purchases, and debt financings or repayments, recapitalizations, or similar matters.

With that, I will now turn the call over to the operator, so we may take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And your first question comes from the line of Michael Bilerman with Citi.

Michael Bilerman – Citi

Ray with Michael, could you talk about the rent spreads they deteriorated sequentially, were there any particular leases that impacted that? Or is that just the direction of where the market is right now, it’s down 12% and do you feel that debt level has bottomed or do you feel that that gets worse as you look out to the fourth quarter and first quarter?

Jordan Kaplan

Bill could be better answering this, but I think with the real number we’re looking at to see the changes in rents is the straight line rents or straight line rent comparison, which is actually down 3% not down 12%, because our rents all have escalations in our lease have escalations and so it’s not as usual comparison to look at the ending rent at the highest point of the lease compared to the beginning rent on the new lease.

But with that said, I mean rents are down, how to what degree will that continue, I hope it won’t, but it’s all a matter of, the first step being when will we start seeing positive absorption and I got to tell you, maybe I am an optimist, but I keep feeling like we are going to start seeing that soon. When you look at the causes of the negative absorption and you compare to what’s going on in terms of incredibly strong leasing we are doing, I feel like we have to start seeing some of that in the next few quarters and then obviously that’s what turns rents up.

Now you might start to see, you might continue to see negative spreads that are on a straight line to straight line simply, because on the leases that are rolling off, we are rolling into some very, they were initiated rolling into some very strong near drives. So we’ve five years ago in 2005 was the start of a pretty strong run up in rental rates. So that big headwinds to keep a positive difference against those numbers.

Michael Bilerman – Citi

And then a related question. Do you feel like you are almost finished with the large tenant contractions in your portfolio or how much more of that do you feel like is ahead of you?

Bill Kamer

I think it’s hard to say. I think it’s we’re rolling through it. We keep feeling that, as Jordan said, that we are getting towards a period of positive absorption really more based on the inflow side in seeing that the volume has continued to be and it’s broadly based, leasing volume that’s continued over a number of quarters. And we definitely are seeing signs of various types in terms of recovery or lessening of the outflow of whether it’s workout deals, defaults and that sort of thing.

But, we’ll be in a better position; I think it’s when we give our 2011 guidance when we really taken a very close space-by-space look of the portfolio and completed that process to give some idea of that.

I’ll mention one thing which – maybe it’s a little counterintuitive, which is our biggest leasing percentage loss in our submarkets this quarter was in the Olympic Corridor and the biggest tenant loss in that submarket in our portfolio was one little over 20,000 feet, which we lost as a result of the tenant wanting to expand to 35,000 feet and we don’t have 35,000 square feet of contiguous space in the West Los Angeles markets. So we couldn’t accommodate the expansion need.

So that certainly was something a difference in trends from where we are going, but nonetheless in the short run represented a loss in that market. And we’re moving very quickly in terms of backfilling that space with a lot of very strong demand.

So as Jordan said, we’ll have a better, I think we are pretty hopeful that we are getting towards the end of this series of in the net absorption course.

Michael Bilerman – Citi

Thank you.

Jordan Kaplan

Okay.

Operator

Your next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill & Partners

Good morning out there.

Jordan Kaplan

Hi Alex.

Alexander Goldfarb - Sandler O'Neill & Partners

Just getting a little more nuanced on to the fundamentals, I think it was the valley that was sort of the market that was lagging the most and there were some tenants who were continuing to downsize their space requirements. What’s the latest going on up there?

Bill Kamer

Well, I think again, as we reported the biggest decline we had in submarket in the quarter was not in the valley on the Olympic Corridor and I think we are seeing stabilization out in the valley and actually good amount of leasing activity and that was, the valley was down 60 basis points as a whole for the quarter.

But spread out I think we are seeing, again I think we are seeing much more stabilization there coupled with continued good demand. So and I think as you look forward over the next four quarters, their role is in particularly for us in the Woodland Hills market as well. So that’s an encouraging sign.

Alexander Goldfarb - Sandler O'Neill & Partners

Okay. And then second question is, just following up, as you guys compete, I think your MO is lower phase rent, lower TIs, lower free rent, some of your competitors maybe higher phase rent, but higher TIs, higher free rent. From the tenants’ perspective, are they agnostic? Or are some of them swayed one way or the other?

Jordan Kaplan

They usually, typically they want lien in the direction of just getting lower all and the rate actually reflecting the transaction instead of having the free rent and all the games in there. And it helped us in the past to get, even almost get slightly inferior economics has still went on because a lot of people real on top of the site, you would be, if your lender on your house canyon said, I got a great plan for you, you’re not going to pay your mortgage for like two years. But then I am going to add it and I can accelerate a rate to you – on the balance on your loan, that’s probably early 2000s concept I’ve seen this time.

Bill Kamer

But, I think I’ll add to it Alex as well which gives us - which is we have our own tenant improvement construction company and do our own space design and we work real hard at trying as much as possible to have spaces that are conventional and very good space to use for multiple generations of tenants. So, if the space basically fits the tenant’s need, they don’t have as much demand for expensive TIs it allows us to really compete favorably there and then when we offer them and attractive phase rent, we’re in a good position to get that deal done.

Alexander Goldfarb - Sandler O'Neill & Partners

Okay, thank you.

Operator

And our next question comes from the line of James Feldman with Bank of America.

James Feldman - Bank of America

Thank you. I was hoping to get a little bit more color on the interplay between the submarkets. I mean, it seems like guys Century City is weak and probably getting weaker. But how should we be thinking about and how are you thinking about the risk of tenants moving from some of the better submarkets into that space if we do see a rise in vacancy? And just as recovery starts to take hold, how the submarkets should interact with each other?

Bill Kamer

In our portfolio, Century City was flat quarter-over- quarter and I don’t think we’re seeing any notable decline in the submarket. I don’t think there is any trend that’s meaningful in terms of movement from submarket-to-submarket that we’re seeing. I think, to the extent that people are moving into submarkets, it’s when the spaces don’t, renewal don’t fit their needs.

So whether it was the expansion example I gave before, where they had to move to a market and portfolio that had large contiguous spaces or whether it’s the reverse of that, which is consolidating space or downsizing into space in amounts that works for the tenant. It’s more that that the driver and it’s incidental for them whether they are moving from across the submarket.

Jordan Kaplan

That’s alright, I agree with all that. Although, I’ll say something I’ve noticed and I don’t really even note the numbers bear it out is that. The vacancy in Westwood became outsized and I have seen, because of that, because they just have every variety of space available now, that tenants seem to be when you see a tenant move submarkets, more often they are not, it seems to be that they are heading over to that market now, because there is some extraordinarily attractive deals there.

James Feldman - Bank of America

Okay and then along those lines as you think about next year’s roll. Give us a sense of how much of that is already pretty close to being put to bed?

Bill Kamer

Well, one of the things I guess is that we’ve talked about a lot that’s useful looking at our portfolio is or because we have smaller tenants. It’s always true that the roll gets finalized very close to the expiration dates. So, even in terms of when you look at the next quarter, it’s not necessarily all baked in at that point which is one of the reasons why when we look out and try to give visibility, it’s hard for us to do that too far off in the future.

So, but again I think where we sitting now, we have a pretty good handle on fourth quarter and as I said, but I think we’re right in line with where our guidance has been as we look at 2011, frankly it’s a little bit early to say we’re getting our arms around there right now going through the process I described to build up to or forecasting that we’ll be sharing with you when we have a good handle on it.

James Feldman - Bank of America

Okay, thank you.

Jordan Kaplan

Thanks.

Operator

And our next question comes from the line of Rob Stevenson with Macquarie.

Rob Stevenson - Macquarie

Good afternoon guys. In terms of the swaps, was there anything in particular about these level of swaps? Or as you refinance debt and have swaps on those, which you would expect to see sort of similar charges going forward on that?

Bill Kamer

Well, the issue is and on a particular charges the issue is, if you break a swap prior to its expiration date and the swap is above current market, there is a cost for accelerating those payments. In this case, the existing swaps matched up with a loan that we fully paid off and we’re refinancing for 10 years and for a variety of reasons it made sense to put in place brand new clean swaps at the current market rate and to payoff the old swaps.

As we go forward, like I say the seven different loans that we have maturing later in 2012 on the office side, that match-up with the total amount of $2.3 billion in debt. As of December 1, close to $1.6 billion of that is floating and not covered by swaps obviously as we refinance up to that amount, we won’t be breaking any swaps prematurely. We’ll be putting in place new ones.

But as we go forward and complete the rest of the entirety of the refinancing, we will have again the choice of leaving swaps in place and doing forward starting ones or breaking them. We’ve discussed before that that choices one that we’re going to look at from time-to-time and it’s good reasons to do what we did and likely we will continue to follow that same format.

Rob Stevenson - Macquarie

Okay. And then as a follow-up, can you tell a little bit about the depth of the transaction market in West LA and Hawaii right now? Are there, are you seeing decent flows of assets? Is it trickles, is it sort of non-existent? Can you characterize that for us? And what you’re seeing on pricing?

Jordan Kaplan

There is deals, I mean they are still updating worked on. Things don’t move as fast as they did years ago and I think we’re seeing deals get in and out of, like I’ve been in more than the lot of - half of us see deals flow multiple times on the same building, which is almost strange because it’s what I would think must be some pretty good buyers. So, but there’s deals, the deals that I think are gone, come back as it flow ups. So it sounds not as hard as it was in, when we were buying like crazy in the 90s, but we’ve got a good pipeline and we are working on stuff.

Rob Stevenson - Macquarie

Do you think that you guys are more or less inclined today to be looking at apartments?

Jordan Kaplan

Well, we are always extremely inclined to look at apartments. We love apartments mainly this company is almost founded more on apartments than office, even though now we own more office, but and we take a hard look at every apartment deal that comes up in any of our markets.

As I said, I think in calls ago, particularly in the Woodland Hills market where a lot of new apartment projects were built, condo projects were built and condo projects turned into apartment projects. There is just so much new supply there and some of these kind of new deals are being sold by even the construction lenders.

So you are buying totally a vacant building and we’ve worked on those deals, but I’ve been surprised by how much people have out bid us. I mean usually we are not, that far behind winning bids. So, yes we are very interested in buying apartments, but I would also say that on what we worked on so far, we have been surprised with the pricing.

Rob Stevenson - Macquarie

Thanks guys.

Operator

Your next question comes from the line of Chris Callan with Morgan Stanley.

Chris Callan - Morgan Stanley

Hi, thanks. I had a question here is on office margins. I think your - I guess two things within that; one is, can you comment on the sequential jump in expenses to the extent that’s permanent or one-time and then two, and I suppose a portion of that’s driven by obviously your acquisition. So then the second would be.

Jordan Kaplan

Expense sequential of what expenses?

Chris Callan - Morgan Stanley

Office expenses, how much of that was just the acquisition and how much of that was, a change in the...

Jordan Kaplan

Probably the office expenses just generally went up was in Bishop Square is in there

Chris Callan - Morgan Stanley

Yes, Bishop Square and also that in parking and other income?

Jordan Kaplan

Other income is probably, because Bishop Square’s triple net building and therefore you will see in other income in the cam. You will see in the cam section, you’ve got a lot of triple nets coming through and same for parking.

Bill Kamer

More than half of the sequential increase in the expense in the office side was simply the addition of Bishop Square. The bulk of the rest is a combination of a kick up in utility rates, electrical rates in Los Angeles that hit in the quarter coupled with the fact that on a seasonal basis costs are higher in the third quarter is normally in any of them. So only that portion is really baked-in in terms of any kind of increase.

Chris Callan - Morgan Stanley

Thank you very much. And then just to pick up on the discussion in deal environment. I hear you that it’s flowing better, but also I would think that competition is picking up, what did you see for example on 6500 Wilshire in terms of the competitive dynamic. I think that went to core fund, are you seeing more institutional capital competing with you for assets.

Bill Kamer

You are at Morgan Stanley.

Chris Callan - Morgan Stanley

Yes, but I don’t work on that side.

Bill Kamer

I mean you could give all the stats of the deal.

Chris Callan - Morgan Stanley

No, I am not involved that level obviously.

Bill Kamer

You mean what do you think as a competition on 6500.

Chris Callan - Morgan Stanley

Yes, and just generally what that means for competition for institutional grade assets, there is an article out actually today on that.

Bill Kamer

I don’t want to talk about 6500 particular especially someone else’s deal on a specific deal, it’s not done. I will say that you are seeing for deals like that which are, 6500 is literally 100% leased. I mean, I think that 2000 feet vacant and 445,000 feet for deals like that, you are seeing a lot more interest and competition then you are -- let’s say for instance deals like the one we bought which is sort of homes to stretch call 80% lease on the corner of Bundy and Wilshire and so as we’ve have said in the past when you are effectively buying kind of a high income lease, when you are buying lease stability, lease income we don’t tend to be a wining bidder.

And if you look at what happened in 6500 and the bidders have narrowed down to their counter select group that you don’t actually typically see shop is winning bidders on most of the other stuff around here, but that type of asset very attractive [Inaudible] it’s a big beautiful, monolithic granite office building that’s 60% cedars and effectively 100% leased as I said, which extremely solid high rent. So it was that might, I wouldn’t totally extrapolate from that about the competition in our market for other buildings, because that building is a bit of an outlayer.

Chris Callan - Morgan Stanley

Thank you.

Operator

Your next question comes from the line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks, good morning.

Bill Kamer

Hi Brend.

Brendan Maiorana – Wells Fargo

Bill, for you the guidance for Q4 there is, if it look at relative to the Q3 run rate there is step down, you guys had a lot lower amortization of the interest rate contracts, but I guess is there also an expectation that there is a reduction in terms of the occupancy in the NOI run rates and if I look at the mid point of your Q4 guidance?

Bill Kamer

No, not particularly meaningfully. Normally, there is, if you look at year-over-year numbers, there is a bunching up of expense in the fourth quarter that you don’t see in the run rate from prior quarters and so that’s certainly a part of it and then another part of it is we do have the financing, the $400 million financing, that we did is – it was reflected and close that on September 30, and so that the interest on that was on the fourth quarter as well.

So, that and then, I know you’re excluding the one-timer of the termination cost and the swaps in your question, but obviously that’s also another component in the changing guidance for the fourth quarter.

Brendan Maiorana - Wells Fargo

Sure. And then, so just the occupancy kind of rough numbers is all effectively flat sequentially and then in terms of the 545 million of swaps that roll off, is that still expected to go to fixed just…

Bill Kamer

Lately is your first question, and then you can state your second one, but I just want to correct it which is on the occupancy the, consistent with our occupancy guidance for the year of 200 basis points, that’s a drop in fourth quarter in terms of an hand occupancy of about 40 basis points. So, on average in the quarter to a mid point 20 basis point drops. There is a little bit of that I didn’t it wasn’t totally flat. And then what was your second question?

Brendan Maiorana - Wells Fargo

Just the 545 of swap to fix that is still assumed to roll into floating just for the one month that is outstanding?

Bill Kamer

Yes.

Brendan Maiorana - Wells Fargo

Okay, thank you.

Operator

Your next question comes from the line of John Guinee with Stifel.

John Guinee – Stifel

Okay thanks. Just out of curiosity, it looks to me that over the last couple years, your re-leasing costs have run from maybe 15, 16 square foot and 3.25 to about 20 to 21 a square foot and about 360 a square foot. How much of that is leasing and how much of that is capital because I’m going into the assumption that the leasing is pretty much a fix, but as the TIs are a little bit more variable in nature?

Bill Kamer

By the way you’re correct about what the variable component is, that’s clearly true. It’s mainly driven by TIs with the commission side pretty much fixed.

Jordan Kaplan

I don’t have the numbers, maybe Bill has a better handle on them, but I don’t see, actually I feel like our TIs was gone a little down instead of up. So you are telling me that you think that the TIs are trending up to commissions as those are said are flattish, I don’t know. I’d have to take a look going, if you are going back four years at what’s going on with the numbers.

John Guinee – Stifel

Now just a year and half two years ago it was 15 to 16 a square foot and 3.25 per square foot per year and that’s run off to $20 to $21 and I am just curious as to what component of that is relatively fixed, which is the leasing commissions and what component is more variable in terms of TIs?

Jordan Kaplan

We’d have to I think we have to look deeper into that although, I will bet when we do you are not going to find that the TI component has, as it trend gone up, matter of fact when I move sit in the meeting room hear what’s going on our typically TI, our classical TI which is paint and carpet I know it has come down. But as I said I don’t have that I mean I don’t have that answer, I don’t Bill’s and Amy are scrambling trying to look backwards and see whether they are going to say any answer for that.

Bill Kamer

Let’s take a look and we can talk further. I have got to say we don’t see a trend at all. I mean it’s obviously a nice quarter-to-quarter and usually driven by whether there is, if there is a large tenant renewal and the renewal TIs tend to spike up in the quarter, but I think when we look at it, maybe we are just starting at a different time period, but when we look at it over any time period, I think you just have to come to a conclusion that it’s just basically that they will be flat from the time and certainly less over year.

Jordan Kaplan

You can catch me at, I remember a couple of years ago we had a few strange quarters with some very large leases where we could get some big TIs, but I wouldn’t turn that to a trend, so I don’t know.

John Guinee – Stifel

Okay, thank you.

Jordan Kaplan

Alright.

Operator

Your next question comes from the line of Rob Salisbury with UBS.

Ross Nussbaum - UBS

Hi, its Ross Nussbaum here with Rob. Bill, I am trying to get my arms around one number, it’s the same property cash basis office revenue increase of 0.2%?

Bill Kamer

Right.

Ross Nussbaum – UBS

And I am trying to reconcile that against the year-over-year occupancy decline and the negative rent spreads, how did office revenue fill up year-over-year against those two negative trends?

Bill Kamer

Well, it’s additional, its rent bumps, when you are looking out on the cash basis you are getting the benefit of 3% to 5% rent bumps that we have in there, also we did somewhat better on cam recoveries in the quarter, that’s really looking at the quarter, the comparable quarter, last quarter to this one in terms of just how cam recoveries had, obviously it’s not meaningfully higher, so it’s consistent I would say with the following.

We went back up and look it from an higher altitude with the trend that we have seen throughout this period of time and since the financial downturn is cash staying for relatively flat over an extended time period. So the rent bumps outlaying any roll down that we have and that the decline has been on the GAAP side with the burn off of the FAS 141 income and straight line income. And that’s – that overall kind of what we have been seeing kind of taken the noise out it from quarter-to-quarter.

Ross Nussbaum – UBS

So there weren’t any abnormal lease terms to use that were secured in that number one right now.

Bill Kamer

The leases give that the lease term fees in this quarter were about $300,000, a little over $300,000, which is up a couple of hundred thousand, but it’s – as it is pretty much average order for us, it’s not a meaningful number in our overall status.

Ross Nussbaum – UBS

So if I look across your portfolio, the average in place rent bump contractually, what is that number on average today?

Bill Kamer

Well, on new leases that we are signing, it’s generally around 3%, but in places …

Jordan Kaplan

It’s going to be between 3% and 4%.

Bill Kamer

It’s going to be higher and then.

Ross Nussbaum – UBS

Thank you.

Operator

Your next question comes from the line of Dave Aubuchon with Baird.

Dave Aubuchon - Baird

The question I had, Bill, was, when you talked about the space reduction by about a tenth I know you didn’t want to look forward, because you are going through the portfolio, but just of the existing leases that you have seen, signed this year, how much on average do you think those larger tenants are contracting by?

Bill Kamer

I don’t have a number like that that we can cope together in terms of on average and as I said, there is a component and not an insignificant component of tenants that are also expanding. But maybe if you just want to throw a dart on the dartboard maybe it’s around 10%.

Dave Aubuchon - Baird

And your submarkets did they have the highest exposure to large space tenants, however, you want to quantify that. I’m assuming it’s the San Fernando Valley and maybe Hawaii?

Jordan Kaplan

I will call it more Woodland Hills than San Fernando Valley for that whole Wilshire Corridor small guys.

Dave Aubuchon - Baird

Okay.

Bill Kamer

Why is the smaller tenant market not as small as West LA, but small tenant market Sherman Oaks/Encino is a small tenant market, so the relatively larger tenants tend to be clustered in the Warner Center/Woodland Hills market, but they are scattered around the other markets and we have a corridor where they go have occupancy or contract like we did with the Olympic Corridor that’s where we tend to see it in our numbers.

Jordan Kaplan

And when we say large guys, I mean we could be talking about a guy that’s between 20,000 and 40,000 feet.

Bill Kamer

Yes.

Jordan Kaplan

Which you guys still consider small.

Bill Kamer

We in our nomenclature, if it’s 10,000 or more, it’s bolded on our internal reports as being large.

Dave Aubuchon - Baird

Okay, and tenant credit, generally is that the bad debt expense sort of behind us now?

Jordan Kaplan

Tenant credit and the deposit is definitely calming down and seeing less of it, unless way fewer requests for any kind of workouts, and so there definitely seems to be improvement in that area. I think we are in the largely passed out phenomenon, now we are in, I think the last pages where as we hit renewals of companies that have business plans that involve consolidation and space contraction as we’re hitting them, we’re seeing exactly where that game plays out. So whether they’re consolidating in our portfolio or consolidating somewhere else as they downsize is sort of a question that needs to be played out in the next few quarters.

Dave Aubuchon – Baird

Thank you.

Operator

Your next question comes from the line of Michael Knott with Green Street Advisors.

Michael Knott - Green Street Advisors

Hey guys, a lot of my questions have been answered, but Jordan I just wanted to get your take on, it sounds like you don’t think your markets is at the bottom yet, but is it your reasonable expectation that maybe in the next six months or so you might sort of be an inflection in the underlying leasing market?

Jordan Kaplan

Well, I don’t, when you say bottom, are you saying bottomed in rents or bottom in occupancy? I’m not sure, like the rent comparison we talked about a little earlier, I think the main thing that you see going on is that leases now that are rolling off are higher leases, so they probably aren’t giving us a good sign as to what’s happening with the current market, right. I’m saying about that spread increasing, but in terms of whether I think rents are going, just flat out going down, I don’t get the feeling that rents are declining, but we’re not going to cause rents to go up without having positive absorption.

And so the real question is, when do I think we will have positive absorption, well a little bit and this is totally anecdotal from talking of people like – like I have a lot of friends that work some in your industry, but they are unfortunately not here and in other industries that might have been out, literally been out of work for two plus years and all of a sudden now are getting like three job offers.

And it’s to restart things they were doing like on the residential side, to restart mortgage back securities operation, so stuff like that. And so I get the feeling that some of these larger tenants space reductions that aren’t necessarily just driven from people by the actual tenant in that space, but it’s one space that many of a larger company are still operating if you roll on a older set of orders and my hope is that as we go into the next year, those orders might be refined a little bit, they might relax a little.

Now we think and say, you know what, we’re feeling a little bit now more like going into a growth mode and there is the - 2010 orders for all of us, I’m sure you guys do was, cut expenses, control expenses with - hunker down and I get the impression that the 2011 orders might be a little different.

They might be a little more, hey we want to start looking at taking advantage of certain areas, capturing market share, I know whatever the case may be and I’m hoping that new set of orders as it trickles these organizations, especially the ones, the larger tenants, takes the hedge off what we can see in terms of those large tenant reductions. And when that happens, one thing we do have going is very active leasing markets. So that headwind would calm down a little, I am optimistic that and my hope is that next year, we will start having some positive absorption quarters.

Michael Knott – Green Street Advisors

Okay, and then I appreciate that and then kind of there is a follow-up to that, what’s your view of how this recovery when it does arrive, what’s your view on how that will look compared to prior recoveries?

Jordan Kaplan

Well, we’ve had –I can look at two prior recoveries that I lived and that I would say were major that we launched. The recovery 1980s and the 1990 recovery, that was a long recovery, long sale recovery with a huge amount of space that needed to be absorbed in which all the new constructions that we were dealing with. And the economy was really going well for a long time before we felt like we were doing well, because it took so much leasing to get there.

Now, this recovery, our hope is that as I said we are going to see a new set of orders coming out next year and the orders are going to be cut everywhere and every way that you can that it will be, maybe we are willing to do a little bit of hiring to try and capture some revenue and if that happens, we ought to be able to recover at a much better pace.

Now that would be more akin to the recovery that we saw occur in 2002, 2003, 2004, where people - rents really got moving like to raise that – were stunning us quarter-to-quarter. And I hope that happens. I don’t want to be the one stands here or predicts it, but until then, we have never seen rents move in a year 15%, 20%, that was the first time we’d ever seen that. So, now I am sitting here going, hey, we said no it’s possible.

Bill Kamer

Let me just answer that Mike. The two clear differences with prior downturns, one of them is that this time on recovery it’s the first one where there was no new supply of any significance that was built during the prior peak days. So there is not first generation space that has to be absorbed by new business activity making that happen. So that’s a pretty big one.

And the other thing is, I don’t, I can say pretty clearly that in prior downturns, we didn’t see a protracted period of very strong tenant demand as we’ve seen over the past six quarters, which is a great sign in terms of activity occurring. This seems to be much more like within a fixed amount of space that we’re seeing a transition in restructuring from tenants that got whacked during the downturn phase at the end of ‘08 and into ‘09. And they work them through that and when that pipeline has run out and that restructuring happens, the underlying fundamentals are great, both on the supply side and on the demand side in terms of a lot of new activity.

So that’s, the issue, I think we’re very confident of that, I think we’re very confident of that kind of very good recovery that the variable is, it’s kind of a quarter ahead of us, and two quarters ahead of us. And so when that time is, is what we’re waiting for. But when it happens, I think the dynamics of the recovery and the fact that it’s got all the makings of a recovery that’s actually a better recovery than we’ve seen in prior cycles, I think that seems to be pretty well in place.

Michael Knott – Green Street Advisors

Okay. That’s all. I appreciate. I’ll get back in the queue. Thank you. Appreciate the commentary.

Operator

Your next question comes from the line of Rich Anderson with BMO Capital Markets.

Rich Anderson - BMO Capital Markets

Good morning out there, guys.

Jordan Kaplan

Hi Rich.

Rich Anderson - BMO Capital Markets

On the new multifamily debt refinance, if I do my math right, you’re saving about $5.4 million in interest per year on the new effective rate relative to what you’re paying off. When you look at that and then you also look at the swap breakage fee that you took, that you’ll take in the fourth quarter, do you think that you left some value on the table in the interest of like we do net present or whatever, leave some value on the table in the interest of sort of cleansing, or do you think when you kind of look at that, it makes, it actually creates value for you guys?

Jordan Kaplan

You mean having broken a swap, as opposed to…

Rich Anderson - BMO Capital Markets

Yes, and incurring that cost upfront.

Jordan Kaplan

Doing a forward, as opposed to doing a forward swap?

Rich Anderson - BMO Capital Markets

Yes, yes.

Jordan Kaplan

No. I don’t think so. I think when you look, it’s really a question of the time periods in which the interest expense is shown. By breaking the swaps now given the low interest rate environment, we’re - by paying that off, it’s more or less a wash between paying that off now or over the next nine months. On the other side on the new swaps, it’s a question of if you start the swaps now, you don’t have the premium of a forward swap.

So over a few years, you more than get that back and then you have that lower interest rate working for you for full seven years. So you definitely come out ahead of the game in doing it that way and then on top of that is, you suggest that, it cleanses the system and you have some real clarity in understanding what the rates are.

Bill Kamer

I think that’s bigfor your hard, financial calculation you are trying to do. I think the big thing that moves you towards breaking the swap is that you stored cash at no value. And I am not previously using this term, but we are getting to zero interest rate on the money in the bank at a low interest rate. If you are not knowing this, we’re warning you by keeping cash around.

Rich Anderson - BMO Capital Markets

Okay. And then, this is kind of like, I don’t know if this is a question that is realistic, but let me ask it anyway. You have, kind of got some people thinking that the whole process of re-financing is going to take several quarters into 2011. I am curious, is that like a log-jam issue, a manpower issue, or why can’t you do it sooner or are you just sort of giving yourselves time to work through it? I am just curious why it can’t happen a little bit quicker than the next two or three quarters?

Bill Kamer

Well, first of all, I am going to tell you that those things are getting way too much late. And so we are going to speed up right now, but…

Rich Anderson - BMO Capital Markets

I don’t mean to push you Bill, I mean, come on then.

Bill Kamer

I don’t think it’s actually a manpower problem. I think it’s a strategy and pacing, we are trying to do it very quickly. And it’s not manpower on our side, it’s – there is a certain – now, you have a product, you’re putting it out, there is a certain number of lenders out there. We have a lot of very good relationships, and you got to put it out in pieces that they get bit on and get going and then move on to the next one. And in the middle of all that the market is changing.

Rich Anderson - BMO Capital Markets

Right.

Bill Kamer

So, at one moment I think, how we should be doing larger than $300 million chunks and you don’t want to have a bunch of amount in the market or at the same time we are going to confuse them like, well I like that one a little better than that one or whatever. You got to do one, not compete with yourself, clear it and then move to the next one. And then as we are doing that, the playing field is changing, because all of a sudden, you got a bunch of guys that want there lenders and they start getting paid off when they don’t want them and they say, “oh, oh, wait a minute, maybe we can take,” a bigger chunk, all of us will get together and we will go out.

So we’re trying to figure out whether, as this plays out, it could play out anywhere from individual $300 million, $400 million chunks too. All of a sudden doing $600 million and $750 million ones, which we moved the things to the system gotcha.

The other thing is, we are evaluating having, both kind of a light feel and a bank deal market at the same time. Now, this is all against the backdrop of the happy holiday season that we’re facing when people start taken their phone off the hook. So that’s why it’s a little tough to figure out and how long this going to take to happen. It could happen relatively quickly, which is what we want and we are not the gating issue there, it’s the market or it could move solely and say because it’s the holiday season just people start working on deals.

Bill Kamer

So just to sum up what Jordan said, restating to your sense is it’s a product trying to be nimble in our strategy and change the strategy where it’s probably to get the best possible the pricing coupled with Jordan said with the fact that the market is evolving in terms of size and capacity and where the best deals are. So we are trying to see nimble and get the best results but at the same time move as quickly as we can.

Jordan Kaplan

We really make sacrifices for speech.

Rich Anderson - BMO Capital Markets

Okay, and just, Bill you said, $1.1 billion that is still is variable that a swap attached, that what you said I believe you said $1.6 early.

Bill Kamer

Yes it’s is $1.11 billion is currently floating on the office.

Rich Anderson - BMO Capital Markets

Right, I thought actually you said $1.6 I thought maybe I was missing.

Bill Kamer

I didn’t I say $1.6 because $545 million becomes floating in a few weeks.

Rich Anderson - BMO Capital Markets

I see.

Bill Kamer

So at that point, all that debt would be floating except for $645 million in swaps that come up next year in ‘12.

Rich Anderson - BMO Capital Markets

I see that, okay. Thank you.

Operator

And your next question comes from the line of Sri Nagarajan with FBR Capital Markets.

Sri Nagarajan – FBR Capital Markets

Thank you and good morning. I think Bill and Jordan, I think you mentioned in your response to an earlier question on 3% to 5% rent bumps on your leases. Now obviously how should we think about these rent bumps as you sign these leases today versus those that are signed during the peek.

Jordan Kaplan

The ones we are signing today are the overwhelming number of them are 3% bumps and then looking at historically, we as the absolute piece for a short-period of time, we are able to get as high as 5% bumps. However, if you go back to prior cycles, 3% was about the best you can get at the peak of prior markets. So compared to prior cycles, we are actually at a very good point compared to this most recent trend we are down from 5% to 3%.

Sri Nagarajan – FBR Capital Markets

Okay, so it’s roughly 3% that we should think about. Now let me ask you the token dividend policy question, where is the Boards head on dividend these days?

Jordan Kaplan

On development,

Sri Nagarajan – FBR Capital Markets

Dividend.

Jordan Kaplan

Okay, so I think, basically there is a couple of things going on. We understand that dividend is one component of the total return for our investors, as well as growth in stock price, and we know that we need a balance in both. The second thing is that, we never want the dividend to act as a drag on the stock price, if it becomes oddly low or strangely low, relative to the peer group.

On the other side of the coin, we don’t want to, we like retaining cash to invest and take advantage of opportunities. Now we happen to be the company that has the dividend that is probably the most covered dividends of anybody. And then maybe there’s one or two out there that are little better, we are building cash flow at a tremendous clip and we have cut our dividend to a number that is pretty low.

So, all those factors are going to be well we’re discussing or what we’ve been discussing with our Board and that won’t result in something, a change, no change, whatever and we’ll have that answer hopefully in the next quarter so.

Sri Nagarajan – FBR Capital Markets

Alright, thanks.

Operator

Your next question comes from the line of Michael Bilerman with Citi.

Michael Bilerman – Citi

Two quick follow-ups. Bill, just on Bishop Square, it sounds like the office margin is lower than the portfolio. So, what is the NOI margin on that acquisition?

Bill Kamer

I don’t know the office margin on Bishop Square is different than as a portfolio. I think you might be getting thrown off by the fact that they're triple net leases. Actually, I think the cost to operate Bishop Square is almost right on with the rest of our office portfolio in LA.

Jordan Kaplan

Yes like if you saw exiting that you guys who noted it, our tenant recoveries in Q4 were about $4 million or so dollars higher than in Q3. Over, that’s almost entirely as a result of the addition of Bishop Square, because in Hawaii the leases are in the net basis. So the tenant recoveries in Bishop Square are almost equal to the rent payment.

Michael Bilerman – Citi

And so, but your office rental expenses also went up by $4.4 million, so you have the expenses and then you have the recovery one-for-one, which is why your recovery rate looks bigger and the office margin necessarily then just drops.

Bill Kamer

Yes, exactly.

Michael Bilerman – Citi

Okay, that makes sense. In terms of the multifamily loan, which is the second question, was there any reason why you couldn’t push proceeds level? I couldn’t remember if this is the one that was originated back in ’07 at the time of the IPO which or why you didn’t try to get additional proceeds?

Bill Kamer

Well, actually that the particular loan was upsized in the summer of ’07, actually six months after the IPO when the market has eased.

Jordan Kaplan

Incredibly low rate why don’t we push proceeds now. I don’t think we’re doing these refies, in general we are not doing them with the intent to push proceeds. Remember, we’re thinking of reducing our debt not increasing it.

Bill Kamer

Yes, let me put even a finer point on it Michael, which is, when you look at the various goals that you can achieve in terms of financing, number one on our list is to get the best pricing and to bring our overall interest cost down in the current climate. And to the extent that frankly is, and we said many times that we got, we’ve been building up cash, we are continuing to build the cash. We are going to deploy that cash strategically wherever we can, and wherever it’s possible to drive down the rate. So we were way more sensitive to the long-term rates than we are pushing proceeds.

Michael Bilerman – Citi

And effectively the $600 million in total multifamily debt is against the call it in the almost $60 million-ish of NOI?

Jordan Kaplan

I don’t know multifamily NOI off the top of my head.

Michael Bilerman – Citi

Yes, it’s about $50 million, but that it's all secured, right?

Jordan Kaplan

Yeah, it’s all first trustee loans on properties non-recourse first trustee loans.

Michael Bilerman – Citi

Okay, thank you.

Operator

Your next question comes from the line of Mitch Germain with JMP Securities.

Jordan Kaplan

Hi Mitch

Mitch Germain – JMP Securities

Hey, you mentioned some opportunities in the multifamily side, distressing and clearly we had Wilshire Bundy, you see anything in the office side?

Jordan Kaplan

Yes, most of what we’re looking at is on the office side. I mean, I know people are pretty focused on multifamily, because I get a lot of questions about it last time, but even the deals I’m talking about to your guys will, they would be considered very small. But on the office side, there is step out there that’s center lined over some stuff and we were working on it and it is where really our pipeline is.

Mitch Germain – JMP Securities

Great, thanks.

Operator

Your next question comes from the line of Steve Boyd with Cowen and Company.

Steve Boyd – Cowen and Company

Thanks. I am curious on the refinancing. What do you think the all-in-cost would have been if you had just done straight fix instead of floating swap for fixed?

Jordan Kaplan

Sorry, I don’t know that. We have our huge good bond relationship with Fannie Mae and it’s kind of developed to them knowing we like these kind of loans and we didn’t even evaluate doing something different out of that and then this deal with them and in any significant way, because we felt like it was a great deal and we’ve got, we had a good long relation with them. We’ve been through, I want to say four or five re-financings with them as we’ve added to our residential portfolio.

So we, I don’t have good, alternative fixed rate data to able to give you, sorry.

Steve Boyd – Cowen and Company

Okay. I appreciate that and just in terms, and given all the activities you had on the refinancing side, would it be possible to provide kind of a run rate interest expense quarterly or annually, including kind of swap amortization?

Jordan Kaplan

I don’t have the answer. I don’t think we are doing that on this call right now. You want a quarterly run rate of interest expense with us making some assumptions about what we do?

Steve Boyd – Cowen and Company

No, no, no, not about the future, just as you stand today with all the activity that’s occurred?

Jordan Kaplan

What’s our interest expense in the third quarter?

Steve Boyd – Cowen and Company

No, no, I guess, with what you have done here in late September and everything else but?

Jordan Kaplan

Well, you’ll get Q4 as a run rate with the swap that having been broken and known effect of it in about, when we do that January, February.

Steve Boyd – Cowen and Company

Okay, fair enough. And then last quick question, in the Olympic Corridor, I think on page 14 in the supplemental, the least percentage sequentially went from 91% I think down to 84.9%, but the annualized rent, didn’t bunch of it moved a little bit. I was just curious of this comparing kind of two different time periods or what will cause that?

Bill Kamer

It’s really a factor of the annual rent bumps matched up to annualized rents. So the occupancy decline didn’t affect us.

Steve Boyd – Cowen and Company

Alright, thank you guys.

Operator

And your next question comes from the line of Michael Knott with Green Street Advisors.

Michael Knott – Green Street Advisors

Hey guys, just a follow-up on one of the recent questions about the types of debt, cost of debt. I think earlier, Bill, you mentioned three types of debts that you guys look at and I think only two of those would really apply to office and I was just curious, if lets say a seven-year floating rate office loan that you’ve fixed via swap versus that this is a straight fix, what do you think that cost difference would be?

Bill Kamer

Well, they are different. It’s kind of apples and oranges because the floating rate debt is a shorter grid. Let me back up and say this, we have always preferred floating rate debt that with swap in as a general rule, because you get a market value for the swap for the fixed component.

And so for example, taking advantage of the refinancing that we just did when we broke swaps, we have the ability to get a true market price in breaking swaps as opposed to a formula price that you get when you have yield maintenance and you break fixed rate loans where it can be some so punitive that it can prevent you from refinancing, it can prevent you from selling the property. So that’s our general preference.

The issue is, the floating rate market on the office side, the maximum duration that you can get on that in the current market is seven years past seven and shorter with seven years on the office side. So to take advantage of full seven year fixed rates, seven year, eight year, nine year, ten year, fixed rates, it requires you to move in to a fixed rate product, even though that’s not our normal preference.

Now the good news is that in the current – with the current long term rates and a lot of competition that exists among the life cos, a lot of our long term concerns about that market are being alleviated. The cost of building in a lot more flexibility to pay off at par has gotten very cheap in the current market, which helps us a lot and two, the long term rates are so compelling that it causes us to be interested in taking a look at fixing fixed rates or instead for five years doing it more for seven, eight or longer. So that gets us into that market. So, it’s really - we have the strong preference, but in terms of getting the mix of rates and duration, it requires us to take a look at both options.

Michael Knott – Green Street Advisors

Okay, thanks. And then just, do you guys have any updated thoughts with respect to, Jordan your prior comments about reducing debt by $300 million or do you guys have any kind of sort of explicit that the EBITDA target that you think about, just curious any thoughts on that topic?

Jordan Kaplan

I can’t say I have an explicit debt-to-EBITDA debt targeting other than I’d love to share EBITDA go up and have that multiple be very well. But, in terms of reducing, working on reducing our debt, that’s doing our thinking and we’re working our way through it. But I mean that’s one more thing that’s layered into this complicated process that we’re going through. And we’re holding that out as I said before, to make sure that as we do that we’re getting bang for our buck and when we do it and whether we even get bang for our buck by doing it.

Michael Knott – Green Street Advisors

And then in terms of the timing or ordering, should we expect that you are going to get all your refinancing put the bed first and then you’ll maybe worry about achieving that objective whether it’s through maybe an ATM or through an offering or is it just

Jordan Kaplan

I would more say that well, as we go through that complicated process I talked about by getting the debt all redone, as we see those opportunities to say well, loan on these buildings is $600 million and we can get this great pricing of $500 million we thought putting $50 million into that and reducing that loan or whatever, it’s going to fall out from this process.

And as we start discovering what’s we are doing what that number is, then we’ll work out how we want to come up with that. I mean we obviously have cash that we can do with, and then we can kind re-bounce ourselves also during that process as we are discovering what we want to do and or there maybe nothing we may not need to issue equity.

Michael Knott – Green Street Advisors

Okay, I have two more quick ones. I don’t know if I’m the last one in the queue or not I can come back.

Jordan Kaplan

You are, go ahead.

Michael Knott – Green Street Advisors

Just real quick on Wilshire Bundy Plaza, would you mind sharing sort of your expected timeline of lease up and/or maybe unlevered IRR expectation and just how you thought about it generally?

Jordan Kaplan

Well the investor IRR, as I said before, is going to be between 12 and 14 to the investor. I know that because of us having to assume that loan and we have to plan in dealing with that loans that comes up during the terms or whether able to be model exactly when we typically model these things. It’s good, that’s good with the numbers a little bit.

In terms of our planned lease up, I think the building is probably a little bit of a stretch, just say it’s 80% leased and we’ve gotten to work on that I think we will have a better feel. Usually our assets that are off by that especially an asset like that in that market I would expect that we will be able do pretty well on bringing that up to par.

The phase that which we do that it depends a little bit on what are the headwinds we are going to face in terms of other tenants that are in the building, because it’s been, it was hard to get in with the other tenants to figure out what’s really going on, because the way that the bankruptcies around. What was your other question? Did you have three questions about that or just two?

Michael Knott – Green Street Advisors

No that’s fine thanks. And then my last question is just, your thoughts on sort of longer term health of California and sort of the impact how you think about the longer-term impacts on your markets from physical problems? I was a little disappointed that our Southern California voted for status quo as much as they did last night. Just curious your thoughts on that?

Jordan Kaplan

Well, I still don’t feel like - well couple of things, I still don’t feel like what’s going on Sacramento can play a positive or negative role in terms of the recovery at California. California is in economic engine it’s extraordinary, as a matter of fact I just saw a stat about just LA, LA economy, just LA’s economy would rank as the sixth largest economy if ranked as a state in the United States.

So the economies are very large. Definitely, Sacramento is embarrassing us, just every term. Every opportunity they get, they embarrassed the rest of us. But so I’m embarrassed and we are so screwed up. I don’t think it’s going to impact our economy and in fact I think our economy is in fantastic shape to take up and do well. Now, look at the industries that we have here and I look at the energy, I note people on the East coast, when they think of it, they are still thinking of the beach boys and it’s just isn’t the case, so.

Michael Knott – Green Street Advisors

And so you don’t see those factors being sort of a structural negative headwind over a longer time period in terms of reducing the attractiveness of moving here or staying here, because of the punitive tax rates, et cetera, et cetera?

Jordan Kaplan

You know what, I actually, I am not sure that we have punitive tax rates. If you compare, all of the – the whole package of taxes for the State of California we are getting kind of far into the politics here, but to other states we actually rank almost debt on at the 50% mark. It’s just that our taxes the way we do kind of odd it is right. We have this Prop 13 protection that these states that holds dramatically down the Prop pretax income at most states would normally live off of and then we have this extremely high capital gains, where we have no capital gains, right since our ordinary income rate, which is a very high rate that cycles up and down very dramatically. The state’s revenue in conjunction with economic terms.

Bill Kamer

And one thing I should add, Mike, is that income approved this political year is that earlier on in the year, as you know, even the hint that prop 13, even if it was only for commercial properties will be changed, even that little hint of it was so unpopular in polling, hence like something like 65% were opposed even if it was just limited to commercial properties that the unions that were originally talking about didn’t even pursue it on the ballot. And so it seems like that’s even further varied in terms of a possibility and a risk in terms of the tax structure.

So I think where we come out, I don’t, Jordan said overall tax rate it’s not that punitive, we really haven’t seen a lot of people, unlike in the early 90s, we haven’t seen a lot people leaving California, a lot of business leaving California which in the early 90s, it happened a lot, and we had to rebuild that. So, and then we see it on the ground in terms of the office demand. You ever seen tenants entering our market in the industries that have not been very present in our markets before and a lot of dynamism.

Jordan Kaplan

You probably saw in the paper, I don’t know if it was yesterday, I don’t was it a Japanese or a Chinese company that’s opening up office here with a bus that cars can drive under that runs on rails on the subs. There’s just, there’s a lot coming in and I haven’t seen a lot of people leaving as a result of anything having to do with the state or state taxes or any of that. But they are mass and they got a lot to deal, particularly with the unions and the locked in unions, return state, return pension plans.

Michael Knott – Green Street Advisors

Okay, thanks for fielding all my questions.

Jordan Kaplan

Alright.

Operator

And there are no questions at this time.

Jordan Kaplan

Yes, that looks like the end and thank you everybody for joining our call today. We look forward to hearing from you again next quarter. Good-bye.

Operator

This concludes today’s conference call. You may now disconnect.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

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