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Douglas Emmett, Inc. (NYSE:DEI)

Shareholder Analyst Call

October 12, 2011 12:10 ET

Executives

Mary Jensen – Vice President, Investor Relations

Ted Guth – Executive Vice President

Jordan Kaplan – President and Chief Executive Officer

Bill Kamer – Chief Financial Officer

Mary Jensen – Vice President, Investor Relations

Good morning everybody. Welcome to our Annual Analyst and Investor Event. Most of you know me, but for those may not know me, I am Mary Jensen, I am the Vice President of Investor Relations for Douglas Emmett. We have a great presentation and property tour plan free today. We’ll begin with the presentation followed by a Q&A session. Afterwards we’ll congregate in the Valley area of the hotel to begin our tour at Beverly Hills. For those of you on the webcast or for those that want to download copies of the presentation, they are currently available on our website. The tour will conclude here at 12.30. I am hoping that it will be promptly at 12.30. So, you may join us in specific event or you can move on and catch a flight if needed. There are cabs readily available on the side of the hotel and just going to the valley service and they are very quick.

Now, without further ado, I’d like to introduce the members of management who are with us here today. Jordan Kaplan, as you may know, is our President and CEO. He has been with the company for 26 years and is one of the company’s co-founders. Jordan joined Douglas Emmett right out of graduate school and was actually our CFO of the predecessor company.

Bill Kamer, who most of you know already, is our CFO. Bill has more than 30 years of real estate experience. He started with Douglas Emmett 12 years ago as the company’s General Counsel and moved into his current capacity as we embarked on our IPO five years ago. Prior to joining Douglas Emmett, Bill is the senior partner at Cox Castle for 16 years, which is a prominent real estate firm here in LA.

Ted Guth who is our most recent addition officially joined us in January. As an outside advisor, he has been a key member of our team for almost seven years. He has a diverse background as a lawyer, investment banker, and professor. As expected, he has hit the ground running with us and ready to take on anything. Although they are not presenting, he probably chatted with them during breakfast.

Dan Emmett, who is the Chairman of our Board and Founder of Douglas Emmett over 40 years ago. In addition to working directly with our Board of Directors, Dan actively works with other members of our management team on our real estate sustainability initiatives as well as our fund structure.

John Meehan started with Douglas Emmett as the Summer Intern and liked us so much that he continued to stand permanently. He has now been with us for 11 years. He is the Vice President and works directly with Jordan on acquisitions and just divisions and was still on debt financing. Incidentally, he will be our primary tour guy today.

With that, I will now like to turn it over to Jordan.

Unidentified Company Speaker

But before Jordan, two things I just have to say here in Mary’s introduction. One of them is she said most of you know who I am. If you do not know Mary Jensen, could you raise your hand? Okay, there is no one, doesn’t exist. And the other thing is in addition to Ted’s many diverse background experiences, one thing that you should take advantage of in talking to him today is when he was the Chief Operating Officer for a boutique investment banking from his office was in the 150 South Rodeo office back then in the actual space when the vacant space that we acquired that we are going to be sitting in. So, feel free to ask him about that building and what it was like as a tenant, those things.

Ted Guth – Executive Vice President

After I left, they actually retired the space.

Unidentified Company Speaker

Anyway, Jordan now?

Jordan Kaplan – President and Chief Executive Officer

Okay. We only buy buildings that Ted’s been at. So, I think first I want to know if it has been effective for us to ask BlackBerry to shutdown during the presentations, so that we’d have all of your attention.

So, welcome to the – until I get this to change, here we go, welcome to our presentation. We are glad that you are all here. So, we are going to do something little different this year as many of you know and many of you have been with us. Since the beginning, I was just talking to Jim about that. Well, five-year anniversary is coming up in about two weeks. So, we are going to do something you’ve probably never seen before as CEO is going to give a presentation where they are explaining to you why our stock is undervalued. But there we all are happy in an economy that seems like the million years ago, but it was just five years ago.

So, in October of 2006, we went public and I think we still are the largest REIT IPO in history. We’ve raised $1.6 billion, $21 of share. I think that $1.6 billion was after the $1 billion that we paid to the investment bankers to get us public, that was our net what we got. We actually sold all of the earlier clients, the stock at $21 we opened it, I think $23.75.

And as you all know we then went through a very wild ride almost immediately after we went public, and we had a little bit of a honeymoon in 2007 and then it got really tough, I mean, feeling like you’re in a rollercoaster and in particular 2008 and 2009 were just exhausting. And you can see here that the bull has taken a little nap.

So, 2010/11, we’ve been talking about recovery, but I hope everybody is worried that the Chinese are going to stop buying and Europeans are going to stop banking. And so no one feels like it’s a very direct road. So, through all of this you would think that we would look the way you look when you have just come off a rollercoaster like that. You know what the hair is thick and straight up and the close half off and looking for the throw up bag, but in fact I feel like we look like, my wife just after she has come back from the beauty parlor and the massage and all the good stuff, right.

So we went into the recession with 46 properties and did exactly what you’re supposed to do during a recession and now we have 58, we’ve increased our portfolio on a per square foot basis by 27%, that I think we have very good recessionary prices. And I mean a lot of you will remember when we were going originally on our road show five years ago, going publicly kept in as well. Is there anything left that you can buy or could you really is there any external growth left for your markets regarded that is internal but is there anything external and we obviously were able to find things and we’re very happy we did.

What you might find a little bit more surprising is our rents are up 42% from when we went public. When we went public, where everyone bought the stock at $23.75, we are up 42% on rents and on a per square foot basis, which is somewhat the magic of cash rents, because we have growth going cash rents in all our leases, we’re up 16%.

So we’ve had some very strong earnings growth over the last few years. And you can see our FFOs up 16% which is a good story in itself and maybe would not be as expected. But what’s better about that story, which I don’t people are focusing on as often is this, when you go public, there are couple of large non-cash things that actually provide you with non-cash income, that is included in FFO, FAS 141 and obviously you’re straight lining. And so, I don’t want to call it fiction or fake, or unrealistic income but it’s in your balance sheet, it’s in FFO. And when we went public, we had $0.36 of share of that sort of income.

Today we are up on FFO 16% and we have less than half of that is been non-cash component that used to represent $0.36, we’re now at $0.18 and it’s declining fast. So we not only have increased our earnings, but we’ve increased it and replaced non-cash with cash. And you see it in our numbers and you’ve heard it in our last calls. I think we have really tremendous cash flow at this point and you also see it in our AFFO, right. So our AFFO is up, I mean, I think $0.97 is the streak consensus, and $0.71 is the, and by the way, it’s streak consensus for 2011, $1.36 when I tell you that’s what it’s going to be but up from $0.71 to $0.97.

So, we have got a company that going through the last five years has done everything, or more than everything that may be you’d have expected us to do when we were first going public, and what you probably did, what you expected, and why we had that multiple. So, when you are going public, we have a lot of discussions about what your multiples that you like, they want us to address not like an apartment guy because the apartment guys had a higher multiple. Even though we’ve only some smaller percent of apartment, but anyway when we went public, our peer group which we organized as Boston Properties, SL Green, Kilroy, and Brookfield. Their average 2007 FFO multiple was 21.1 and we were 21.8, so, slightly above the average.

Today, 2011 we are 12.9% and our peer average is 14.1%. So, it’s obviously we are not excited about that comparison and AFFO is even more extreme. When you are looking at a 2007 multiple of 36 on AFFO with a peer group of 28 and now we are at 17 with a peer group of 22. So, all of these teams go short distance to making the point that I said we were going to try and make which that we were undervalue and we are a great buy right now, but what you say back to me, it would be I got it, you did that, but all I care about is what you are doing in the future, care about what you did in the past. So, we were right in the past and maybe we were right or wrong now that depends on what you do in the future.

So, we are going to talk a little bit about the future and what we see coming up. This is a slide I was like to include to show you that in LA and if you are little bit lost you know that we own everything along them now, that’s where the high end residential is and here in Honolulu and you’ve heard this from us 100 times, where 22% of the Class A market and number of properties we have in our average lease size.

So, let’s talk about now the going forward and recovery. So, for three or four, how long, I mean, three years and then how many years you feel like we’ve really been in the session. People were saying to us a lot of things, but what’s got into your market, when are rents going to go up? And I know that’s what you want to hear like rents are going up tomorrow that be a great statement to be able to make. But what we were saying was we are not going to know that until we see absorption term. And we need to see – so we need to see positive absorption and fourth quarter, so fourth quarter of last year we said on our call for those great followers that actually listen to our calls, we said we feel like things are turning. We think we are headed in the positive absorption and we were close to a breakeven in the quarter.

So, in fact, we had mediocre positive absorption in first quarter, our first quarter of positive absorption on like 10 quarters. Second quarter, we had stronger positive absorption and third quarter, which is ended we have had even stronger positive absorption. And we’ll get into on or call those exact numbers, but this is a trend that we called early on and has actually to some degree even surprised us the strength of the recovery in our markets. And as you know last quarter, we’ve got our guidance in terms of occupancy from flat throughout the year to being positive.

And so what we have said through all that time was look, we were doing – this has been going on for a while. We were doing almost 200 leases a quarter. That means that the people in our offices are staining, executing three plus transactions every business day of the quarter. That is tremendous flow, right almost 700,000 square feet a quarter. So, what we had been saying them on is we don’t need the economy is – we are doing great, we got great industries, everything is fine. What we need is contractions and defaults, the headwinds of that huge activity to back half. And in fact they have backed off, defaults are way down. There was a point at which defaults were a multiple a three and maybe even a four multiple, but we would consider typical for a quarter.

We are now 1.2 times or close to on target for where typical defaults – defaults what we would expect for a portfolio of our size and contractions are way down. And I am not saying there aren’t still a few, but they are way down. Those headwinds have subsided. And therefore, we are feeling much better about the go forward in this market. Our office rents have clearly stabilized. In fact, we are seeing some positive signs and upward arrows, I mean, I don’t want to say rents are going up, but we have instances where we know that there has been bidding on suites and we’ve gotten increases in the rental rates. And you all know and you don’t have to hear from us that residential rents are really moving. And we are looking at having a very strong year on the residential side this year.

So, when you look at our company and you look at the other companies that have that multiple that we feel we are on fairly slow. We know that many of you and most of the world is focused on these five main gateway port cities for the United States, San Francisco, New York, and we know you like San Francisco, you like Washington, and you like New York, you like Boston. I mean, but we feel like you should love Los Angeles and there are characteristics of all these markets that are good and they are good markets. I mean, other markets are good markets, no doubt about it. But as we found in New York and we found it going down and we found it coming back and maybe we now find it tapering off.

When you are such a one industry town, a single industry town, which New York is very focused on the finance industry that can give you that can be very scary. And many of you that we know in the past you heard me say this. And I know you have said to us what happened, what happened to LA, because our history has been that we would go into recessions a little later which we did in this recession. We go a little shallower and we come out a little earlier.

And so New York, we went into the recession led by New York, led by the collapse of the finance industry. And New York seemed to come screaming out of it and the way that was just shocking. And I have to say I myself felt like what’s happened right. I mean have we lost our branch wire, we are lagging them by so much. But if you look back today and focus on what actually happened with that decline, they got a boost that was literally Herculean. I mean, the government came in and gave them $1 trillion that you specifically targeted the finance industry a $1 trillion of support right. So, they almost able to say well maybe that was just a bad dream and its over.

And you saw that market do a very quick turn, a very sharp down and a very sharp return. Maybe today as you look at it and they are not giving that support you are going to see maybe a little bit lower or a little bit more of a leveling off. San Francisco is great market, Boston, they are all great, I don’t know, in Washington which I know the government has provided another effective single tenant market and government has provided continuing and maybe for over 200 years growth in that market, but I don’t know today any of us want to rely on politicians for our business model.

So, let’s talk a little bit about LA and all of these markets and much as it’s granted, we were all disciplined. There was no new supply coming on. I am not going to talk a lot about the supply side. You’ve heard it on the thin item, we have good supply constraints, particularly good supply constraints in our market, maybe it can be set for Boston, but some of those same could be set for some of those other markets. But the bottom line is areas known and supply coming on at the moment. So, it’s all about the demand side. It’s all about the industries driving demand.

So, as I said, New York finance, as finance rises, New York rises and finance declines, it declines just like the plane you took out here for this conference, I mean, if you came out on 747 and you found out they only have one pilot and they didn’t have a co-pilot and the pilot falls asleep or has an aneurism or does whatever, what’s happening the students are coming back asking if anyone knows how to fly the plane, right.

So, in our market, we are supported by multiple industries. We have like six, seven co-pilots or maybe they are all pilots, I don’t know. One of the facts that I had always said we are largest port in the west apparently. And we check we are the largest port, U.S. port in the United States, we have here. That’s a very strong business. As the matter of fact, they are expanding the port. And I am surely there is a lot of do with Asia and China and the growth of Vietnam and the goods that we are bringing over here in Korea and some for Japan. We are also the really undisputed world entertainment capital with more than 260,000 people employed directly in that industry, but even more than that tangentially employed because its not just entertainment as you would view in movies and television. But it’s all the games and other stuff on your, you know, that you give your kid to be able to drive and not having screaming in the backseat would like to play the iPhones and iPods.

We have another thing, which Boston is known for the density of the universities that they have. We have extremely broad and deep reach in education, which I believe to be probably if you were to choose one industry that you wanted to be particularly strong is the best because it just develops all other industries develop from great educational and research institutions. As you know, we have UCLA, USC and CalTech and Pepperdine and Vaio and it goes on and on, but 60 spread throughout our market.

We are also a huge place for tourism and many of you know that because I have gotten calls from some of you where I thought you were saying, you are coming into town to, you don’t want to say going to be intent of the meeting and you are saying, hey give me good place to stay, I am coming with my family, where should we go, what should we do, which is really surprising to talk to people that are coming for vacation, no place that you live, I feel like we want to go to Hawaii, you know, but I am going to work there unfortunately. But tourism still plays a very large role and plays a very large role in our market.

But one of the most interesting things that we have going on here there is type of the too best for last is technology, which you know technology has moved down from the north and we have very significant technology tenancy now in our markets with Yahoo and Google and the game manufactures that the video game manufactures and even the true hard tech guys. And technology has come down because it was coding guy engaged to and wanted to marry entertainment and they put those two things together as you know, Apple’s brilliant at.

And so now you have technology and entertainment really this is the capital of technology and entertainment combined and they are not only married I mean they are having kids and grandkids and it just spread all over our markets to the extend that now people are calling this kind of coastal areas Santa Monica going down to Venice, Silicon Beach and you see it. I mean we see it on our tenancy. We see it in the people, whom I’m talking and my friends are getting jobs in those sorts of companies.

So, it’s not only another industry that I can point to as a demand driver. It’s a hero of demand drivers. I mean its growing. And the second hero another one that I would call just so incredibly significant is our medical education and research centers. You can’t imagine how many people from around the world come here to go to the doctor. We have an incredibly deep hospital system here between Ronald Reagan and St. John’s and Cedars Sinai and City of Hope and Childrens and with specialties, I think we looked up something, I don’t remember, how many hospitals it was, extraordinary number of hospitals 20, 30 hospitals that have a top one or two and like usually it’s like 20 top 10 specialties in know what, because they rank hospitals by specialty rights. So, one could be a top 10 cardiac, but not a top kidney or something. So, we have something like 20, 30 hospitals that are ranked in that fashion with the big guys like UCLA being ranked in like all 20 having the top 10 department.

So, that’s made the huge difference and that’s on top of what you see going on here in the way of research. Incredible and for me the most interesting thing if you have free time to look into is that medical research break news that are happening in our places like UCLA and USC and that independent research places in medicine here with respect to cancer and other special and complicated surgeries.

So, we are feeling very good about the directional leasing and the reason for the directional leasing and the industry support we are getting. And when we name when I go through these industries you got to be thinking well, you were to bet on, you are going to say what are the industries, I am going to bet on for the United States, over not the next year, but for the next 30 years.

For the U.S. to be completed of across the global spectrum, these would be all the ones. And I knew it say we have the best-in-class of the industry supporting our markets and that includes. We have a fair amount of finance and also we have a plenty of lawyers and accountants and all the other good stuff that goes along with major gateway city. But these individual industries have made a very big difference and in fact I would postulate that had it not been for all that support to the finance industry, we would have done the same thing as we are doing now. Pulling out of it probably earlier without the support, I mean, none of these – no industry I just named got any government support. And we are pulling out of it very strongly in the phase of what’s going on right now in the national and world economic (scene).

Unidentified Company Speaker

Before I get into my part on this slide, I just want to mention, because I don’t think we mentioned it so far. In terms of the slides, they are going to be available on the website and if you want any of them or all of them e-mail to just let Mary know and she will get them to you after the presentation. Not surprisingly, I am going be talking about our balance sheet and it was a year ago at this Investor Day when we sat down and said our primary focus – this year our primary focus is our fifth anniversary and looking at where we were our first year as a public company where we are today and our growth prospects going forward in the context of our fifth anniversary.

But last year, if you remember are major theme was in laying out our plan for financing, since we obviously had a lot of heavy lifting to do over the year. We wanted to make everyone understand, gave all the current information we had at that time to lay out very clearly where we are going. And over the past year, we’ve succeeded in implementing on that plan frankly and lot of help given by the Federal Reserve in the interim. But a lot accomplished that much more successfully then we had contemplated at sort of the high end of our expectations a year ago.

So, since that time, we closed 7 term loans aggregating over $2.5 billion. We were able to fix and swap out rates with a weighted average of 4.07% significantly lower than our best estimates for a year ago. And probably of as much or even greater importance as the actual rate is that we have a very strong, as most of you know from talking to us over the years, we have a focused strategy on how we approach that, which is the primary attribute of it is to maintain maximum flexibility, because we don’t know what the credit markets are going be in any period at time, particularly in the short period of time, but what we do know is if we have maximum flexibility we’ll be able to adapt whatever the credit conditions are. And we find that having a property level that light financial covenants and very kind of general pre-payment kind of provisions is the best way to preserve the flexibility and have big windows to refinance over a period of time.

One other thing, which frankly we talked about a lot over the years, but I think maybe now it’s better understood is we said one of the reasons we’ve stayed away from corporate level debt and maintain what we consider to be a disciplined by staying within best price conservative property level debt is staying way from rating agencies. But if you are the United States treasury today you might have said maybe the government should have done all property level debt and stayed away from dealing with S&P. I don’t think they’ve had a happy experience with that over the past year.

We certainly know that a number of the other REITs over the past several years that major motivator in them doing sometimes dilutive equity deals or expensive debt deals such a long time or concerns about that they were getting uncomfortably close to running a foul of downgrade issues or covenant issues. And in the refinancing we have done, we’ve kept our traditional structure in place. And going forward and looking forward to wherever the credit markets go in the future, we feel that we are very well structured for good times, but also keeping an eye open for the possibility that credit markets could in future years become tough again and we have maintained our flexibility.

We had a lot of discussion a year or so ago about the fact that our debt was all bunched up in 2012 maturities. We have laddered much of that out in over a 7 to 10-year period. And then we have been able to and we got into this process initially year or so ago we said when we are asked about paying down the debt that we are refinancing. We said we have cash and the cash is growing and that we have used cash to make, where it creates value for the company. And so we looked at that, we said, we are going to refinance this top level debt to get to best pricing and will use the debt, will use our cash to make pay downs to be able to get best pricing levels.

As it turned out, credit markets were very accommodating. And I think again the implementation was good and we in fact we had to use very, very little of the debt, I mean, I think like 25 million, 30 million in total to maintain best pricing levels as we did this refinancing. So, in larger part, as a result of that plus our cash continues to grow, we are currently sitting on over $300 million of cash on our balance sheet. In addition, a lot of this goes to the slides Jordan was talking about in terms of the growth of our AFFO and converting such a significant amount of non-cash income into cash income.

We are sitting now with roughly 2 to 1 coverage of AFFO to dividend in growing and best-in-class position in terms of our cash or dividend coverage. And going forward, we have a plan which we have discussed with most of you to reduce leverage. It’s not a big one-time event, it’s something that we are going to be doing over time taking advantage of the significant amount of the cash on hand and taking advantage of the growing levels of free cash flow that we have, which for large part generated by the fact that we have been able to maintain and Ted will be talking about this in a second maintained certainly on a relative basis, very good low G&A levels and CapEx levels.

So, I talked a little bit about the internal growth effectively right, increase in occupancy, and where we could be headed in terms of rents even. And so the other question always is well what about acquisitions. And the reality is and you guys know it that because of the global volatility, deal flow has slowed down, but we are actually working on a number of deals and we feel good about our pipeline right at this moment that there are still attractive opportunities out there.

And I think that we will be able to continue to add to our portfolio. Obviously, well this tells you we have ample liquidity, but one of the things that’s making even bigger difference is that lot of the stuff that’s coming up has real significant vacancy. And that can be comfortable for someone is starting with an operating platform in a market, where the average tenant size is very small. We do not have a second runner up in this market. We have almost 600 people of which 500 plus are here in the lay. And there is nobody that maybe even has 100, right.

And in terms of our penetration, the number of leasing personnel that we have, I mean, it is really a very big advantage for us, because we are totally comfortable in any of our markets and in anything we will look at buying taking on significant vacancy and performing and meeting our numbers in terms of lease up, because we have such a good feel for what’s going on. So, I don’t want to give up the acquisition side or the external growth side. I feel like we still have good opportunity to have external growth and I think pricing is still reasonable, especially in light of obviously our views and of the fundamentals and where they are headed.

Unidentified Company Speaker

I’d like to talk a little about the operating platform. I know we have talked about a lot in the past and I think that in general we get good marks for our operating platform. But what I’d like to do this morning is explain to you why I think that, that platform is particularly important in the call it micro-lease environment that we live in. As Jordan said, the concentrated portfolio that we have not only has I think advantages for us in leasing and in acquisitions, but it also has significant advantages for us in the area of property management and in general in handling our operating platform.

We have a chance by having the limited markets that we have. We can have a lot of senior management focus on assets so that people for the most part were either here in Hawaii and we can go out and talk to people they can come and see us. There is an understanding of what’s going on at the property levels that I think is probably more than what you would expect for a company of our size. Also like to just talk a little bit about some of the parts of our operating platform and how they help out. As you all know, we do have a construction company that does the bulk of the TIs and the CapEx for us in our buildings and that’s not they adjust for the profits or the revenues from it, we like those, but that’s not really why it makes a key advantage for us.

The first thing we get from that is we get to compress the vacancy time because we can control that construction process make sure that it happens when we needed to happen make sure it’s available when the tenants are there. We can compressed the amount of time that when a space becomes available when somebody leases it to when we actually have occupied again.

Again in a micro lease environment that’s something that really matter a lot. Secondly, it allows us since in the end. We effectively pay for the TIs and the CapEx one way or another. It allows us to keep those cost lower than they might be if we were dealing with third parties and that inefficiency that there.

Those advantages are both important. But it’s also important to understand that for us we deal largely with tenants or not very experienced in office build outs. For the most part if you’re renting 50,000 or 100,000 feet or even 20,000 feet, the person you’re dealing with on the other side is a professional whose space planners, who are used to building out space, they understand the process, they get through it.

When you are dealing with a micro lease with an average or median micro lease of about 2500 feet, you’re talking about often couple of lawyers, three lawyers and support staff. And if they have to manage the construction process, again, you got two problems with that. First, they are not going to do a good job, but lose time, you’re going to have vacancy problems. They are not going to be good at meeting it out. They are going to cost them more money, going to cost you more money in the end by that same token.

And finally for many of them, I simply can’t visualize the space. We have lots of tenants who when they walk in, they don’t want custom space because custom space means having to figure out a lot of things they are not used to. And so one of the things that we have done to adjust to that market, which has actually been incredibly successful for us is to build out the sweeps in advance of when they come in. And so they can come in, they can see where their office is going to be, they can see where the quarter is, they can actually see the kitchen, they can understand these things in a way they might not otherwise.

The other advantage as it gets for us is that it’s cheaper because we build out the way we want to build out. And when it comes time to turn that property if somebody moves out, we have generally constructed it in a way which we think will fit a lot of tenants. And I really can’t overemphasize how important, I mean, Bill and I were at an operations meeting few days ago, where I guess last week when the property managers and some of the properties are saying th0at they want even more sometimes we’ll put furniture in the suites. So, they can really see what it looks like, just like you do in a residential model home. And they were saying they want more furniture, because those suites move much faster with these tenants. That one, okay.

The same reason is true for the leasing side. Again, it does produce revenues for us, but more important to that when we have to do three leases every business day, three office leases. This is ignoring the residential, which is a different thing. When we have to do that, it is very important that we have control over that process that that process happens efficiently that we can move it forward and as you can see here we get about two weeks from an LOI to a signed lease on average. Again, reducing that time in our lingo compressing that time is a key thing for increasing occupancy and in the end also in keeping our CapEx and G&A low.

And with that last point, I would like to talk about something which sort of is a point that John Guinee of Stifel Nicolaus made which we thought was an interesting one. And that is that a lot of investors are now using, as one of the metrics that they’d look at, what the implied cap rate is on various companies. And if you look at our cap rate on a before CapEx and G&A basis, it’s sort of classic NOI basis, you can see that we’re slightly better, but basically on track with that same peer group, we’ve been using all day today.

And John’s observation was that when you’re buying a REIT stock, you’re really not buying properties, you’re buying stock, you’re buying a company. And therefore your actual cash flow or the actual expected returns will be affected by things that are below the NOI line. So for example, CapEx and G&A both will impact how much cash flow is eventually available for us to return to investors.

And as a result of that we’ve feted a note that talked about what things look like if you look at the NOI after CapEx and G&A and in that case you can see that while the peer group both go down somewhat obviously, the peer group we suddenly see a large gap which we think should be closed.

So I hope we’ve started complaining, stock prices, why isn’t it and historically we get lot of facts and we’re not complaining about one thing or another, but when we look back at the five years and when we’re looking at what’s going on now, when we look at our prospects going forward. It really just strikes us that the proposition of the stock is significantly undervalued. It’s just glaring. And that’s why we decided to do this. I mean we are in the gateway market, the operating platform and fundamentals are showing great recovery trending.

We used to get bank for the debt. We got the debt worked out, strong cash. I still feel like there is good acquisitions and we have shown a history now. When we started, people said how do we know, you can do this, how do we know you can do that, we were brand new in the market, it’s only been five years. But it’s still like dark years, so it feels like it’s been a lot longer than five years. And we have actually through this recession performed than everything we said, not even expecting the recession. So we say we feel it’s a very compelling current valuation for moving into the stock.

So with that said, five year anniversary, happy anniversary to us and we would like to take questions, hopefully you have a few.

Question-and-Answer Session

Unidentified Analyst

Hi guys, I think one challenge that we feel like you guys face is external growth, I don’t know you touched down a little bit with your growth and your platform over the past several years, but it feels like most of that came several years ago and then also in Hawaii, so very little, but it has been in your kind of core LA markets. Can you just talk about your outlook for acquisitions, why does it seem so slow here on the investment sales front, do you expect that to pick up, can you just talk about that?

Jordan Kaplan

Yeah, I mean, there was a couple of things going on. There is a long trend of the fact that especially in this market, we buy lot of properties and there has been some consolidation, still there are one and believe me those portfolios we like to buy and I still think you’re going to trade. And I don’t want to get off, my kind of myopic, I don’t know what the right cycle, as it varies through, we’re now testing, just trying to buy that EOP portfolio, but there are still one-off, plenty of one-off deals that are out there, that we’re working on. We have a reasonable pipeline, it’s not lack a deal, so I mean I really think, the stuff was coming to market and I think just last turn sort of scared some people off, scared sellers off and scared – sellers got a little scared off, because they could still get low cost debt and then maybe we are going to sell and then they thought there were some deals that didn’t go for the price they expected. And so they said well we are back away, I don’t know lot of like and we’ll bring it out after Labor Day, and the Labor Day came and they were like what we are going to do with next year, we are not going to do with this year and people kind of burning because they had maybe a good first half of the year, I don’t know, but someone was rocking. Still we see that stuff out there and I still feel good about that.

Our growth as other than for short period in the 90s, our growth has always been little jerky and there is times and we are able to layout a lot of good properties that work with our portfolio and then there is times when it can be very dry, those are like out there. And certainly, I feel so many now, now of our last few acquisitions, we just bought it if you were talking about west side, we bought 300,000 for building and binding in Welsh share. We just brought a little building. We are going to go visit here and mainly the largest deal we did that was that million square foot one in Hawaii. But I still feel good about adding in the LA markets here and maybe adding a little bit in the Hawaiian market. You can just say, you go ahead, if you want to just change your voice to talk a while later? Okay, go ahead.

Unidentified Analyst

Jordon, you talked about how you feel like your stock is undervalued and in my view you guys have done a good job kind of keeping your head down for the past five years and operating your portfolio the way you wanted to operating the balance sheet the way you wanted to. But then we can all kind of sense the frustration with the share price relative to where I think you feel like the value is. Are there things that you want to do, where you feel like you can move the share price closer to what you would view as intrinsic value? You could, I mean, if you sell assets you could get a portion of that value and may be buy shares back and still be able to reduce leverage a little bit or are there things that you are thinking about that might be able to bring your intrinsic value or your share price closer to that intrinsic value?

Jordan Kaplan

There are two things that I think are playing a real role in where we stand today and frankly our presentation didn’t get those straight on the hair above say what they are and deal a little bit. Number one, I think maybe people are still uncomfortable with our leverage level and that’s why in building maybe stated as strongly we have a real goal of reducing our leverage. I mean and I know it calls next quarter and go how can we then pay down your debt $500 million, but we have a real goal of getting that leverage level down and operating the company at a low leverage level, which we told you in the past would be one of our goals, but we had other things to deal with and we feel like we’ve dealt with them and that is like front in center on the plate right now. And I think that may make a difference.

The second thing because you could – every time people have complained about external growth you just bought and build in they will always certainly, yeah, but that’s what you did yesterday and we are more concerned about what you are going to do tomorrow. So, you’re never going to prove to people that you can keep growing the portfolio externally. And I think people are starting to understand the internal growth prior to the story.

The second thing that I think is acting as a little bit of the headwind is I think there is still a little. If you were to look at the five gateway markets, I think there is still some prejudice or concern about LA and it’s recovery or at least some misunderstanding about what’s going on here, which is why we wanted to take the time in this conference to talk more about those demand drivers and try and get that word out. We are probably the loudest and most accurate story concerning what’s going on here right, I mean we have 22% of the market. We do a tremendous number of transactions.

So, we see things ahead of everybody, I mean, ahead of all the leasing brokers and everybody else. And frankly, I’m surprised at how few people make use of our quarterly calls that our shareholders to figure it out what’s going on in the market competitors, because it’s extremely clean and good data, but still I will say I don’t think we are getting, I think we need to do a better job of telling our story about how we feel about our fundamentals and the way they seem to be progressing right now and you know anything could turn on you and you could do a back flip and double twist and break an ankle. But as we see things going on right now and I said some of my earlier comments, I told you that Q3 has exhibited through there, I mean we are seeing very strong recovery of fundamentals in the absorption numbers and in the deals that we are doing. So, I think getting that story out or is that story develops I think that’s going to make a difference too.

Unidentified Analyst

Can you talk a little bit more about the submarkets, I mean, you commented that you and the market are waiting for rent growth, where do you think you’ll see it first in the kind of where is it really going lag here. And then also as you’ve talked about Silicon Beach in tech and media how deep is that demand, what submarket is that in and then as you think about the other drivers, where that really growing demand?

Jordan Kaplan

Well, Ted you want to answer.

Ted Guth

I mean obviously the center, where the Silicon Beach activities are occurring is in the Santa Monica submarket. I mean if you saw, we were last quarter on our data where 97% leased in that market and that market is it’s effectively full. And what you see are the, you know, we talk about tech, but in large part as Jordan was getting across the point that the lines between tech and entertainment are really blurred. So, it sort of a combination of the two depending upon which way you characterise them.

But those two it’s the tenants are radiating out in that level. A lot of that’s going south, where we don’t have buildings in Venice and Culver City in that area, but we’re also seeing it migrate east into Brentwood. And we talk about this a little in our call, our last quarter call, we’ve seen very strong activity from those type of tenants in Sherman Oaks/Encino, particularly the Sherman Oaks part of that, where we’ve seen a number of deals and including recent one since last quarter video gaming company startup guys spinning off from other bigger companies, a lot of entrepreneurial activities, we’re seeing quite a bit of it in that area as well. So, it’s those would be the strongest areas in terms of that demand.

Unidentified Analyst

And in terms of prospects or rent growth across the submarkets, how long do you think need a way?

Ted Guth

Well, we’ve said across the whole portfolio and we do talk in terms of submarkets, but it’s the submarkets are close together and they do have an impact on one and other. So, it’s easier to talk about the whole portfolio in a meaningful way. We’re now a 100, 250 basis points away from occupancy growth to the thing that we would get be able to gain traction if you look at our portfolio wide obviously in the submarkets that are getting those stronger push from the demand drivers that we’ve talked about.

Jordan mentioned, we’re seeing an isolated examples in particular buildings bidding voiceover individual space, when can pop 10% on that one deal that’s already occurring. And we would hope to see that broaden out more quickly in those areas first and then spread out in the other submarkets.

Unidentified Analyst

Hey Jordan, yesterday we are there with couple of other LA landlords and it sounds like we are seeing after August and September sort of slowdown outside of Beverly Hills and Santa Monica (indiscernible) demand in those markets. I guess your commentary on demand in the third quarter sound is pretty optimistic. Is that not only in those market across the portfolio and I guess how do you change your leasing strategy in the sort of non-Santa Monica, Beverly Hills markets given the macro headwinds and some capital markets uncertainty?

Jordan Kaplan

So, my comment about recovery in the industries price across the board and we have not -- you said, you have some, I didn’t hear properly, but you said you are nervous some other LA landlords they have seen a slowdown in August and September, okay, we haven’t seen them. And then you asked about the economic headwinds and whether we have changed our strategy?

Unidentified Analyst

Most of you become a bit more aggressive on leasing to the lock in occupancy just given some of the headwinds to the economy?

Jordan Kaplan

I’d like to say that the occupancy we lost over the last couple of years was because we were like we were holding back for better times, but actually all throughout we have been pretty aggressive about trying to push occupancy, when you buy buildings with vacancy. And we know job one is to get that thing up to a level, because you really can’t move rents until year ’12. Our leases are like five-year leases. So, we don’t hang back like we are doing 15, 20-year deals and we are locked in at similar rate. So, we are always pushing for occupancy and we always have the strategy of as soon as occupancy gets to a point, where we feel little bit of price tension and we start moving rents. And because of our simple on steroids large position in these markets, we are usually the first to feel the improved occupancy and the first in the rents.

Unidentified Analyst

Back to acquisitions, you said that you’re looking at some deals when there was vacancy. Can you talk about the reasons you think there that the properties have such vacancy. Can you quantify that? And I guess if the markets are turning why do you think these sellers are looking to disclose the properties at this point?

Jordan Kaplan

Well, there is a lot of reasons why buildings are sold and it can go anywhere from big pension fund that’s looking for liquidity to too much exposure, the office market to just playing all deal fatigue or debt that’s coming up. It’s not under water, but it’s too high, they don’t want to put capital in. The deals that in general there have been a couple of deals, that have been fully leased what you would say like tuned to the net for the market, fully leased above market rents, really trying to feed exactly what most of the big parts of capital looking for.

But there are plenty of deals coming out and a lot of it, normally you see coming out, these guys that are tired of having 20% vacancy, they don’t have the machines set up, they are smaller operators, not necessarily small companies. We build large company with only one or two buildings, here in this market. And they just are done, right, they just want to get it off their balance sheet and they’re hoping that maybe it’s not the best that, going forward at least, our feeling is going forward and it’s happening. It’s obviously happening, enough and I just described.

Much more of the value of a building can be ascribed to its income and its operations today and could have been in 2007. In 2005, 2006, 2007 it had all the due with the camp on the market and vacant square foot equally or maybe more valuable than leased square foot, because you can still have the dream of higher rents on the vacant space.

Today, how your building is operated, the NOI, that’s coming off, it plays a very significant role in its value. So if you have been fighting that for a number of years and you feel like well, I have had a little bit of a run up in the capital market. And this is especially what happened in the first half of the year, people felt like, hey maybe I don’t have to be fully leased to sell it, maybe I can get a good price 20% vacant, so that stuff came out. And it’s coming out still I think.

Now they got nervous again, when capital markets backed up and they were all actually deals, that came to market, that were 50% leased, where they thought that they were going to get credit, further vacancy and they did it and they got pulled above the margin which sends pretty big signal to other people that were thinking about selling and pretty much shutting down to the summer.

So now I am hoping that people, it’s all about expectations, even if you live in tract housing development and you have the same house as everybody on your block, and they’ve got five houses down and the markets moving, and got five houses down just sold this house for 300 grand, when the broker comes to talk to you to sell your house, like I am sure because that guy sold for 300 grand, my house worth 350 grand, right. That’s always what happens. And for a while there was a run up and they were getting that. So when that backs off that feels like the market has gone down and then push people away for a while.

Bill Kamer

Let me take a part of what Jordan was saying and kind of make a different point, it’s only tangentially related to acquisitions. I got to point that I don’t think we hear hard in our presentation which is how does this all types together with kind of our view of the world which is if you except the consensus macro forecast of the economy going forward, sub normal growth or maybe some decline over a period of time, but in extended period of time, a lower growth than we’ve seen in previous years. And seriously that’s the climate in which we’re operating. That sort of frames it up, I think well to understand, really a lot of the themes that we are covering here, which is we really feel that the advantages of an operating platform and that drives a lot of value day by day by doing a lot of blocking and tackling. When we are in the markets in ‘06 and ‘07 and as Jordan said, the capital markets were causing the tide to rise very quickly, that value add of an operating platform was only a small part of that return.

If you look at environment today of call it moderate growth, the advantages of an operating platform are much higher percentage. Now, that translates into lot of what we are talking about it’s why you will see buildings with people who in today’s world that don’t have that operating platforms that are going to be living with greater amounts of vacancy. It also translates in terms of the debt side and the difference between sponsors who are able to get very low cost of funds on their debt and others who are not don’t have that opportunity. Again, 607 the opportunity to get financing was broadly available today. It’s – there is that lenders are competing for the same sponsors that they want to do business with. So, there is a real edge there.

So, we see by being in the market that we are in, with the industries that we have, the operating platform, the low debt cost structure that all those things in the macro environment going forward or things that should enable us to perform very well in the environment. Now, the consensus is long and we wind up throwing out of this with stronger macro environment, so much the better, but we feel like we are very well structured going forward to do very well within the consensus view in terms of where most people think the economy is going.

Jordan Kaplan

And to bring Bill’s point back to acquisitions, it’s also the reason why we feel good about our ability to capture these acquisitions, when you go to 150 South Rodeo, you see a building we bought, it’s classic acquisition of our 75% occupied with the time of acquisition. And we feel we can buy those because we do believe we can find ways to lease that up, whereas most of the other landlords with less of an efficient operating platform are going to be saying, I got to buy that without the expectation, again assuming Bill is right that this is a relatively low growth environment that I can buy being a better operator fill that. I have to wait for the market to fill it for me.

Unidentified Analyst

Just going to ask one follow-up question on the balance sheet, Jordan you mentioned that one of your real goals are to produce your leverage, I am sorry if I missed it, can you provide some details around that?

Jordan Kaplan

You didn’t miss it. I mean, we want to reduce our leverage, I have talked in the past about the fact that everyone has different ways of value and we finance at the property level, right. We don’t finance at the corporate level. So, the way we look at – the way our leverage is paying across our portfolio is different from what you guys look at it, because you can only look at it, because you can only look at it in an aggregate fashion, but we are looking at LTVs and individual property level coverages. And I’ve said to you, I think the way that’s all viewed for us today is somewhere in the low 50s. And for most of our history running in the company before this recession, we operated in the mid to little up 40s.

And I’d like to get in terms of percent LTV and I like to get back to that and it’s our goal, it’s a primary goal as opposed to be saying I want to use the money to send out to adjust your dividends at the end of the year or when it go start buying in New York, I guess might be, it’s a primary goal for us is to bring our leverage down.

Unidentified Analyst

One maybe a third headwind in our view might be just the overall prejudice about the State of California. And I was wondering if you could maybe talk a little bit about elevated unemployment and what progress has been made over the past call it six to 12 months, what has Brown done for you, I guess?

Jordan Kaplan

Well, I actually think just as now just pure (indiscernible), but I think Brown is doing a pretty good job actually. Look our general – our politicians in our state economics are screwed up as yours. So, all our politicians went to the same school, I guess, but that Brown who I was little nervous about having been a California resident my whole life, so I was here when he was doing round 1 of his governorship. It came this time, pretty clear that and saying that he was probably the only guy we could deal at the unions to some degree and could deal some of these entitlements, because he had credibility on that front. He probably created a large part of that problem for us.

And if we look at the way he is governing today, he seems to be focused on doing that. And we’ve brought some loss on this issue too, but we had our first signed-off budget on time during his tenure in August this last year, right. So these seem to be pulling it together, now they are pulling it together from just literally like a garage sale, I mean everything in every direction, but I am feeling a little more optimistic now. If all that said the state government in an economy like California’s which is whatever that you want to close several parts of the economy in the world or whatever does not play a tremendous role. And so I don’t think they have an opportunity to dramatically change things on the plus or minus side. But they do seem to be pulling it together little bit in the areas that they can and he seems to be focused on the right things. And he seems to be getting more cooperation out of our completely retorted legislator, than other governors have been the past.

Bill Kamer

And on your point about the California economy, lot has been written about the California economy basically being bifurcated between the coastal California economy and the inland California economy. For all the things we’re talking about in terms of the tenant demand that we’re seeing those are industries where there is hiring going on. I mean manufactures shortages, the video gaming companies, tech companies, they are in trouble finding people that have the skills that they are looking for.

And its up and down the course, San Francisco has got that, it’s the higher data play on, it’s more reliant on a bit doubling down on the tech part of it specifically. But you also obviously see it stronger there right now, but in all the industry, talking about the health services and tech entertainment, people are hiring along the coast. If you go inland, where it’s a construction-based economy, construction workers, it’s the sad situation as people have been out of work for long time without prospects of getting retired anytime soon. It’s more inland California is more like Nevada in terms of the drivers of the economy and that’s waiting for a housing recovery.

Unidentified Analyst

Yeah. Two question for you guys, one would be, when do you think Warner Center will stop paying as a tractor from the story? And then two Jordon have you felt any pressure to expand to new markets like here (indiscernible)?

Jordan Kaplan

Well, basically Warner Center, huge positive because we could lease it up and it all goes straight to the bottom line. Actually as I said and when I don’t remember someone asked me like they asked me if my statement about the recovery was across all the markets and we are seeing it there too. So, we are leasing, we are seeing positive focus in there and some pretty good deals being made. So, I thought about that right for, you asked that question, whether I could say it across the board. So I don’t know it’s unfortunate we bought a lot, we were repositioning a lot and the market itself was maturing in a way where I was losing even in a great market it was losing its large tenants and going to smaller tenants. So that process in this past recession was accelerated, you know actually well that’s exactly the wrong time because the large tenants were going, but small guys weren’t coming.

Now, we are actually seeing that, so we’re feeling good about getting great even if it’s not an minimal rate growth, we’re getting good occupancy growth which is very strong in terms of driving short-term, next couple of years in NOI out of that market. We are looking at other submarkets, now we are in a different strategy and I know Kilroy, I looked some of their stuff and they had a whole history thing going. We started out like these two markets now were in these nine or something like that.

And that’s a strategy, I mean they are providing let’s say, diversification across some fashion, geographic diversification. And we know, but as a strategy, now that’s something to say, we don’t add markets, but we add markets base on filling our criteria. But we don’t try and so ourselves as we will provide Western, United States diversification. We’re going to go to the best markets that we’re pressed, in the west, that’s true. But they have the other characteristics that we focus on even more and then we’re going to go there in a big way by anyone else’s standards probably be over opposed to those markets, you know, in a controlling fashion and try and make the best out of those through that control position. So, we are still looking in markets. I don’t feel pressure to add markets. I feel pressure to grow the company because I think that in general price is good and opportunities are good, when get people to sell, I want to be the buyer.

But I don’t feel like we really got own some in San Francisco. Another type I feel we ought to say, which is that if things come up, some came up in San Francisco and some came up in one of the markets we are in. I would say we are going to make more money doing the deal that we are in as opposed to you touching the company, which it goes back to what Bill said, operating (Taiwan) are being so important to us, with the stretch you are just trying resources to now things up in San Francisco.

Ted Guth

Let me say this to, you know, we the more we look in markets outside of LA and I guess we are studying them all the time to look at these opportunities. The sort of the better we feel about Warner Center. We look at what’s going, one factor is regarding Warner Center and still going amazingly still development is going on this area is the amount of -- one of the reasons we haven’t bought a apartments at Warner Center is because there is over 3,000 units of high quality multifamily housing right in Warner Center in the specific plan area, beyond that a lot of other housing going in. So, real growth in terms of the population base there.

The other thing and as Jordan said, we are seeing positive developments there now, but I think what’s you are going to see happen is Sherman Oaks/Encino a very strong market, really, you know, we are always is try to lump it in, in terms of the valley. Its like gets add to the value, when its markets the percentage of our portfolio. But it’s not in terms of the dynamics Warner Center and larger tenants are unique to Warner Center and Sherman Oaks that I said I really feel other than Santa Monica it’s a stronger submarket right now.

But I think as a result of that consistent with our idea that near-term we are going to be able to push rents in the stronger performance submarket that’s like a shot of adrenaline for Warner Center to see, you know, once we start seeing some real rental growth in Sherman Oaks/Encino. We really talk about our separate submarket. They are in relationships and one of them there with bigger differential of ramp between those two submarkets. I think you are going to see that improvement more in Warner Center, which is already occurring. I think you are going to see move up that much quicker.

Jordan Kaplan

There is a lot of years, where Warner Center got higher rents San Antonio, Sherman Oaks. So, that’s not even like a hurdle of possibility. Are there any other questions?

Unidentified Analyst

Insider ownership remains among the highest in the REIT sector with your management team, but we have seen a lot of net selling activity this quarter. I just wanted to see if you guys can comment on the rationale behind insider sale.

Jordan Kaplan

We are seeing a lot net selling you mean you haven’t sold any stocks so you are talking about Ken sale?

Unidentified Analyst

Yes, Ken and Dan.

Jordan Kaplan

So, Dan as a program, where Dan stand right like just we are talking about like you are not here. But Dan is a point and we have had discussions about those and we never see goal post in. So, larger shareholder, individual corporate, any other version you want to talk about in the company. And Ken and I are I think second.

Dan is definitely at a point I mean he is put in his time in a way that you can’t imagine and if you are look at what he is actually selling as it relates to his kids trust and diversifying that, which, you know, you will think you should do as far as kids trust and as a percentage of what he owns it is microscopic literally. And frankly, he is being advised that he is probably not doing justice to his responsibility of those things and he should be giving them more diversification and that can also be said for the being Ken. I mean we get, you know, Ken’s 90% and I’m probably 98% of my net worth in this company.

None of the selling that you are talking about is anything to do with like with Doug’s and I start closing. Again these going good or bad and different, you just have to do with a program that Ken is much better at than I’m so diversifying and trying to set something aside for his kids and not having it all bet on one thing. And that’s all it is.

Bill Kamer

That being said, I think if you look at Dan’s, Dan announced a plan going back probably beginning of this year, where he will be making these sales from time to time. If you look at that plan and add up the things, you can see that it has Jordan said, represents a very small piece of his things. And as Jordan said, if I weren’t a company executive, I will be saying to him, diversification is a good thing for you to do that, similar comments can be made, and have been made to Jordan, and Ken, I don’t anticipate that you will be seeing more sales.

Unidentified Analyst

Hi, can you guys talk a little bit about the time frame over which you hope to achieve your deleveraging plans? And related to that, how do you hope to accomplish a competitive earnings growth rate while you are deleveraging particularly relative to some of the peers who have already moved their leverage levels lower?

Jordan Kaplan

Well, I don’t think that the deleveraging is a headwind towards our earnings growth. I think a lot of our peers, the ops that have been which is going to give us a niche I think they delevered at some very low stock prices that caused them how to create real extreme dilution. I mean you are talking on a per share basis right. So, I think that anything we do going forward, especially if we don’t have to issue any stock if we are able to do, just do cash flow and the cash flow we are building up. We will now have tremendous impact and we’d be like you shot my arm in terms of earnings and earnings growth. Now, we want to balance some of the deleveraging program against having good available liquidity and being able to buy and grow the portfolio, but it’s a very strong goal of ours to do that deleveraging, but I don’t think the numbers are I mean just the hard numbers or that deleveraging is very hard on our earnings growth.

Bill Kamer

I think it was reflective in what we said before which is I wouldn’t expect some dramatic single event that is going to change the capital structure in a way that you say, well that really moved the needle dramatically. This is what we are expressing is a long-term program, where we have no compulsion to make any huge move and in the context of again significant amount of free cash flow that we are hoping will grow as well that will provide a lot of the basis for deleveraging.

Unidentified Analyst

[Question Inaudible]

Bill Kamer

Well, okay, so say John knows about our portfolio and you know they as much as almost wrote a book saying that I want to transform that portfolio. And he is very, very smart guy, just very smarter capital allocation and he doesn’t feel like this is the right time to sell those properties and therefore he is going to sell many things if timing is right. Okay. So, I can’t perfectly read his mind towards when that transaction is going to happen and I don’t know all the force is on him, although I do a lot of work to try and understand him. And we’ll be there when they trade will go and as I have told people many times, stay about those building to settle. And they make no bonds about that. In terms of…

Unidentified Analyst

In terms of the fund?

Bill Kamer

In terms of the fund, acquisitions almost everything that we would buy would go into the funds and as there are a few exceptions of that, for example, Bishop Square did not, but that was because of the size of that would have given them more exposure to Hawaii in that fund and they would have been comfortable with, but other than that and some things where they would obviously relate the properties, they will all go into the fund.

Unidentified Analyst

The apartment portfolio source reduces the cash over the next couple of years for you guys?

Jordan Kaplan

It’s not a user cash. It provides very strong cash flow.

Unidentified Company Speaker

No, he was asking would we buy more apartment building?

Unidentified Analyst

Or so, because you don’t really get any credit for the apartment portfolio, if I take a look at the valuations that you put up there, when you adjust for lower cap rate on the apartments then, which you would get on the office. Your office valuation is even worse or even cheaper.

Jordan Kaplan

Yeah. I think the history of the company, it’s funny, because we were a residential company. And then we went into the 90s, early 90s and we thought the opportunity was in office and we have bought a lot of office and we were able to out buy office although we are still also buying apartments. We feel that apartments are one of the things are very good at and we have been good applying the best projects become available and leasing them up and changing the way they work in getting strong cash flow out of them. We would like to buy more apartments and in fact we have made offers and haven’t gotten there, but we have worked on buying more apartments. And I would hope to be able to increase the apartment portfolio.

In terms of the opposite side of that question is, you know, which we get this version of that like you are underappreciated for your apartments, apartments are trading at good price now why you don’t sell them and use the money to buy and cannot do whatever, whatever your next thing on the list is. And I understand that view except though, we have the view even with the -- who understand the people think apartments are well valued. We have the view that rents in especially the apartment portfolio we have right now have a lot of very strong running room and that we’re going to get a lot more value out of them. So, I feel good about our position and for whatever I would selling for that and probably going to buy.

Unidentified Analyst

[Question Inaudible]

Jordan Kaplan

We have been pretty aggressive and we were so aggressive that we went out and we were looking in Warner because our apartments are in good size of apartment deals are traded out in the Woodland Hills area. But we took there with us a little bit of our pressures about the way the apartment portfolios have worked for us in Hawaii and in west side.

And when we then took a more microscopic look at that market, what’s coming on in that market and the units that are still what we have observed in that market, we pulled back from there. And that’s why we didn’t make the deals out there because sitting there been some good size of deals we’ve traded out there. In terms of here in the west side, it’s been very small stuff. The stuff that I whatever in my list – my list of stuff I’d like to buy and worked on, we haven’t been able to get that yet.

Mary Jensen – Vice President, Investor Relations

Okay. I have to cut that, we are already 30 minutes late on the tour. So, what we are going to do is we are going to head out to the Valley area. On your way out we’ve supplied some Douglas Emmett has with a handout for the property tour. If you follow John Meehan, he is right back there. He will take you out to the Valley area. We are going to walk to two of our assets and then we are going to catch a bus that will take us around Beverly Hills. If you have luggage with you, please again check it with the (indiscernible), I don’t think you want to carry it around with you. Thanks.

Unidentified Company Speaker

Thank you all for coming.

Unidentified Company Speaker

Thanks for coming. If you are even thinking about getting the base, the bus is open air and particularly for those of you who are going to be on the afternoon, you are going to regret it if you don’t take one.

Unidentified Company Speaker

You know how fun it will be (indiscernible) that Douglas Emmett had on the (Victor’s) tour right.

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