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Executives

Mary Jensen – VP, IR

Jordan Kaplan – President and CEO

Theodore Guth – EVP

William Kamer – CFO and Secretary

Analysts

Brendan Maiorana – Wells Fargo

James Feldman – Bank of America

Rob Stevenson – Macquarie

Joshua Attie – Citi

Alexander Goldfarb – Sandler O’Neill

Mitch Germain – JMP Securities

Rich Anderson – BMO Capital

John Guinee – Stifel Nicolaus

Ross Nussbaum – UBS

Michael Knott – Green Street Advisors

Michael Bilerman – Citi

Douglas Emmett, Inc. (DEI) Q3 2011 Earnings Call November 2, 2011 2:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s Quarterly Earnings Call to discuss its 2011 Third 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. (Operator Instructions)

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

Mary Jensen

Thank you. Joining us today on the call are Jordan Kaplan, our President and Chief Executive Officer; Bill Kamer, Chief Financial Officer and Ted Guth, 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 may be referenced in managements’ remarks are CB Richard Ellis for Honolulu and Los Angeles office market, REIT for the Los Angeles office market, MPF Research for the Los Angeles multi-family market and Property & Portfolio Research for the Honolulu multi-family 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 will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Jordan Kaplan

Thanks, Mary. First, I’d like to thank those of you who participated in our Investor Day a few weeks ago. At that time, we announced our third consecutive quarter of positive absorption in our office portfolio. We achieved positive absorption of 40 basis points over 58,000 square feet.

Third quarter 2011 represents our largest positive absorption quarter since first quarter 2007. The office leasing recovery in our markets remains on track, with continuing tenant demand from a variety of industry groups. Law and accounting firms were particularly strong in the third quarter. And new business formation from tech and entertainment companies is generating additional demand.

Sherman Oaks/Encino and Santa Monica are currently our strongest submarkets. Our apartment communities are over 99% leased. More importantly, we continue to see strong rent growth in our residential portfolio.

Despite our recent strong leasing activity, we know that some economists are projecting a long period of relatively modest economic growth. Even if that comes to pass, we believe in the competitive advantages of our strong operating platform, our high quality geographically desirable properties and the diverse industry supporting our markets.

Before I turn the call over to Ted, I want to touch on our cash flow and dividends. In today’s world, cash flow and dividends represent a higher percentage of expected total return. As we discussed in detail at our Investor Day, our cash flow has been steadily increasing during the five years since our IPO. Currently, our dividend represents only about one-half of our AFFO. Together with our other sources of cash, we have ample liquidity for external growth deleveraging and future dividends. Ted?

Theodore Guth

Thanks, Jordan, and good morning, everybody. For the nine months ended September 30, 2011, funds from operations increased 17.5% and adjusted funds from operations increased 15.6%, compared to the same period in 2010.

For the third quarter of 2011, FFO and AFFO decreased by 2.3% and 2.6% respectively. FFO per diluted share for the third quarter of 2011 was $0.34, compared to $0.36 for the same period in 2010. AFFO per diluted share for the third quarter of 2011 was $0.25, compared to $0.26 for the comparable quarter of 2010.

As we mentioned in prior calls, the amortization related to the swaps we terminated lasted December had no impact on either FFO or AFFO this year. In the third quarter, GAAP interest expense was increased by $1.5 million as a result of that non-cash amortization, which was then in calculating FFO offset by an equivalent $1.5 million, leaving no net – 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.

Early in the third quarter, we fully amortized the GAAP impact of that swap termination. As a result, the amount of amortization was significantly lower than in previous quarters and future quarters’ results will no longer be affected by the 2010 swap termination.

With respect to GAAP income, the third quarter saw $11.2 million decline in depreciation and amortization, because the in-place lease asset created at the time of our IPO was fully amortized at the end of our second quarter.

G&A totaled approximately $7 million or 4.8% of total revenues for the third quarter of 2011 and $21.3 million or 4.9% of total revenues for the nine months ended September 30, 2011.

Our same property metrics for our office portfolio were down in the third quarter, while our multi-family same-property metrics continued to improve. Overall, same property net operating income in the third quarter of 2011 decreased 5.1% on a GAAP basis and 3.5% on a cash basis when compared to the third quarter of 2010.

Same-property total revenues in the third quarter of 2011 decreased 2.7% on a GAAP basis and 1.5% on a cash basis when compared to the third quarter of 2010. We continue to see improving demand from tenants despite quarterly fluctuations within our portfolio.

As Jordan noticed, robust office leasing in Sherman Oaks/Encino resulted in a 140 basis point increase to 91.6% leased. Our Santa Monica office portfolio reached 98% leased by the end of the third quarter. Warner Center continues to have our lowest overall occupancy, but we achieved 40 basis points of positive absorption during the quarter. Overall, we signed 170 new and renewal office leases, totaling 641,000 square feet during the quarter compared to 204 new and renewal leases totaling 666,000 square feet in the prior quarter.

The third quarter included 74 news office leases, totaling 237,000 square feet compared to 86 new office leases totaling 263,000 square feet in the second quarter. This leasing activity resulted in over 58,000 square feet of net absorption in the third quarter. The lease percentage for our total office portfolio this quarter increased by 40 basis points to 89.2%. The occupied percentage for our total office portfolio was also up by 40 basis points to 87.1%.

On a blended basis, annualized tenant improvements, leasing commissions and other capitalized leasing cost for our office portfolio decreased to an average of $3.84 per square foot per year compared to $3.94 in the second quarter. On a blended basis, our total lease transaction cost for our office portfolio in the third quarter averaged $16.84 per square foot, compared to $18.71 in the second quarter.

Our multi-family portfolio was 99.6% leased in the third quarter. We continue to see strong rent increases. As a result, the average in-place rents across our multi-family portfolio, including units that did not have vacancy, were 4% higher at September 30, 2011 than a year earlier.

During the third quarter, the mark-to-market and rent-roll metrics for our office portfolio improved from the second quarter. On a straight-line basis, our average rent from expiring leases was 5.7% 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 11.0% higher than our asking starting rents.

On a cash basis, our ending cash rent from expiring releases was 12.1% higher than the beginning cash rent from new and renewal leases signed for the same space. This largely reflects the effect of the built-in growth in the 3% to 5% annual rent escalations contained in almost all of our office leases.

With that, I’ll turn the call over to Bill.

William Kamer

Thanks, Ted. Turning now to our balance sheet, our cash position continues to strengthen. We now have approximately $350 million in cash and cash equivalents, compared to approximately $272 million at the end of 2010. We also have access to additional capital as needed. Our fund has approximately $167 million of undrawn equity commitments, which we can lever for new acquisitions. Another $189 million remains available under our existing ATM program as we did not raise any equity since our earnings call last quarter.

When we completed our financing program in July, we had obtained seven term loans totaling $2.55 billion over a 10-month period. And we had repaid all but one of our loans, which was scheduled to mature in 2012. Last quarter, we were planning to repay that loan with a significant portion of our cash on hand and from the proceeds of a new, secured revolving floating rate credit facility that we would put in place over the next several quarters.

Since then, long-term treasury and swap interest rates have further declined. So, we are now considering the possibility of one more term loan to repay a portion of the remaining 2012 loan maturity to take advantage of the compelling interest rates.

Although we continue to review our options, we still expect to repay the balance of the existing $522 million loan from our cash and from the proceeds from the credit line. This would allow us to further the process of reducing our leverage as we have previously discussed.

As we said last quarter, we anticipate terminating a $322.5 million swap before the end of this year. We currently estimate that the cash and non-cash cost of terminating the swap will be approximately $10 million, which was reflected in our previous guidance estimates. However, the actual termination cost will depend on market conditions at the time of the termination.

Now, turning to our guidance for the balance of the year, as a result of higher office and multi-family NOI, and lower interest expense than we previously anticipated, we are increasing our full-year 2011 FFO guidance to a range between $1.35 and $1.37.

In providing this guidance, we are assuming the total interest expense effect in 2011 FFO will be between $147 million and $148 million, slightly lower than our prior guidance, a weighted average diluted share count for 2011 of approximately $160 million, no change from our prior guidance. Total FAS 141 income will range between $20 million and $21 million, also no change from our prior guidance. Straight-line income will total approximately $8 million, which is at the high end of our previous guidance.

G&A will total approximately $29 million, slightly above our prior guidance as a result of the write-off of financing fees and revision to accruals. We still expect that 2011 G&A will aggregate less than 5% of our total revenues.

No change to recurring capital expenditures in our office and multi-family portfolios. We continue to estimate approximately $0.25 per square foot for our office portfolio in a range of $425 to $475 per unit for our multi-family portfolio.

This guidance excludes any impact from future acquisitions, dispositions, equity issuances or repurchases, debt financings or repayments, recapitalizations or similar matters. As stated above, our guidance does 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 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 Brendan Maiorana with Wells Fargo.

Brendan Maiorana – Wells Fargo

Thanks. Good morning out there. So, Bill, I just wanted to clarify, so the $300 million or $350 million, the cash pay down, the delay in doing that or not doing that I guess in Q3 is more just based on the decision around what balance of the capital takeout will be as opposed to thinking about using the cash for means other than debt repayment?

William Kamer

Well, what we have indicated – I don’t think we ever talked about completing the repayment of the remaining loan and putting our credit line in place in Q3. We’ve talked about it being over the next several quarters. And in terms of a dollar amount, our thinking was and still remains that we will use a significant portion of our cash in connection with – in connection with that payment. So it does not indicate any change from what we previously said.

Brendan Maiorana – Wells Fargo

And I mean the balance – and the decision if you guys choose not to use all the cash to or kind of bring your cash down to what you would think of as a minimal level would be because you see opportunities out there, or would it be for some other reason that you would like to hold some level of cash on your balance sheet?

William Kamer

No, as we’ve indicated – and again there is no change from what we previously discussed. We have liquidities to meet our anticipated acquisition targets available to us. So, it doesn’t reflect that. I mean, really what we’re looking at is the optimal mix of – in our refinancing in terms of the best implementation in terms of floating rate or fixed rate to take advantage of interest rate – the interest rate climate and that’s really all that we’re saying.

Brendan Maiorana – Wells Fargo

Okay. Sorry. And then just to clarify the interest expense guidance that you gave for the year, I guess if we look at that for Q4, does that assume that there is pay down in Q4, or is that assuming that you are at kind of your current capital plan?

William Kamer

No, it doesn’t assume it. It – the reduction which is – our guidance went up about $0.02 at the midpoint. About half of that increase is from lower interest expense and about half of that is from the higher multi-family and office NOI that we had in our guidance three months ago.

The interest reduction, a little bit of it is from the floating rate portion of the debt at lower rates than we had anticipated. And the rest is the thing you alluded to before, which is as we’re going through our alternatives between some term loan or floating rate loan, we’ve pushed back the date of completing that from – in the – assuming it being earlier in the fourth quarter to more like it in the beginning of next year. So the answer is, it does not include any pay down of debt.

Brendan Maiorana – Wells Fargo

Okay. All right, thank you.

Operator

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

James Feldman – Bank of America

Thank you. I was hoping you could help us understand when you think same-store NOI might turn positive. I guess it’s – framing it around, what you think your leasing spreads would be – what your mark-to-market is on your current leases rolling in ‘12? I know you had mentioned the 3% bump scenario leases. I am just looking year-over-year and your same-store now and you had a big – decent decline in expenses granted occupancy is down, I’m just trying to figure out what it’s going to take to get to a positive quarter of same store?

Theodore Guth

I think we’ve been saying throughout the process that the real story in terms of increases of NOI in the short term really comes out in terms of occupancy. And that, that really swaps the other issues in a portfolio. In terms of the rent, obviously, we still probably have a couple of years of where the rents are rolling off from pre-2008 time frames, but the real question will be of how fast we can see the increases in occupancy going up.

James Feldman – Bank of America

So, I guess what kind of occupancy growth do you need to see? Like thinking about ‘12, what kind of occupancy growth do you think you need to see to negate the negative spreads? I mean, you’re up 40 basis points.

Jordan Kaplan

Hi, this is Jordan. You’re talking about the negative spreads in the rents and at the same time is NOI – and those two can move very differently. Right?

Theodore Guth

If I can go back just – remember and I think we talked about this in the last couple of calls that within – we have sort of in our – in existing people who are in place, we have sort of two things that are happening. The first one is, we have on that portion of our portfolio, call it 10%, 11%, 12% of the portfolio that’s rolling, we have the roll down of rents to the extent that the in-place rents are above current market rents.

At the same time, on the 80% and those statistics we gave you on a variety of different levels is what it is in place. At the same time, on the other rents or the other office which is not rolling, which is about call it 80% of the portfolio, that has built into it each year a 3% to 5% rent bump. And so that rent bump of 3% to 5% on 80% as it turns out is about equal, probably a little bit in excess of (inaudible) depends on exactly where we are of the roll-down effect.

As a result, the truth is that that’s not going to change much in the next year or two in terms of the contribution that the rental rates will make to NOI in the portfolio. And that’s why it comes back to -the real question is when do rents go up, I mean when do occupancy go up.

Jordan Kaplan

So summing it up, for 2012, the – in terms of cash same-store NOI, the rent bumps and the roll-down of rent more or less offset one another. Usually the rent bumps do a little better than that moving up. Occupancy, our guidance has been that our occupancy will be at the end of 2011 and starting 2012 will be higher than where we started this year. So with higher – if that trend continues and without giving our guidance at this point for occupancy or FFO or AFFO for next year, but just where we are now and the trends continue, we’ll have higher occupancy in 2012, the rent bumps and roll-downs will be offsetting one another, so we certainly anticipate based on those trends that same property revenue will be higher next year than this year.

James Feldman – Bank of America

Okay. Thank you. And then how much more do you think you can squeeze out of expenses? I see you’re down 2% year-over-year on the office side.

Jordan Kaplan

Well, we continue to make progress on that front. I mean, the variable number where we don’t – we have some control, but not a lot would be on the utility side. We saw an increase in that this year, trends now are starting to head down in that direction in terms of rates with price of oil coming down. So hopefully we’ll see some help on that end as well.

James Feldman – Bank of America

But that would be the key driver otherwise things are...

Jordan Kaplan

It’s a variable that we don’t – it’s a variable that we have limited control over. Things we do have control over, we are able to keep them well contained and are continuing to make progress to reduce.

Theodore Guth

Although, I think we have made a lot of progress in recent years and it always gets harder as you keep pushing down the things you lose the low hanging fruit. So while our operations group is superb and working very hard, it’s hard to keep pushing it down.

James Feldman – Bank of America

Okay. All right. 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 what’s going on in Honolulu? You guys had sequential decline in occupancy of, I think, it was like 130 basis points there, is that just one tenant moving out, or is there some weakening in that market? And how do you look – when you look over the next four quarters, you got about 10% of your leases rolling there, I mean, how does the outlook there look for you?

William Kamer

Yeah. The thing that’s important to understand is, while we always talk in terms of 10 submarkets that we’re in, the nine in L.A. are – have a lot more in common with one another than they do with Honolulu. So in Honolulu, Honolulu never saw the spike up in ‘07 that the L.A. market did. We were never as high in occupancy there as we were in L.A.

Conversely, in the decline in ‘08 and ‘09, it didn’t come down to the same degree as the L.A. market; it’s been a relatively very stable market. So we’re in kind of a range there, kind of a range down there and so we’re down a little bit. It’s not from one source. I think the likelihood going forward as you’ll see us in that market, you’ll see that market continue to perform that way. So we don’t view this as any significant negative in the market. We see it as a continuation of a fairly stable market.

Rob Stevenson – Macquarie

Okay. And then can you talk a little bit about your – what you’ve been seeing, not only this quarter but the last couple of quarters, in terms of lease renewals? Given your smaller space user, have they been giving back space in any significant amount relative to historical norms or has that stayed relatively consistent?

Theodore Guth

I think we’ve seen relatively consistent performance. Our – again, and this is like a broken record over lot of quarters, we’re the most pleased with our smaller tenants and the least pleased with our largest tenants.

The largest tenants which follows a trend pretty much nationwide, you have seen space contractions which we’ve discussed in great detail in the past that has been a headwind to our occupancy going up. But I think among the smaller entrepreneurial tenants, they didn’t have the kind of layoffs, they don’t have – they never had the ability to utilize space in a way – allow them to do space contractions.

So, we feel very good about that and as a matter of fact are we seeing as Jordan alluded to, in a number of the industry groups, among the smaller entrepreneurial tenants, we’re seeing new business formation that has been a significant positive driver.

Jordan Kaplan

We still also love our largest tenants. So, I don’t want to say we’re displeased with them, right?

Rob Stevenson – Macquarie

All right. Thanks, guys.

Operator

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

Joshua Attie – Citi

Hi, thanks. It’s Josh Attie with Michael. The absorption in the third quarter and some of the leasing was likely set in motion in the first half of the year. Can you talk about the current activity in the portfolio and if you’ve seen any change in velocity as you transitioned into the fourth quarter?

Jordan Kaplan

Yeah, Josh, again, I know this is a thing we talked about a lot and it is always important for everyone that is focused on the New York-centric REITs and their leasing pattern how they do things to kind of change their gears when they are talking about our markets. But our markets really are not – don’t have that time lag, this is not leasing set in motion in the first half of the year as you said, it’s much more real-time activity. And then to go to your – the thrust of your question, we’re seeing that trend in terms of that high leasing volume and all of the trends we’ve discussed, so far the first month in Q4 we’ve seen a continuation of those trends.

Joshua Attie – Citi

Thanks. And can you also talk about your outlook for the Warner Center market where you have a lot of vacancy and what you think the timeframe is to lease some of that out?

Theodore Guth

I think we are still pleased with that market. It’s obviously further down the curve than some of the other markets and it’s still making its transition from sort of large tenant to smaller tenants. And so while that average is coming down, it still is bigger than our portfolio. We did see increases in that leasing in that first quarter and I think we expect to continue to make steady progress in that – we’re hoping that the economic headwinds abate, but even without that, I think we expect to see continued steady progress.

Jordan Kaplan

And the most – in terms of near-term performance there, the fact that Sherman Oaks and Encino has been performing as well as it has, is a very positive development for Warner Center because they – it is the closest submarket to it. And as we see that market continue to perform well and particularly since I think we’re in a position in Sherman Oaks/ Encino in the not-too-distant future to see rent increases take hold there given the strength in occupancy, that in the near term should have a positive impact on Warner Center.

Joshua Attie – Citi

Okay. Thank you very much.

Operator

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

Alexander Goldfarb – Sandler O’Neill

Hi. Good morning out there.

Jordan Kaplan

Good morning.

Alexander Goldfarb – Sandler O’Neill

Question on the financing on the capital markets. Just given some of the volatility – obviously Europe continues to be a – have its issues it’s trying to sort through. But in the U.S, the unsecured – I know – unsecured borrowers, but that market is in a state of flux. The mortgage market sounds like it’s also good for the trophy assets not so good if you are some of the others. The banks seem pretty eager to put money out and put their deposits to work. So just sort of curious as you guys were talking to your lenders, are you seeing any new people suddenly show up wanting to give you more capital or anyone who you were speaking to early on who has pulled back?

William Kamer

You mean other than investment bankers?

Alexander Goldfarb – Sandler O’Neill

It’s coming to year-end, I’m sure that the phone calls will be increasing.

Jordan Kaplan

No, but I mean (inaudible). The capital markets have moved pretty strongly towards top quality sponsorships, top quality location, top quality assets and there is definitely a have and have not market. And we have seen a number of new players show up in the past year or so. I mean, obviously, we had a very broad sampling of this market when we put away the $2.5 billion of loans that we did. So, yeah, there is – it’s a very favorable environment for us, but as you suggested, it is a rapidly changing one, which is why we constantly have to make sure that we’re putting together the right formula to get the best implementation because the choices and where the opportunities are shifts, so we have to keep on top of that to keep performing as well as we have been.

Alexander Goldfarb – Sandler O’Neill

And that’s what I guess I’m asking is, over the past few months, maybe since August, folks that you were speaking with, has anyone said hey we want to give you more money or people you’re talking to in August or early September now coming to you and saying actually we can’t commit what we originally agreed on?

Jordan Kaplan

No, we certainly haven’t had anybody go back on commitments.

Theodore Guth

No, I don’t think they went back away, but the markets are good.

Alexander Goldfarb – Sandler O’Neill

Okay. Thank you.

Operator

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

Mitch Germain – JMP Securities

Good afternoon. Bill, just some commentary on the revolver discussions and some perspective on timing potentially.

William Kamer

Right. Well, as we said, it’s over the next couple of quarters. We’re trying – as I indicated, we’re looking at the options between terming some of the loan out and doing a revolver and then using cash to pay this down. And we’re – it’s going to – it should play out over the next couple of quarters.

Mitch Germain – JMP Securities

Okay. So probably before August, it’s an August maturity, correct?

William Kamer

August maturity. I mean, assume it’s a...

Jordan Kaplan

We’ll definitely pay all our debt off before it matures.

William Kamer

But if your question is, is it a Q4 – is it more likely be Q4 ‘11 or more likely be Q1 ‘12; I’d say more likely be Q1 ‘12.

Jordan Kaplan

I think one of the problems people are having with this last piece of debt is and why – why we apply the cash to it already and we’re getting questions like that, is that – we want to structure it as flexibly – make it as flexible as possible. So, in one sense, we want to apply money to it, but we want to have that liquidity still available on the properties or have some completely de-levered properties that have no debt on them to keep flexibly in our structure.

So, the kind of – we’re at the finer point of the game now deciding how much do we create it – some properties may put a credit line on them and just pay them off and have zero against them, but still we have that liquidity here. Do we do it with all the properties? Do we take because we like interest rates, one or two of the properties and take – shoot them out long-term? Those are the things we’re playing with and that’s the reason – I think in one of our earlier questions, that’s the reason why you don’t see us saying, hey, we’re sitting on all this cash – apply the cash to it. We haven’t organized the properties in a way with loans against them in a way where we feel like we will be able to maintain maximum liquidity and flexibility and still have paid down our debt.

And we’re in the process of doing that now and that’s why we keep talking about taking maybe one property and go longer term and then doing the credit line and what properties on the credit line, and that’s what we’re working through right now.

William Kamer

But I think the key takeaway is this is a product of more opportunity that we have three months ago because of the fact that interest rates are more favorable now than they were even three months ago.

Mitch Germain – JMP Securities

Thanks, guys. That’s it from me.

Operator

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

Rich Anderson – BMO Capital

Good morning to you guys out there.

Jordan Kaplan

Good morning, Rich.

Rich Anderson – BMO Capital

Quick question, you mentioned CapEx, no change to your view for ‘11, but it trickled down second quarter to third quarter. I think you said $16.84 in the third quarter, is that representative of any trend or is that just sort of timing stuff?

William Kamer

I think it’s just – I think (inaudible) just timing.

Rich Anderson – BMO Capital

Okay. I figured just asking. And then bigger picture question, you said $160 million of available equity in the fund, for me that doesn’t sound like a lot. I know you can lever that and buy – you have more buying power, but do you feel like when you were going through the process of building up the fund, it didn’t quite get as big as maybe as you thought it would be. Do you have any other longer-term plans about the fund structure, which is kind of in your DNA and to build that back up now in the next couple of years?

Jordan Kaplan

Let me let Bill answer the other thing. But let me just mention the first piece to what you said, because – which we – I mentioned at the Investor Day, which is with the fund capital that’s available, that is about $400 million of buying power – buying assets, which we think for over the next 12 months is in terms of the type of deal save and expect for larger portfolios, which we always said we would finance differently that, that handles anything that would come along, but you can talk about the rest.

Rich Anderson – BMO Capital

Is that $400 million then – so in your mind and you are comfortable with that or would you like to have a little bit more available to you at this point?

Theodore Guth

I think that as Bill said in the call, we have a variety of sources of funds and just I’m going to try and address the larger issue that you asked about our thinking about fund. We do have the cash flow that’s coming in from operations, which is not insubstantial. We have the ATM that is available to us if we do need to – if we do decide we’re going to make more acquisitions in that. So – and we can do other types of public market financing as well. The – and there are some unencumbered assets within the funds, so there is even little bit more room than maybe the – that has to be precise.

The fund structure was something that is one of the arrows in our quiver, it’s particularly useful when we did – do it at the time that we did it in the cycle where our stock price is relatively low. And when we were down in the single-digits in stock price, we did not think it made sense to put together equity for deals from our stock and so we went out and raised this capital.

At different points in the capital cycle, it’s much less likely that we would use the fund structure, but again, that’s where it gets evaluated time-to-time. But I think we’re comfortable with the size of the funds we raised and we’re comfortable that we have a fair amount of firepower from that and that we have lots of other sources when we get through that acquisition pipeline.

Rich Anderson – BMO Capital

Okay. Fair. Thank you.

Operator

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

John Guinee – Stifel Nicolaus

Jordan, John here. Guess what my question is?

Jordan Kaplan

Guess what your question is (inaudible)?

John Guinee – Stifel Nicolaus

I remember you guys, you used to be in the apartment business – about four, five years and I’m wondering if you’re still in the apartment business and what you think of it these days in Southern California.

Jordan Kaplan

We – well, we are still in the apartment business. I mean, if I – believe me if there is something I would like to have our next acquisition be, it would be an apartment building. Yeah, and we’re working on deals. We work on deals. It’s hard to expand the apartment portfolio. In terms of the stuff that we own right now, I love it. I mean, you heard on the – you’ve heard earlier on the call that we’re seeing real rent increases, real increases of cat that are hitting the bottom line, great cat increases in cash flow, so they’re performing extremely well.

I know that a lot of times the market doesn’t give us that much credit because (inaudible) office company, they don’t give us a ton of credit for that, portion of our portfolio that’s apartments and people say to me, you’re just hanging on to something that you’re kind of living in your past, but we really aren’t, and we really are looking to expand the apartment portfolio, it’s one of our goals, but not – we’re not willing to expand it at any cost. And so we look for good deals to come up and we work hard on them.

And we’ve had – and I’ve said on some past calls, I mean, I told you guys about some of the misses we’ve had in some of the markets that we looked into and then we backed away from in terms of apartments out in the Woodland Hills area, we got very close on a couple of deals out here, some didn’t trade. I mean, some of the ones we really wanted didn’t trade. So they are probably still out there, deals that could happen. But we will eventually add to the residential portfolio, I promise you. And then you will – apartment guys.

John Guinee – Stifel Nicolaus

All right. See you soon.

Jordan Kaplan

Okay. Thanks.

Operator

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

Ross Nussbaum – UBS

Hey, most of my questions have been answered, but I’m curious do you guys have any acquisitions in the work that you either have LOIs, what should we be expecting on that front in the next quarter or two?

Jordan Kaplan

Well, we have your e-mail, should I send you our acquisition pipelines, so that you can just go run through it and (inaudible)?

Ross Nussbaum – UBS

That would be great (inaudible).

Jordan Kaplan

I mean, we’re 100% working on deals. I feel good about our pipeline. And as I said in the – during the Investor Day, I mean, I’m still – I am still – although time is running out, I was still hoping to get some stuff done even this year. So we’re working on deals.

Ross Nussbaum – UBS

Thanks.

Operator

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

Michael Knott – Green Street Advisors

Hey, guys. Just curious, do you think your Century City fundamentals feel as good as the 96% leased rate that you have there. And then also just curious, you can comment on why Westwood and Brentwood are not faring any better than they are?

Jordan Kaplan

Okay, so you’re asking whether we like the fundamentals in Century City as well as we like the actual lease rate in the buildings that we own. Clearly, we don’t. Century City is seeing a little more vacancy right now. We’re outperforming that market by something like 900 basis points, is that right? 800 or 900 basis points, but the market has got a couple of things going on with the buildings that – the newer buildings that are there and some of the variety owners and some of what’s driving them.

I would still say that long term Century City is one of my favorite markets on the west side. It’s a fantastic market and the opening up of Santa Monica Boulevard and the changing of traffic patterns, and Bill was laughing when you asked the question because we’re just talking about it before – this morning before the call. I still love Century City. I mean, if I had to choose a couple of markets where I would want – I would probably say Century City and Santa Monica. I mean, it’s a great market. But you’re right, there is real vacancy there now, maybe they had too many finance companies or something that shrank back on them, but I’m very confident that as the world improves, Century City will show its colors and that will be very good.

Theodore Guth

And the other thing with Century City, I mean we really are very, very strong on it, in terms of its long-term situation. And in terms of 2012, we have very, very low role in our portfolio there. So, it’s – we feel good about it throughout that window as well as long term.

Jordan Kaplan

In terms of Westwood and Brentwood, Westwood – well, let’s do Brentwood first. Brentwood is another very strong market and I wouldn’t judge it quarter-to-quarter. I would expect it to stay relatively full. It – the type of tenants that are in Brentwood are exactly the type of tenants that we’re doing the best with right now, and those small entrepreneurial guys that want to be right there know where they live. So I don’t have a – I feel like give Brentwood even a tiny amount of time, it’ll be fine.

And Westwood, it’s suffering. Most – we only own two buildings in Westwood. Most of Westwood’s owned by EOP. And there is a lot of vacancy in that portfolio and that vacancy is hard to wrestle with quite frankly. And we – it also is a good market. I mean as times passed, if I look back 10 years, Westwood got higher rents than Century City. Now, Century City has got a couple of new buildings and even the old ones have been rehabbed. And I know – what I said two minutes ago, but Century City has been drawing off of Westwood. We used to see a lot of the big law firms and some of the investment houses would be in Westwood, now they are all more looking to center in Century City.

But Westwood’s still another, what I would call very good market that there is a move now to do a bunch of work in the village there. That’s the – attached to that that have fallen off quite a bit in the last couple of years. And – but the buildings in Westwood are very good buildings and it is well located vis-à-vis the freeway. They’re doing some traffic cleanup on the freeway and the over – the underpass there and in the other connectors across the 45 freeway. So while I realize that, that market is doing – I mean I – surprisingly worse than I would’ve even expected right now, I still have great hopes for it and expectations that it will do extremely well in the long run.

Michael Knott – Green Street Advisors

Okay. Thanks, that’s helpful. And then the second question, I also have a question on the – on multi-family, but I don’t have to have you, I guess…

Jordan Kaplan

Well, let’s be fair that we’re talking about that before, so I should have come up with that because he was talking to me about that in the Investor Day….

Michael Knott – Green Street Advisors

Okay. My question is, it look like there was a recent trade on Wahoo for a multifamily property that kind of looked like similar location to where, for example, the Royal Pinia as I’m just curious have you bid on that, how you thought about it. Because the pricing actually looked a little less full than I might’ve guessed, I think what we saw was a six cap and maybe $200,000 a unit, just curious if you looked at that or maybe if that has any implication for the value of your multi-family holdings there?

Jordan Kaplan

We took a very hard look at it. I mean, we almost talked to everybody in this room right now listening to this call and called – good golf carts and looked at the property and discussed it for – I can’t tell you how long before it even came on the market.

It’s – I don’t want to – we have reasons why we decided that wasn’t a good property for us. I could tell you in terms of (inaudible) comp. It is on – it’s got a couple of things going on that it probably isn’t the best comp to the other stuff we have. And I don’t want – I’m not going to beat up the property, but it’s on – as I’m sure you know it’s on a ground lease with the military that maybe is not the most favorable ground lease that you could be on.

And there were some other issues around that area in the military bases there and development in that area and the way the zoning does or frankly didn’t apply to those buildings when they were being built. That made us feel like that wasn’t going to be – while it’s – when you’re there, you’re there on the places right on the water and that’s extremely nice. It probably overall wasn’t a project that was going to be the long-term quality that we wanted to own out there, so it didn’t work for us.

Michael Knott – Green Street Advisors

Okay. Thanks. It’s very helpful.

Operator

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

Michael Bilerman – Citi

Yeah. Thanks. Just wanted to follow up a little bit on deal pipeline a little bit and as much. I know you’re probably not going to send that. But can you talk a little bit about the types of deals that you’re looking at, the size of them, how much are more stabilized versus sort of redevelopment plays or lease-up plays? Are they in your core markets, or are they outside your core markets and just to give a flavor of what you’re looking at.

Jordan Kaplan

Couple of residential deals, but beyond that mostly office, the office stuff is (inaudible). Well, one of them is pretty fully leased at the moment, but had some stuff coming out. The other stuff as vacancy – and it’s all in our core markets and there isn’t – we’re not – it’s not much in Hawaii, so it’s all in the L.A. markets.

Michael Bilerman – Citi

And this – what percentage is being sort of shot by brokers and sellers versus stuff that you are sort of gotten in from your relationships that you are just sort of doing off market?

Jordan Kaplan

Well, we’re working off market on tons of stuff, so I don’t even – I would say it’s – maybe it’s – when you say off market and on market, it’s starting to have a little bit of a mixed meaning nowadays, because there is deals that the people might even be working with the broker and they might come to us with a broker that it’s good to have them in the process. But they didn’t put it out into a huge bid and whole process. So, I mean, there’s deals we’re working on where there is a broker in a deal, but it’s not being openly marketed. There’s deals that are being openly marketed and there’s deals that we know the owner on and we’re talking to him. So, all three of those are going on. In terms of openly marketed deals, one or two.

Michael Bilerman – Citi

And then I guess are you interested at all at selling assets to fund some of this growth? I mean, are you getting unsolicited advances on some of your assets that – you’ve shown hesitation to sell equity, right, but you can always sell assets to narrow that gap to NAV?

Jordan Kaplan

Well, like to narrow the gap to NAV, sell assets, you mean there is some assets where we are not getting as much credit for it?

Michael Bilerman – Citi

Right. If you – I mean, if you – I mean, if you think your stock is trading at a discount to NAV and not wanting to sell equity, new equity to...

Jordan Kaplan

I understand, I understand, ways to raise money. I don’t feel like I am under pressure to raise money and I don’t think it is a good time to sell. I think it is a time to buy. So, I would – I would be equally as reticent to sell – probably more reticent to sell assets than I would be to issue some equity, because – I mean, once you sell the assets, getting them back isn’t easy. And I think that the whole portfolio is under-valued, the real estate part of the – about NAVs and stock prices. I think the real estate is not at any sort of value apex right now, so I would’ve want – we have the best properties in L.A. and I know I have a good feel for where that market is going. So I wouldn’t want to lose that and sell any of them.

Michael Bilerman – Citi

And just maybe just a little bit more color, you talked a lot about the financing market, but what’s happening on the transaction side, I guess, in competing for buildings, who are you bidding up against and who are you losing out in terms of the competitiveness of the marketplace?

Jordan Kaplan

I mean, I don’t want to start – I mean, generally we’re not – I’m not seeing other REITs if you’re asking me that, I’m seeing more of pools of capital that are – have an advisor or a manager that’s spending that money.

In terms of individuals, there are some cases of individuals and I’m not counting the billionaires, but just individuals that put together deals, but they are extremely rare and I think what you might be able to (inaudible) I don’t know if they can get debt right now and deals.

So it’s actually a pretty good time competitively for us to be buying buildings because I think we’re in a very strong position competitively in terms of an acquirer. But we need what I think about where values are today and that’s a good time to buy them, and that’s not a secret to other people who own buildings here, so it’s very hard to get them to sell the buildings. But we’re working on them.

Michael Bilerman – Citi

And those excess go into the fund or they go on balance sheet do you think, what sort of pipeline that you’re looking at that we should be penciling out that that $400 million gets filled up first or that more assets go on balance sheet?

Jordan Kaplan

Generally, we try and aim everything into the fund. There are some deals that for one reason or another the fund isn’t right for and then sometimes they don’t go into the fund. But generally, we’re aiming for the fund for everything we – our job and our obligation to the fund people is to get their money spend and obviously we want to do all the good deals that come up, and I’m always hopeful that they fit in the funds so that we can get them replaced.

Michael Bilerman – Citi

Great. Thanks for all the color.

Jordan Kaplan

All right. Well, maybe (inaudible). Okay, everybody. Thank you very much and we look forward to speaking with you again next quarter.

Operator

This does conclude today’s conference call. You may now disconnect.

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