Douglas Emmett CEO Discusses Q2 2011 Results - Earnings Call Transcript

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 |  About: Douglas Emmett, Inc. (DEI)
by: SA Transcripts

Douglas Emmett, Inc. (NYSE:DEI)

Q2 2011 Earnings Call

August 3, 2011 2:00 pm ET

Executives

Mary Jensen – VP, IR

Jordan Kaplan – President and CEO

Ted Guth – EVP

Bill Kamer – CFO

Analysts

George Auerbach – ISI Group

Alex Goldfarb – Sandler O’Neil

Josh Attie – Citi

Brendan Maiorana – Wells Fargo

James Feldman – Bank of America

Rob Stevenson – Macquarie

Rich Anderson – BMO Capital Markets

Michael Knott – Green Street Advisors

Ross Nussbaum – UBS

John Guinee – Stifel Nicolaus

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s quarterly earnings call to discuss its 2011 second quarter financial results. 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.

I will now turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett. Please proceed.

Mary Jensen

Thank you. With us today on the call are Jordan Kaplan, our President and Chief Executive Officer; and Bill Kamer, our Chief Financial Officer and Ted Guth, our Executive Vice President. Please note that this call is being webcast live on our website 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 website 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. 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 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 website.

Please note that the market data sources that maybe referenced in management’s 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 that all participants limit themselves to one question and one follow-up per person. This is in consideration of the others who are waiting.

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

Jordan Kaplan

Thanks Mary and good morning everyone. I will start with a brief update on our leasing fundamentals and financing programs. Ted will review our second quarter financial results and Bill will conclude with additional comments on financing and our revised FFO guidance for this year.

In contrast to recent headlines about national and global economic uncertainty we continued to see a steady recovery in our markets. Fortunately for us, job creation within California has been improving and is concentrated among highly educated people in professional services and technology who live along the California coast, where our properties are located.

We have seen this improvement reflected in the steady progress that we are experiencing in our leasing fundamental. In our multifamily communities, the leased rate remains over 99% and revenues are increasing at an accelerating pace. We expect that this trend will continue.

During the second quarter, our office portfolio had 15 basis points of positive absorption. This is our second consecutive quarter of positive absorption and our office leasing volume remains strong. During the second quarter, we signed 204 leases the largest number in our history of the almost 700,000 square feet of new and renewal leases we signed in the quarter over 263,000 square feet came from new leases.

Overall, our office leasing program during the first half of 2011 was somewhat better than we initially expected. We now anticipate that our office portfolio occupancy at the end of 2011 will be slightly positive when compared to the end of 2010. Before I turn the call over to Ted, I want to say how delighted I am that we have completed our term loan financing program. Since September of last year we closed six term loans aggregating more than $2.5 billion at a weighted average rate of 4.07%. Our property level debt structure is very labor intensive and takes time to complete but it was clearly worth the wait. We have locked in historically low interest rates on retaining a debt structure with exceptional flexibility and staggered long-term maturities.

With that, I will turn the call over to Ted.

Ted Guth

Thanks Jordan. Good morning, everybody. Our funds from operations and our adjusted funds from operations include increased in both the second quarter and the first half of 2011, compared to the same periods in 2010. For the second quarter of 2011, FFO increased by 24.5% to $0.37 per diluted share, for the first half of 2011 FFO increased by 29.3% to $0.77 per diluted share. AFFO increased by 32.7% to $0.29 per diluted share for the second quarter of 2011 and by 25.6% to $0.59 per diluted share for the first half of 2011.

As we mentioned last quarter, the amortization related to the swaps returned last December has no impact on either FFO or AFFO this year. For the second quarter GAAP interest expense was increased by $4.48 million as a result of that non-cash amortization, which was then in calculating FFO offset by an equivalent $4.48 million leaving a net zero impact. FFO was only affected last year at the time the swaps were terminated, when their full impact was reported for FFO purposes. In the third quarter, there will be a final similar add back covering one month of amortization.

G&A totaled $6.8 million or 4.7% of total revenues for the second quarter of 2011 and $14.3 million or 5.0% of total revenues for the first half of 2011. Our same property metrics for our office portfolio were slightly down in the second quarter, while our multifamily same property metrics continued to improve. Overall same property net operating income in the second quarter of 2011 decreased 3.9% on a GAAP basis and 2.3% on a cash basis when compared to the second quarter of 2010. Same property total revenues in the second quarter of 2011 decreased 1.6% on a GAAP basis and 30 basis points on a cash basis when compared to the second quarter of 2010.

We continue to see improving demand from tenants in our submarkets Santa Monica in this quarter showed the most improvement in this quarter followed by Honolulu. Of course occupancy in any specific submarket in any given quarter can be affected by the decision of one or two tenants. On a blended basis, annualized tenant improvements, leasing commissions and other capitalized leasing cost in the second quarter averaged $3.94 per square foot, compared to $3.63 per square foot in the first quarter. Most of this increase related to a single lease where we are converting retail space into traditional office space. Excluding this one transaction, our annualized tenant improvements, leasing commissions and other capitalized leasing costs in the second quarter averaged $3.71.

As Jordan mentioned earlier, we had another quarter of healthy leasing volume. During the quarter, we sighed 204 new and renewal office leases totaling almost 700,000 square feet, compared to 185 new and renewal leases totaling 709 square feet in the prior quarter. During the second quarter, we signed 80 new fixed new office leases totaling 263,000 square feet compared to 81 new leases totaling 261,000 square feet in the first quarter. These new tenant leases resulted in 22,000 square feet of net absorption in the second quarter. The lease percentage for our total office portfolio increased again to 88.8%. The occupied percentage for our total office portfolio remained flat at 86.7%. Our multifamily portfolio was 99.4% leased at June 30, 2011 compared to 99.6% at March 31, 2011.

During the second quarter, the mark-to-market and rent roll metrics for office portfolio are as follows: on a straight line basis, our average rent from expiring leases was 7.2% higher than the average rent from new and renewal leases signed for the same space. On a mark-to-market basis, our in place cash rents were 11.4% higher than our asking starting rents, this percentage is unchanged from last quarter. On a cash basis, our ending cash rent from expiring leases was 15% higher than the beginning cash rent from new and renewal leases signed for the same phase. This largely reflects built in growth from the 3% to 5% annual rent escalations contained in almost all of our office leases.

With that, I will turn the call over to Bill.

Bill Kamer

Thanks Ted. I will provide an update on our financing activities and share our current thinking about our future financing activities. A lot has occurred since June 30, to help you understand our current debt structure page 13 of our supplemental package includes an updated debt schedule as of August 1 reflecting our new loans, associated loan repayments and interest rate swap expirations.

In July, we closed two loan transactions totaling $885 million. The first loan is a secured non-recourse $355 million seven year term loan, which matures on August 5, 2018 and beers interest at a fixed rate of 4.14%. The second loan is a secured non-recourse $530 million seven year term loan maturing on August 1, 2018. We have effectively fixed the floating annual interest rate on this loan to an interest rate swap contract at 3.74% until August 1, 2016.

Since September 2010, we have obtained seven term loans totaling approximately $2.550 billion of this amount all the $16.1 million is fixed at a weighted average annual interest rate of 4.07%. When we first announced our refinancing program last year we had loans maturing in 2012 totaling approximately $2.7 billion we now have only one remaining loan with an outstanding balance of approximately $522 million that matures on August 31, 2012. Related to this loan we have interest rate swap contracts that fix the rate on $322.5 million until August 1, 2012.

Since our earnings call last quarter, we used our ATM program to raise over $61 million in gross proceeds from the sale of 3 million shares at an average price of $20.35 per share. It is our current thinking that we will repay the $522 million loan utilizing a significant portion of our cash on hand, which is over $300 million as well as proceeds from a new secured revolving floating rate credit facility, which we would put in place at some point in the next several quarters.

Based on this strategy, we currently expect to terminate the $322.5 million swap before the end of 2011. Our preliminary estimate is that terminating this swap would reduce 2011 FFO by approximately $10 million although the actual cost will depend on future events. In any event we are still evaluating our options including the decisions concerning a potential credit facility and the swap termination.

Now turning to guidance, we are increasing our full year 2011 FFO guidance to a range of between $1.32 and $1.36 the new mid point is $1.34. In providing this guidance we are assuming the total interest expense affecting 2011 FFO will be between $148 million and $150 million representing lower interest on our debt, which is largely offset by the $10 million of cost that we would incur if we terminate our $322.5 million interest rate swap.

A minor change to the weighted average diluted share count for 2011 to 160 million shares as a result of the 3 million shares that we sold under our ATM program. No change to total FAS 141 income we still estimate that it will range between $20 million and $21 million. No change to straight line income it is still estimated to range between $7 million and $8 million.

A small decline to G&A, we now anticipate the G&A will range between $27.5 million and $28.5 million instead of $28 million to $29 million. No change to recurring capital expenditures in our office and multifamily portfolios. We continue to estimate $0.25 per square foot for our office portfolio and a range of $425 to $475 per unit for our multifamily portfolio. This guidance excludes any impact from future acquisitions, dispositions, equity issuances or repurchases, debt financings or repayments, recapitalization for similar matters. As stated above, we have revised our guidance to include a $10 million reduction in FFO resulting from the anticipated termination of our $322.5 million swap before the end of 2011.

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) your first question comes from the line of George Auerbach with ISI Group.

George Auerbach – ISI Group

Great, thank you. Jordan just a clarification on your comment on occupancy guidance for the year saying that occupancy would be higher at the end of the year than it was at the start of the year. Is that related to the 86.9% overall office lease rate or the 88.1% excluding the JV properties.

Bill Kamer

This is Bill, George. Related to our year-over-year occupancy so we are seeing now as you know our guidance has been flat for year-over-year 12/31/11 over 12/31/10 for the entire portfolio and we are, we have now seen as Jordan indicated performance so far this year has been somewhat better than we anticipated. So we are, we think it’s going to skew to a slight positive instead of flat.

George Auerbach – ISI Group

Okay great. And also just on the JV page 10 is the line equity allocation and basis difference of around $1.03 million in the quarter, what does that relate to?

Jordan Kaplan

Equity allocation in the space.

Ted Gunt

I think that relates to a priority distribution that we, it primarily relates to a priority distribution that we are entitled to receive from the fund.

George Auerbach – ISI Group

That’s why your share of FFO seems to (Inaudible).

Jordan Kaplan

That’s correct.

George Auerbach – ISI Group

Alright, thank you.

Operator

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

Alex Goldfarb – Sandler O’Neil

Yes hi, good afternoon. Jordan if you are listening to one of the office conference calls yesterday there was some discussion about you know companies entering different markets and Westside LA was mentioned. I know that you guys in the past have mentioned about new people coming in and what that’s done to values but, seeing as your market remains one of the focal points for outside investors curious how that’s changed your underwriting and if that means that there may be less opportunities for you in a sense maybe Douglas Emmett needs to explore going to new markets or in fact there is still enough opportunity in there despite all these others who want to enter that you still see staying in your existing markets.

Jordan Kaplan

Let’s say I would.

Bill Kamer

Before Jordan’s comments Alex I just wanted to mention in having to listen to some of those calls I think one of the other take away from the calls was the comment that it’s difficult for people to come into the markets and acquire any significant position because of effectively our existence as the dominant landlord in our market.

Jordan Kaplan

Is he talking about the BXP’s Mort’s [ph] comment? Are you talking about Mort’s comment?

Alex Goldfarb – Sandler O’Neil

Yeah, so I guess my question is with all the, with people looking who want to come in.

Jordan Kaplan

Let me say this, it’s a market where there is always people looking to get in. I mean I don’t feel any difference in pressure alright from whether I mean BXP is trying to buy here or Vornado is trying to buy here or some solvent fund or just other big funds I mean there is a whole group of billionaires that just like buying buildings here all cash. So there is always plenty of competition for us when we are bidding to buy buildings. I don’t feel any change in that if that’s the question you are asking.

Alex Goldfarb – Sandler O’Neil

Yeah, so that was my question, if you felt any pressure that maybe it’s more difficult to acquire now and therefore maybe it’s worth exploring entering other markets.

Jordan Kaplan

No, I mean let me just say, buying a building is especially a marketed building; it’s always the painful process biding. And the reason you get the building is you’re the highest bidder and there is always other bidders. But I still feel like because primarily, because of that, like this is the best market for us to operating because this is where we have the most edges.

Whereas going to somewhere where maybe the grass looks greener on the other side of fence is always risky because there you’re an outsider coming in that market, that’s why we win the bids here, that’s why we end up with the buildings that we want because we have a better feel for cost structures and rents and what could be achieved in these building and someone coming from the outside that isn’t as confident in their assumptions.

Bill Kamer

And we also have the critical math that I think that they were talking about on their call as the problem for them coming out here.

Alex Goldfarb – Sandler O’Neil

Right, right. Okay. Thank you.

Operator

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

Josh Attie – Citi

Hi, it’s Josh Attie with Michael. When you look at market rents and then you also look at the rents that are rolling in your portfolio over the next 12 to 18 months. Do you think that spreads are close to a bottom that down 15% this quarter?

Jordan Kaplan

I think, I don’t remember what we said. I think, well, our feeling was that we were going to deal with that spread for the next couple of quarters and it would start recovering and it starts recovering basically because we’re trailing behind as the anchor of the fast rise up above ‘06 and ‘07 and then as when the market started dropping again at the end of ’07 and into’08.

Then you have leases that were signed at lower rates as compared to the rates that were signed in today, so then the spread starts collapsing and then when within some quarters after that it will flip itself back around again. And you could just do a backwards look five years, look at the environment that we’re comparing against.

Because today rent, our feeling is rents are flat, maybe they have a little bit of even and outward look, but it can’t overwhelm the fact that we are having a steep rising period from five years ago that we’re still facing. So, you just look backwards five years to see what’s going on and you’ll see how the comparison will move going forward.

Josh Attie – Citi

Right, to your, the spread and you will be rolling more difficult spreads or it more difficult rents over the next three or four quarters. So unless the market rents improve, your spreads will be worse than 15%, I got them.

Jordan Kaplan

I don’t think they move a lot worse and I think they turn on themselves relatively quickly, the same way you saw us going into the recession relatively quickly.

Bill Kamer

Right. And remember that because we have these built-in rent escalators in the portfolio, the translation of those roll down in rents, it doesn’t affect our NOI. So NOI is mostly of defect, NOI from the rental rates in the portfolio has actually continued to be slightly positive throughout this period. It’s because the rent bumps of 3% to 5% affect a much larger percentage of leases.

Josh Attie – Citi

Okay, thank you.

Operator

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

Brendan Maiorana – Wells Fargo

Thanks. Good morning out there.

Jordan Kaplan

Hey, Brendan.

Brendan Maiorana – Wells Fargo

So a question with the, I guess the bios to pay down the remaining debt maturities with cash and then on the line. It seem like that the, I guess, I’ll call it the bios to do that, maybe driven by, what you see as less acquisition opportunities that are out there, so less ability to use that cash in the near term or maybe if you that, interest rates are going to stay low for an extended period of time, am I kind of reading that correctly and what’s the rational to pay down the debt as suppose to keep that cash on balance sheet?

Jordan Kaplan

Well, just the simple economics of it is much rather use the debt particularly as the cash tick on the credit line to reduce our interest expense, so I like that process. And we still have the flexibility in the credit line and access to it, but we are using the money to reduce our interest expense. I’m not giving an indication, I don’t think that there will be, that they will to be able to buy properties or anything.

Brendan Maiorana – Wells Fargo

Is there, so I guess, if acquisition opportunity, do kind of move up, the decision is I suppose to maybe taking refinancing that debt of what you’ve done, pretty attractive rates today. The outlook would be if you could do that in the future, you still think rates are going to be pretty low?

Jordan Kaplan

Okay. You asked two questions, but you are asking our outlook of what we think rates are going to be and then what would we do if acquisition opportunities come up. So first of all, we are buying stuff in the fund right now, so we’ve the capacity of the fund. We’ve a lot of capacity to buy and built into the fund, I don’t know, what do we have $150 million, $200 million left.

Bill Kamer

$300 million to $400 million of buying (Inaudible).

Jordan Kaplan

Yeah, and in terms of outlook for interest rates, I mean, we’re no better at it and you guys are your economists are, but if you, in terms of putting your money where your mouth is you just saw us do a ton of debt and fix it, going out. So we like where our rates are today and didn’t make us debt do a bunch of floating, right?

Ted Gunt

Let me say it very simply, that the consideration in terms of our current thinking is we have a large and growing amount of cash, that based on rates that are available in the process or you are getting basically nothing for it, and that’s growing. And to reduce leverage and reduce interest cost is just as Jordan was saying it’s just a better economic proposition.

But it’s neutral to our ability to access the fund by putting in place with the credit line and that’s what our current thinking. Now having said that, as we said couple of times in our prepared remarks, for some other reasons you are mentioning, which is credit markets and interest rate environment, certainly has been changing overtime and we are going to monitor that going forward and we’re going to wind up, making what we think is the best execution that we’re sharing with you where the current thinking is.

Brendan Maiorana – Wells Fargo

Okay. That’s helpful and just a quick follow- up. Jordan, maybe a year ago, I don’t know, maybe it’s a little more or less than that. I think you mentioned that your goal would be to see leverage by $300 million, you have roughly $300 million of cash on the balance sheet, so is this assuming that, that’s the effective amount of de-levering or do you think that there is more to come via ATM usage or some other form?

Jordan Kaplan

Well, I would say this, I like the extra, bonus we’re getting by first of all using cash free on our balance sheet to reduce our interest expense and also it does de-lever us. And beyond that as Bill said, we’re going to make decisions going forward and even and you’re right, I said that I would like that less leverage and this does result in us having less leverage.

Brendan Maiorana – Wells Fargo

Okay. Thank you.

Operator

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

James Feldman – Bank of America

Great, thanks. So I was hoping you could talk a little bit about fundamentals. Jordan, in your comments you’ve mentioned that tech and media are kind of keeping things pretty strong. As we’ve seen in New York, it seems like things are starting to moderate what gives you comfort that those sectors are going to kind of stay strong here and what should we do watching?

Jordan Kaplan

Well Bill, probably has a better answer for this and I don’t know, let him answer. But the one thing I want to say is, I’m not just relying on tech and media, I feel like and this almost the broken record, but I think we have 5, 6, 7 major industries that are going to support us going forward.

I mean you’re talking about markets that tarp had a huge impact on that were dependent on financing the finance world and that they, and that, got this big infusion, a very rapid run up even in the face of the recession the rest of the country was in. Our industries, whether it be Healthcare, Tourism, Entertainment, the big education infrastructure we have here and healthcare research, import and export, what about that mix, all which are great strong industries are one on the lying on long term, not just the two that you mentioned and why I feel good about our future prospects.

Bill Kamer

And the thing that I would add to that is, I know, we see these commentary to come along. I think mostly their comments the people they just can’t avoid a perspective from where they are located. So people tend to view our markets with a focus that’s very New York centric.

And as we’ve commented before, New York because of all the government money that went into necessitating the financial services industry, saw a much earlier and more robust recovery. And we’re reading and hearing that there may be some slow down in that as those programs these often thing settle out in the financial services industry.

And so people then come and look at our markets and kind of try to put the same view point on it as we were saying all along our recovery from industry sectors is not coming that way it’s from a broad group of tenants, it has been Deccan Media and other entertainment. But for example, in the past quarter almost a quarter of all of our new, it’s a new marginally added leasing activity came from law firms. Accounting and consulting firms were extremely strong too, I think between those two sectors it was over a third of our new activity. So we are seeing a very broad based set of demand and again, our view of the market profile is that we are on track with what we thought would be at the beginning of the year as we see this recovery. But elevated somewhat and we see it as kind of a steady progress along the line.

James Feldman – Bank of America

Okay, and then can you talk a little bit about what you are seeing so far in terms of leasing velocity in the third quarter and also the San Fernando Valley?

Bill Kamer

Well, it’s too early other than anecdotally, but I think anecdotally we are continuing to see the same forces in terms of strong volume across our market. I will say that, if you are asking for some differentiation in the submarket Santa Monica has been and fall by once a quarter it’s been our strongest market, Santa Monica the phrase that’s been used in the business press of the Santa Monica and other markets on the coast being referred to a Silicon Beach isn’t very strong. And then we are also seeing a lot of that strength as well in (Inaudible) where we have seen as we talk about the prior quarter a number of entertainment and tech companies locating there. So, all of our submarkets shows to be the strongest once.

James Feldman – Bank of America

Alright, thank you.

Operator

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

Rob Stevenson – Macquarie

Good afternoon guys. Can you talk a little bit about your approach these days apartments maintenance? Is it a situation where you are looking at some of the acquisitions that are going on and it’s just too pricing [ph]? Are you guys sort of the apartment buying mode at this point.

Jordan Kaplan

No, we are in the apartment. We would like to buy apartments; we are in the apartment buying mode. Now, I don’t know to talk about individual deals but I mean, we were interested in buying but I would say we are picky.

Rob Stevenson – Macquarie

And I mean, what’s the sort of profile stuff that you are interested in at this point?

Jordan Kaplan

It’s the same profile that we will look for and office buildings, which is an high amount of market that are supply constraint, our near kind of the prime office corridors to say in reverse because when we talk about office we say near prime executive housing. So there’s synergies for us, the high humanity, high quality units because we run a very high service operation but we are still very interested in adding apartments to our portfolio.

Rob Stevenson – Macquarie

Okay, and then secondary, there’s been a bit of a pickup in transaction volume on the office side in the valley, is most of what’s coming down the pipeline sort of lower quality stuff or is there starting to be some higher quality stuff that from a pricing standpoint is comparable to yours?

Jordan Kaplan

Well, there’s a lot going on, so I don’t know exactly, which deal you are talking about and try to compare to ours, but when something comes up that is comparable to ours. In general you are seeing us buy those buildings because we are happy to add what fits in our market, so we are happy to add them.

Rob Stevenson – Macquarie

Okay, thanks guys.

Operator

Your next question comes from Rich Anderson with BMO Capital Market.

Rich Anderson – BMO Capital Markets

Good afternoon. The comment it was emphasized in place cash rents were 11.4% higher than asking rents. Now, there’s no change in the quarter, can we refer that to be, what you could be an inflection point in operations through, I know you are talking about better occupancy but I mean, can you kind of give a little bit more color on what your view is about our potential inflection point in operations and any specifics behind that, regarding your larger tenants and the pushback that you’ve seen in the past?

Bill Kamer

We said all along, we think that to really move rents we are going to have to see somewhat more, somewhat of increase of 100 to 200 basis points of occupancy, that being said I think that we do feel like rents have moved to a bottom and that there is now some light towards moving that up. But how fast that happens and where that will be to see in the future quarters.

Rich Anderson – BMO Capital Markets

So none of that, it was all the guidance increased almost was almost entirely interest expense related and the offset being the slop charge and that’s it?

Bill Kamer

No, let me give you the components of the guidance change, there is we have lower interest expenses than we anticipated for the year of call it around $0.05 more or less. And that came as a result of having a longer period of floating rate loans and it was in the regional guidance coupled with the fact that we have been achieving lower interest rates on the deals that we’ve done and we anticipated as well. So it’s a combination of those two factors, that amount more or less $10 million, more or less $0.05 largely offset by the fact that we have changed our guidance now and are anticipating as we discuss in terms of our likely financing strategy for the rest of the year that we will terminate our 2012 slop expiration this year in connection with repaying the remaining loan and that will be an additional tenant. So that more or less offset, so that gives you a net $0.03 difference, that net $0.03 change in guidance from where we were a quarter ago is driven by a number of factors higher NOI both on the residential side and on the office side and various miscellaneous things including the lower G&A that we mentioned in our assumption all of which adds up to about $0.03.

Rich Anderson – BMO Capital Markets

Okay, great. Thank you. And then on the multifamily side, you mentioned and you have been saying this for a while the CapEx of 420 to 475, which is understandably a different type of multifamily product in the multifamily REIT generally own. But is there any issue there in terms of deferred maintenance or whatever that you might have to go back there and start spending more on those properties overtime?

Bill Kamer

No, it is as Jordan mentioned before we’ve given the client how we have in the bulk of our unit. It’s a very high service orient cliental so the properties are maintained at high levels to reflect that and reflect the people who are staying and so no, it doesn’t.

Rich Anderson – BMO Capital Markets

Okay, great. That’s all I have, thanks.

Operator

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

Michael Knott – Green Street Advisors

Just wanted to go back to the recent leasing velocity question, just a little bit, just curious what you may have seen even towards the end of the second quarter and so far. Early in this quarter in terms of our tenants willing to take new space and continue with prior or existing business plans irrespective kind of the negative headlines we’ve all been seeing and.

Bill Kamer

Yeah, that’s why Jordan kind of tried to address that I think in his comments. We have not seen in terms of tenant behavior any indication that relates to the headlines or the government…

Jordan Kaplan

I don’t think our chance were getting ready for the government to shut down, they just kept rolling forward to something that they would make a deal. So they called it right and we haven’t seen a velocity slow down.

Michael Knott – Green Street Advisors

Okay, and then any comments on sort of tenant expansions within your portfolio, is that picking up at all or?

Bill Kamer

Yes, I think the fact I mentioned before about the large portion of our new leasing volume coming from law firms and accounting firms that has been new, does reflect the fact that, we are seeing some levels of rehiring among the tenants and we are seeing marginally I wouldn’t say it’s a huge differential but marginally greater number of renewals with expansions and renewals with contractions at this point. But again, just pulling back from this I think the important thing because I think this is ultimately where all your questions are coming from which is are there, dramatic differences that we are seeing either negative or positive in the profile of leasing. And what our current thinking on this area and what we are experiencing is the steady phase that we saw at the beginning of the year somewhat elevated from our initial expectations and that’s just continuing kind of.

Jordan Kaplan

Yeah, there is a lot of little detail on what’s going on the leasing but the number that I think if you want to talk about inflection points or something like that. It’s the fact that we finally turned a positive absorption, I mean there is lot mixed in there, expansions, and less defaults and things like that, but at the end of the day, those all come together and either you get a positive or negative absorption and that’s going to give you the best directional evidence of where people are headed. And now we are on our second quarter of positive absorption and that’s better than good news, I mean that’s great news.

Michael Knott – Green Street Advisors

I agree, and thanks a lot for lot. Just one more question. Jordan, why do you think there hasn’t been a lot for sale yet in your market and has the phase been disappointing to you and you expect that to pick up in terms of investments opportunities?

Jordan Kaplan

Well, it is always disappointing to me that more it’s not for sale that we can buy. And I have to say, I feel like from what I expected it has been slower and I spend a lot of time trying to think why these guys are getting this done and the only, maybe I am wrong or it is just the, and it seems like the summer more than past summers, maybe people were on more alert past summers, I don’t know are more nervous but this summer it just has been much harder to get people’s attention, peoples don’t want to start things until after August.

It has just been a slower summer than, I would have otherwise expected and I am hoping it that’s all it is. And that people get back to the game, because I know deals out there where people are saying yeah where’s the point where we are going to get something done here, but just they are just not getting it done, done, they get it out and get it marketed. So we are still following a good amount of stuff, but I hope it is just longer summer vacations, but I don’t know the real answer.

Michael Knott – Green Street Advisors

Thank a lot.

Operator

Your next question comes from the line of Ross Nussbaum with UBS.

Ross Nussbaum – UBS

Hi guys, good afternoon. I am wondering in line of comments on the market from a transaction point of view. Have you looked at divesting some assets, perhaps things like Warner Center as a source of funding going forward from a capital perspective?

Jordan Kaplan

Well, I can’t say, I mean I can’t say that considering; well let me say this considering that in the markets we’re in, we still think it’s a good idea to buy more buildings in those markets. It would be odd to sell what we think are some of the best buildings in those markets which we already own to buy other building in those markets since it is all the same to the pricing environment that we are dealing with. So, we are not, I can’t say we are thinking that hard about selling buildings and what I think are great markets to buy in, in order to buy more buildings in those markets.

Bill Kamer

And remember that, before the IPO which was not that long ago, that company did go through the portfolio and look at the various buildings that were in the portfolio and to the extent that any of those buildings did not seem to make sense going forward and disposed them.

Jordan Kaplan

Yeah, we sold a bunch of buildings.

Ross Nussbaum – UBS

That’s fair, I was just looking at your submarket portfolio and thinking ultimately when you run down occupancy rates, is Warner Center going to challenged perhaps? More so, going forward of next two years then you other submarkets and would this be an opportunity to take advantage?

Jordan Kaplan

Well that’s a good point and that caused you to look at Warner Center, but that means that the opportunity to outperform is more Warner Center than anywhere else. I wouldn’t want to sell one of my markets that I think has good long-term perspectives when it is down, you want to sell it when it’s doing particularly well and people are describing a very high value to it. So, we are still willing to buy there.

Ross Nussbaum – UBS

Okay, and then lastly, obviously you had a great quarter on the gross leasing perspective and were positive on the net absorption but it would suggest that you still had quite a few tenants who were turning out of the portfolio. The tenants who aren’t renewing, where are they going?

Bill Kamer

Well, first before I see that, I think that’s the kind of the point you are making is really the point that we are trying in terms of the idea of being steady progress, which is the volumes now for a number of quarters that have remained very consistently at extraordinarily high levels on the gross leasing side. And what’s been happening as we anticipated it would is on the outflow side, it’s been decreasing, the lines across now we are seeing positive absorption and we anticipate the debt trend of greater positive absorption as we maintain high leasing volume and as the outflows further decrease, we will continue.

Mainly, the outflows come from consolidations and downsizings that are still, layoffs that occurred at some point before the lease has come up for renewal they want to use their space more efficiently and so they downsize or use different units that are consolidating. Sometimes, there are moves that tend to be within our submarket and it tends to be specific to the tenant. You may have a tenant who they were on two floors with us and they downsized, they have had some layoffs and now they are kind of fitting in the floor and a half but they are at a size where on another building with another floor place they can fit more efficiently on one floor, so they make that kind of move. It’s that sort of thing. It is not moves that are occurring with their moving to other buildings or other submarkets.

Ross Nussbaum – UBS

I think we are in the seventh of eight standing of that.

Bill Kamer

Of the downsizing?

Jordan Kaplan

That’s something is always going to occur. If you don’t have the right fit for the guy and he has made a change in the way he is operating then he is going to where it’s a right foot, the right fit. The things that cause you lose tenants are they move into a new space, they shrink or they default, right. Defaults are down and shrinking is down and we don’t tend to lose many to just the fact that they are moving unless there is some structural reason why we can’t accommodate them in one of our buildings and that’s always something that’s going on.

Ross Nussbaum – UBS

Right, where I am going is does the occupancy rate start going up because the gross leasing activity is going to be improving or is it going up? If you are maintaining that gross leasing but you’ve got fewer and fewer tenants turning out.

Jordan Kaplan

The second one. You got really fewer defaults and fewer shrinking and staying in the portfolio, but shrinking less of those two things which are I think direct symptoms of the recession and our leasing velocity has stated the same and therefore in terms of inflection those lines have crossed now and now we are getting positive absorption.

Bill Kamer

And the room for that improvement is large. I mean we are already in the positive absorption for couple of quarters, but we don’t need to see (Inaudible) hard to even imagine having higher gross leasing activities than we have had over the last number of quarters because it is just been so huge. But there is a lot more room for the outflows to continue to climb because normally at this pace of inflow we would be seeing huge increases in occupancy and we are heading in that direction and making steady progress to getting there.

Ross Nussbaum – UBS

You not a believer of the point, but do you have numbers behind your renewal percentages, what you are renewing now versus maybe a year or two ago?

Bill Kamer

In terms of retention, it’s more or less the same, that’s not really tremendously different.

Jordan Kaplan

It’s also a very misleading number, it’s not a good number to use to figure out what direction things are going in the best of markets and worst of markets, those numbers still stay some sort of similar.

Ross Nussbaum – UBS

Appreciate it, thanks.

Operator

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

John Guinee – Stifel Nicolaus

Hi, this is just, Jordan a curiosity question. When you guys (Inaudible) has an incredibly focused investment strategy and my guess is that you do a bottom-up approach, which means you sit down with your DL [ph] team and you have a list of all the buildings in your focus submarkets. You toss out buildings that don’t fit the certain quality standards and you come up with a certain number of buildings and certain number of square footage, amount of square footage that you’re interested in and whether it is Honolulu, West LA, Century City, San Fernando Valley, is your total target list that you’re tracking total 50 buildings and 5 million square feet or does it total 200 buildings and 40 million square feet?

Jordan Kaplan

First, you are exactly right and we actually have a list and I am not remembering the numbers but we have to do that exact analysis when we’re raising that last fund so we’ve done it. And the number is closer to what you gave your first guess. It’s not 200 buildings, it’s more like it is less than a 150, 75 buildings. I don’t remember the numbers but we actually have a mall listed.

John Guinee – Stifel Nicolaus

Would you mind forwarding that list to me?

Jordan Kaplan

As soon as we complete the final purchase on that list, I am going to send it to you.

John Guinee – Stifel Nicolaus

Thanks a lot.

Bill Kamer

Thanks.

Operator

You have a follow-up question from the line of Michael Bilerman with Citi.

Michael Bilerman – Citi

Hi Bill, in terms of the $0.06 swap termination charge that, when are you expecting that, third quarter or the fourth quarter?

Bill Kamer

Fourth quarter.

Michael Bilerman – Citi

And then, so thinking about quarterly guidance for the back half of the year, so the back half of the year you have basically got $0.55 to $0.59 just backing up with $0.77 from the $1.32 to $1.36. So is there from a trajectory standpoint 3Q versus 4Q, what else is going on that would alter that quarterly guidance?

Bill Kamer

I don’t have, in front of me broken down; first of all we haven’t given quarterly guidance. But other than the big number that you are talking about which is, there is, or anticipating guidance since heading into Q4 for the swap terminations on Q3.

I don’t have all the other differences or obviously your seasonality differences in Q3 and Q4 that has come along normally you have higher expenses in Q4 and Q3 just normal course, but I don’t have it allocated between quarters.

Michael Bilerman – Citi

Is it $0.05 or $0.06?

Bill Kamer

Excuse me?

Michael Bilerman – Citi

You said $0.05 or $0.06?

Bill Kamer

I think about five and half cents or something.

Michael Bilerman – Citi

And then I guess the other impact is if you take the loan, which is swapped out at 5% and go floating that’s going to have a bigger effect on 4Q relative to 3Q.

Bill Kamer

Well, I guess where in terms of the interest of that going forward it would depend on when in Q4 it terminates.

Michael Bilerman – Citi

Well I’m just thinking you are carrying it at 5% now in the third quarter. In the fourth quarter, 5 is going to drop down to pretty low rate that’s going to have.

Jordan Kaplan

It’s depending on when we do it in the fourth quarter.

Bill Kamer

And even when we do it depending on what the rate is, depending on how much we pay down, how much the rate is for any replacement financing. But yes, the swap otherwise expires on August 1 of next year, so from the day of termination to August 1 schedule maturity date that it would lower interest expense than you would see with the 5%.

Michael Bilerman – Citi

Now as the assumption that you are going to take the 338 cash, how much of that cash are you going to use to pay down the loan, because that’s going to go the other way right, because you are earning (Inaudible) on the interest today and you are going to pay down, so that’s going to have some effect as well. How much of the cash is being used?

Bill Kamer

That’s what we said before. Those are, we’ve got, here is the thing just to step back a second. We’ve been running a sprint in the form of a marathon for the last, since September to get 7 term loans done and refinanced everything and reschedule it, and we just completed that. We are now saying okay, that activity is completed. Now we are saying, okay, what sort of that, just kind of cleanup activity we have and how do we get the best results from it?

So, we are going to take time because we have the time now to focus on the best options. So, that mix up how much do we pay down? How we structured? Exactly, we are going to start working on that and get there over the several quarters, but that’s exactly what we don’t have nailed down yet.

Michael Bilerman – Citi

Let me. At the beginning of the year, as you sort of looked out at all the refinancing activities that you had planned, given the fact that it was going to be dilute to your numbers, where would you end up? And now that we’re, you have passed the sprint, you got through it and everything is done, and you have done it at unbelievable rates. Where does that quarterly sort of run rate, sort of take you into 2012? If you are sort of at this let’s’ 30s number, 31 and 33 excluding the charges based on your guidance.

Bill Kamer

Michael, you’ve been very consistent in the last couple of quarters in asking for that. And actually when we were going through and made the decision to put in the August 1 debt schedule that we put in, that going forward on August at page 13 of the supplemental that gives all that. I was actually thinking of putting a blue ribbon around it.

Jordan Kaplan

That’s why you put your picture next on the thing.

Bill Kamer

But that’s it; you’ve got all the rates laid out in that (Inaudible).

Jordan Kaplan

What do we do the August 1 because we wanted you guys to be able to figure out a interest run rate and so you have all the new debt cost and everything on that schedule.

Bill Kamer

The only thing you need to adjust for is in the $522 million, which is, we’ve given you all of your current thinking.

Jordan Kaplan

You know the function about it.

Bill Kamer

You just have to make some assumptions on how much of that debt is left and what you think the interest rate will be on the portion that’s left. But everything else in the whole debt stack is laid out.

Michael Bilerman – Citi

It’s now with all this free time that you’ve been so labor intensive over the last year. What do you do?

Jordan Kaplan

Go to Disney Land.

Michael Bilerman – Citi

But seriously, I guess now there is free time in the executive management team. What is the big sort of next project? What is the big focus for Ted and for Bill, for Jordan, Harry? It’s obviously been extraordinary amount of time getting this stuff done over the last 12 months. So you definitely have a lot of resources that you can throw at something, what is it?

Jordan Kaplan

Well, I tend to stay on the capital market side, so I’m focused on acquisitions and any other financings that are coming out and all that stuff. And Bill and Ted sort of float back and forth, so Bill would probably float back towards operations for a little while and then something heats up, he floats back over to my direction.

Bill Kamer

Although I will stay.

Jordan Kaplan

And nothing that the company has pay or anything now they’ve got this done. It is working this hard.

Bill Kamer

Although I will say I think we all felt we have fulltime jobs before last September when we heard the program, so I think going back to a pace where we can look forward and spend some more intense time planning and making moves and fine tuning the machine. I think it is still a job that we used to think was a fulltime job.

Michael Bilerman – Citi

And lastly just on the March 20 term loan, that $315 million. What are those conditions upon which that could be extended from 18 to 20, one needs to be satisfied?

Jordan Kaplan

Forgetting what’s in that. It’s pretty gentle test, I forget whether, it’s probably a debt yield test, but frankly I forgot.

Michael Bilerman – Citi

Yeah, just because you know a while you did sag your maturities, you still got a bulk load going from October of 2017 to August of 2018 and God forbid that March 2020 loan goes to ‘18 you’re going to have a 60%, 70% your debt rolling within a 12-month period again.

Jordan Kaplan

Right, the anticipation is that loan will go to 2020 and the tests are set in a way that makes that highly probable, but beyond that, one other things, not in my ample free time as you trend to remind me of over the next, going forward is going to be the work on financings to come along between now and then. So that, by the time we get to 2018, we won’t have, we will have things spread out over a longer period of time going forward from there.

Michael Bilerman – Citi

Right. So that is more so when the slot comes off, you’ll send it out rather than waiting to the final maturity?

Bill Kamer

Well, the key thing which Jordan touched on at the end of his prepared remarks to keep in mind with our debt structure is, it’s equally achieving very good rates and this is our main focus, maintaining maximum flexibility because none of us are smart enough to predict interest rates or have credit markets that are going to be in the future.

And we have been able to achieve that. We have very long windows with each of our loans where we can very inexpensively refinance and further stagger maturities. We have made a lot of progress in that direction, but the intent would be to make a lot more over in the next several years.

Jordan Kaplan

And we do, we watch spread and we watch all in rates and sometimes we find much earlier than when the loans comes due because of that and sometimes we wait longer.

Michael Bilerman – Citi

Okay, that’s helpful. Thank you.

Bill Kamer

Thanks Mike.

Operator

And we have a follow-up question from the line of Rich Anderson with BMO Capital Markets

Rich Anderson – BMO Capital Markets

Okay, I was actually trying to get out of the queue, but I guess so, at the risk of repeating.

Jordan Kaplan

You can just call in as a well-wisher and you don’t actually have to ask us another question.

Rich Anderson – BMO Capital Markets

Okay great, fantastic quarter. That’s it.

Jordan Kaplan

Thank you.

Operator

Okay and we have a follow-up question from the line of Brendan Maiorana with Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks just for Bill. I just want to follow-up on the guidance and the debt. If I look at, and I appreciate the schedule on page 13, it is very helpful, but if I look at, I mean your guidance of interest expense for the back half of the year. It’s about $84 million as compared to assuming the $148 million to $150 million for the year versus about $64 million of FFO impact, interest expense recorded in the first half.

So that’s around $42 million a quarter versus doing $36 million, a bit more than $36 million in Q2. What’s included within guidance does that assume that the repayment of the remaining $522 million, just happens at the end of the fourth quarter or is there something else that would drive that number up in back half of the year relative to where you were in Q2?

Bill Kamer

Yeah, no it’s assuming that we get any benefit from paying that or get from it, from paying that off sooner, that’s why the guidance, we indicated in the guidance that excludes any effect from any refinancing so it assumes.

Jordan Kaplan

I didn’t follow all your numbers but the cost of the swap breakage, an estimated cost of that is in there, so.

Bill Kamer

But not any savings from a pay down of the 522 loan.

Brendan Maiorana – Wells Fargo

Okay, wait, wait sorry, Jordan I just want to make sure. So that the $6 million is included in the 148 to 150?

Bill Kamer

Yeah.

Jordan Kaplan

Yeah.

Brendan Maiorana – Wells Fargo

Okay, okay, got it. Okay. Okay, alright that makes my numbers still come out a little better.

Jordan Kaplan

That’s good. I think you might have a last question too.

Operator

There are no further questions in the queue; do you have any closing remark?

Jordan Kaplan

Well, thank you everybody and I look forward to speaking with you again; we all look forward to speaking with you again next quarter.

Operator

Thank you for participating. This does conclude today’s call. You may now disconnect.

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