Douglas Emmett's (DEI) CEO Jordan Kaplan on Q2 2016 Results - Earnings Call Transcript

| About: Douglas Emmett, (DEI)

Douglas Emmett, Inc. (NYSE:DEI)

Q2 2016 Earnings Conference Call

August 03, 2016 02:00 PM ET

Executives

Stuart McElhinney - VP, IR

Jordan Kaplan - President & CEO

Kevin Crummy - CIO

Mona Gisler - CFO

Analysts

Craig Mailman - KeyBanc Capital Markets

Jamie Feldman - Bank of America Merrill Lynch

Blaine Heck - Wells Fargo

Manny Korchman - Citi

Steve Sakwa - Evercore ISI

Alexander Goldfarb - Sandler O'Neill

Jed Reagan - Green Street Advisors

John Guinee - Stifel

Rich Anderson - Mizuho Securities

Michael Bilerman - Citi

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session.

I will now like to turn the conference call over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Mr. McElhinney, the floor is yours sir.

Stuart McElhinney

Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Mona Gisler, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website.

During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us.

Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although, we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website.

When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. Thank you.

I will now turn the call over to Jordan.

Jordan Kaplan

Good morning, everyone. Thank you for joining us. We had another good quarter. Thanks to strong fundamentals and supply constraints in our markets. Office rents in our core LA markets continue to grow by double-digit rates year-over-year. Unemployment in Los Angeles County has dropped 200 basis points during the last 12 months and now stands at 4.8%. West LA unemployment is even lower at only 3.6%.

Our same-store cash multifamily revenues were up 2.9% over last year. Apartment rent growth seems to have slowed, though the slow down this quarter was exaggerated by some temporary softness at one property in Hawaii.

As Kevin will describe in more detail, our second quarter was busy. Since our last earnings call we sold down a portion of our initial interest in the Westwood joint venture, purchased a building in Brentwood and agreed to sell a building in Sherman Oaks. We also closed to new loans at very attractive interest rates and now have no material debt maturities until August 2018.

During the quarter, Ken and I and a few others exercised options that were approaching the end of their tenure life. The associated tax withholdings reduced our fully diluted share count by approximately 1.4 million shares. During July, we offset that reduction by selling 1.4 million shares through our ATM program. We do not plan to sell any additional shares.

Overall, I'm excited about our outlook for the remainder of 2016. I will now turn the call over to Kevin to provide some color on our recent activity.

Kevin Crummy

Thanks, Jordan, and good morning, everyone.

As Jordan mentioned, we had another active and successful quarter. In May, we sold an interest in our Westwood joint venture which reduced our capital interest to 30%. In June, we closed a seven-year interest only non-recourse $360 million loan. The interest rate is LIBOR plus 1.55%, which we effectively fixed at 2.57% for five years. A portion of the proceeds were used to pay off a $256 million loan, scheduled to mature in April 2018.

As Jordan said, we now have no material debt maturities until August 2018. In July, we purchased 12100 Wilshire in Brentwood for $225 million or $616 per square foot. With a 77% leased rate after known move-outs, this acquisition is a kind of multitenant lease-up opportunity we love. Our buildings in Brentwood average 98% leased in June and we’re excited by the upside in this building. 12100 Wilshire is owned by consolidated joint venture that we manage. We expect to retain 20% to 30% of the equity in the venture. In connection with the acquisition of 12100 Wilshire, we closed a three-year non-recourse $90 million interest-only secured loan. We intend to leave the interest-rate floating at LIBOR plus 1.55%, while we stabilize occupancy.

Lastly, we’ve entered into an agreement to sell a 168,000 square foot property located in Sherman Oaks, for $56.7 million. The building is our easternmost property in Sherman Oaks and is less synergistic with the rest of our portfolio. We expect the sale to close during the third quarter.

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

Stuart McElhinney

Thanks, Kevin. Hi, everyone. We had a robust leasing quarter, signing 197 office leases covering 773,000 square feet, including 283,000 square feet of new leases. The lease rate of our office portfolio remained flat at 92.1%, while occupancy moved up by 30 basis points to 90.7%.

Rental rates continue to rise across our entire portfolio. Our cash rent roll up this quarter was positive 13.5% and straight-line roll up was 30.1%. 85% of the leases we signed in Los Angeles quarter had fixed annual rent bumps greater than 3%. Our portfolio leased rate exceeds the relative market lease rates by an average of 187 basis points.

On a mark-to-market basis, our office asking rents at quarter end exceeded our in-place rents by 15.1%, up 20 basis points from last quarter. On the multifamily side, our 3,300 units were again fully leased at quarter end. Rents continue to rise, those Jordan mentioned, that growth has slowed. At quarter end, the annualized asking rents for our multifamily portfolio exceeded our in-place rents by $17.9 million per year, about half of which related to our 229 remaining pre-1999 units in Santa Monica.

I’ll now turn the call over to Mona to discuss our results.

Mona Gisler

Thanks, Stuart. Good morning, everyone. I will begin with our results and then provide a short update on guidance. As Jordan mentioned, we are pleased with our Q2 results.

Compared to a year ago, in the second quarter of 2016, revenues increased by 16.7%, FFO increased 15.3% to $81.8 million or $0.46 per share. AFFO increased 11.4% to $66.4 million or $0.37 per share. Comparing our same property cash results in the quarter of 2016 to the second quarter of 2015, revenues increased by 1.7%, expenses decreased by 3.1%.

Overall same property cash NOI increased by 4.1%. Core same property cash NOI rose by 5.3%. We are very pleased that we’ve reduced our same property operating expenses this quarter. A large portion of the reduction was driven by utility savings from new software and systems installed as part of our on-going sustainability effort. Some of these savings were passed through to our tenants, reducing tenant recovery revenue.

Same property revenue growth this quarter was impacted by this reduction, as well as other timing of prior-year CAM reconciliation. G&A for the second quarter was $9.4 million, only 5% of revenues and well below that of our benchmark group.

Finally, turning to guidance. We are increasing the midpoint of our guidance by a penny and now expect FFO to be between $1.76 per share and $1.80 per share and AFFO to between $1.40 per share and $1.44 per share. For more information on some of our assumptions underlying guidance, please refer to the schedule in the earnings package.

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

Question-and-Answer Session

Operator

Thank you, ma’am. We will now begin the question-and-answer session. [Operator Instructions] Again, only as a courtesy we please to ask that you limit yourself to one question and a single follow-up. If you have further questions, you may re-enter the question queue. [Operator Instructions] The first question we have comes from Craig Mailman of KeyBanc Capital Markets.

Craig Mailman

Hi, guys.

Jordan Kaplan

Good morning.

Craig Mailman

Just a question on the disposition, it seemed like last quarter you were maybe a little bit less willing to pair some of the lower growth or less synergistic assets. Can you just talk about the decision to pull the trigger here in Sherman Oaks?

Kevin Crummy

This is Kevin speaking. I don't think that last quarter that we were less willing to do disposition. We just were in the marketing phase and we’re currently not close to that transaction, so there's not a lot that I really want to comment on it other than to say we’re pleased with the transaction and on a going-forward basis, you can expect us to look at our options at every asset as we always do, but at this time, more and more actively buying. I wouldn't expect that we are going to have an active dispo program just given the concentration of our properties.

Craig Mailman

Okay. And then, just a follow-up here, I think last quarter you guys discussed may be kind of being comfortable with that $400 million to deploy into new acquisitions. Just curious what your update thinking on that is, given the ATM issuance and then the proceeds from the sale?

Kevin Crummy

We’re still comfortable with the $400 million, I mean the $400 million is the combination of what we think we can put out and what we think it’d be prudent to put out on looking at everything we have in our future, both cash coming in and cash going out, and we’re still - I'm still pretty comfortable with that number.

Craig Mailman

Great, thank you.

Kevin Crummy

Thanks.

Operator

Next we have Jamie Feldman, Bank of America Merrill Lynch.

Jamie Feldman

Thanks. Can you talk about the acquisition pipeline and what you guys are seeing out there and what may come to market?

Kevin Crummy

Well, we expect a lot of - I’d be disappointed if more properties aren’t sold in core markets this year. So we’re expecting that there should be continued activity between now and the end of the year.

Jamie Feldman

Okay. And then, in terms of submarkets, are there certain like how far afield would you go from where you are right now?

Kevin Crummy

You mean going into new markets?

Jamie Feldman

Given submarkets around LA, is there any place you try that you’re not in now based on what you’re seeing in the pipeline?

Kevin Crummy

I think in the markets we’re in, there is going to be trade. So, I don’t even think at the moment we’re going to have to look outside of those markets.

Jamie Feldman

Okay. And then, Jordan, you commented in the press release about a 59% AFFO pay-out ratio and prospects for distribution growth, can you comment a little more on what we might be able to see here in terms of a bump?

Jordan Kaplan

Well, obviously we have - the company has a lot of strong cash flow, true cash flow. So when we look at dividend and - I think to be fair while the board discusses it every quarter, they really take a very hard look at it for the dividend that would be paid in January if they’re thinking about making a change. I think of looking at what dividend would - obviously, they don't want the dividend to act as a gate in terms of letting the stock rollup, so they don't want it to be too low.

I know that - they also - we all agree that we’d like to see some regular growth in the dividend year-over-year to the best of our ability to maintain that. That’s all tempered by the fact that we are - that your company even beyond the dividend generates a lot of cash flow and we’ve been able to put that cash flow to good work, so we look at all those things and come up with whatever they want to increase it by.

Jamie Feldman

What pay-out ratio would you be comfortable operating in?

Jordan Kaplan

I don't think that while we’re able to use cash to also buy assets that pay-out ratio is as important as the other two things I mentioned. I don't think they’re uncomfortable with the low pay-out ratio, because we’re using the cash. So, but I’d recognized that it's a very low pay-out ratio, but if it turned out to be a low return on the stock price and they thought that was how the stock-price done, I think that would be more motivating to more dramatically increase it.

Jamie Feldman

Okay, alright. Great, thank you.

Operator

Next we have Blaine Heck of Wells Fargo.

Blaine Heck

Thanks. Just a follow-up on the investment pipeline, can you maybe give us an idea on the amount of opportunities you guys may have looked at before and acting on 12100 Wilshire?

Kevin Crummy

Before? Well, I mean the major - there have been a couple of other trades that we weren't successful on in the market, Yahoo and Wells Fargo, I think both of those came out after the 12 month…

Jordan Kaplan

I don’t know. What’s the gist of - what are looking for?

Blaine Heck

Just trying to see kind of a general idea of what the opportunity that is out there on the market at this point?

Jordan Kaplan

Oh, there is deals. We feel like there is deals coming out this year, I mean like more going forward, there's obviously more than usual trades in our markets this year. We've gotten our fair share and are still more coming, and there is some that we haven't got.

Blaine Heck

Okay. Fair enough. And then, just a follow-up on the 12100 Wilshire, is there any renovation that needs to be done on that asset and kind of what are your leasing prospect like for the spaces taken at that property?

Jordan Kaplan

The building is in extremely good shape mechanically that we have some money in for some cosmetic, and there are some corridors and some stuff like that, that we have money and to finish a program that that's already well underway. In terms of leasing, there's obviously vacant space, but the leasing activity on the building is good to excellent. So, I mean that's something that we feel very good about and the space that's available in the building is good space. So it is, as Kevin said, in the prepared remarks, it's a perfect Douglas Emmett, get it for a good price per foot, lease-up opportunity, get to - make use of fundamentals and operating platform and create real value, I mean it's like a prototypical version of that.

Blaine Heck

Great, thanks guys.

Jordan Kaplan

Alright.

Operator

Next we'll have Manny Korchman of Citi.

Manny Korchman

Hey, guys. Jordon, If we think about the couple of deals you've done and with similar sort of structures, did you give any thought to taking this one in wholly owned and using your equity which has had a pretty strong run to just do it for Emmett itself rather than with a partner?

Jordan Kaplan

So, that's sort of two questions. So, the first part, I'd like to own as much of these buildings as we can, and so, I always think about taking a 100% or a larger percent. Now, I will say even beyond the cash constraints, we have a group of partners and we have some sort of not legal or binding, but agreements with them that this set of opportunities, they’re going to have an opportunity to participate in. And that's why we've been saying to guys we feel confident and comfortable that in terms of equity and having good partners in our deals that we have a long-term view. We feel comfortable that we’re going to be able to continue buying using them.

Now, the second part of what you're saying is, hey, maybe your stock is so high that you should just be issuing equity and using that instead of using our private equity platform. And while I'm very pleased that the stock has moved up, I still don't think that - I still think the stock is at a significant discount to the value of the company and in particular, to the value of even what we're buying at this time.

And I do think those buildings are going to end up, that value is going to be realized and recognized in the company overtime and they’re just fantastic long-term investments, but the trade of issuing the stock and then still buying these buildings at these prices, it's still - I don't think that matches up very well although I understand that with accounting, almost anything can be made to look accretive. I still think we're better off keeping the shares out there fairly well-balanced, not increasing them and making use of our partners in order to gain greater market share and control these great buildings.

Manny Korchman

Maybe just a very quick follow-up, I hope, how do you manage the fact that you own so much of the market, but now one of your buildings is in JV and any potential conflicts as you commence especially with significantly lease-up needed at that building?

Jordan Kaplan

So, the conflicts that which obviously we get are said a lot, generally, the way our operating platform works and you have to keep, these aren't like New York buildings with million square foot tenants, right, so it's much more of a flow business, small tenants. So it's not like you even could do any steering that would be impactful anyway. Not that we do, we don't. But the way the buildings are operated, they're operated on a geographic basis. So the same team that, for instance, runs Westwood and leases Westwood would lease the Westwood deals in the JV, and the Westwood deals are wholly-owned, and the way they are graded and viewed is all about how they're doing in that market and they are flowing out market, and same thing with the portfolio manager, the most senior engineer that has that whole portfolio et cetera, okay. And then, the building separately because we do surprise inspection, we do a lot of things where we grade the quality of the buildings. That’s always done on a building-by-building basis for the individual team that's at that building.

So, in terms of operational, there are really are no conflicts. Obviously, in terms of debt, each piece of debt is handled and we're doing our best on each piece of debt, and that gets a same team, but there's no real conflicts there. The place where things are segregated is there is always a sort of a separate - there's a separate accounting team for the JV assets. It's a different group from the group that does the accounting for the public company and then offset or rose up through Mona, but we need to do that because they tend to have maybe different types of questions than you guys do and we have to have people available to answers those questions and as surprising as it maybe, they even have more questions than you guys do, and they called mid-quarter and all the rest of it. So, we have to be able to answer all those.

Manny Korchman

Thanks, Jordan.

Jordan Kaplan

Alright.

Operator

And we have Steve Sakwa of Evercore ISI.

Steve Sakwa

Thanks, good morning.

Jordan Kaplan

Good morning, Steve.

Steve Sakwa

Hi. Jordan, I just want to go back to the kind of small equity issuance. I know it's not a lot of money, but - and I understand you guys needed to do as a management teams which you needed to do with your options and that has kind of a life of its own. I guess I didn't quite understand the kind of offsetting need to then issue equity to get the share count back up, was there something mechanical I'm missing here or just help me understand that. Do you just like your stock price and you wanted to issue equity?

Jordan Kaplan

No. It was actually kind of a fair treatment of what's going on, I mean it hasn't been our intention to buy in any kind of significant block of equity, and it's not our intention to issue equity. So because when - the way dilution is accounted just so the entire value of that spread is settled in stock, but when - then the company has to make a payment, which can be up to 50% of the value that has to be done in cash, so the government for the taxes - because the way that government looks at it is it's almost like they’re just paying salary, right. You've effectively bought in a block and I thought, well, let's balance that out and put it back out there so to get things back even again. Kind of following the purity of not making decision about issuing and not making a decision about buying back, just saying we're going to let that thing go on its own.

Steve Sakwa

So, is it fair to assume that if this happens in the future, we should see a similar sort of action on your part or...?

Jordan Kaplan

That's hard to say, because I have to look at what's going on at that time. So we might at a time when might go it's a great time to buy the stocks, so let's just - let the transaction stand as it is or it might be a time that we go, no, let's just follow this process that we're following.

Steve Sakwa

Okay. And I realized given the size of your tenants, there isn’t a necessarily a big kind of forward pre-leasing market, but just kind of maybe give us a little bit of lay the land on kind of leasing environment today and the discussions that you guys are having for kind of back half of '16 and maybe beginning parts of '17?

Stuart McElhinney

Hey, Steven, it's Stuart. Leasing environment is very good, demand is strong, lots of good activity kind of across the board, so no signs of slowing, all is going well. So we're feeling good.

Jordan Kaplan

I don't think the nature of what we're doing because the way you asked your question is, are you starting to focus on larger tenants or something. I think tenant size - I mean the flow that outstanding and you saw that in the numbers that we published, and I think tenant size and all the rest of staffs are - we're expecting to have stand through the rest of the year.

Steve Sakwa

Well, I guess maybe just as a follow-up, Stuart, just given that you've got more vacancy up in Warner Center, can you just sort of comment on what you're seeing up there and kind of tenant demand, the pipeline and kind of your expectations for filling that vacancy over the next maybe 12 to 18 months?

Stuart McElhinney

I think activity remains good out there. Obviously, we’ve talked a lot about Warner Center and the need to make up some ground there and we've been disappointed it hasn't happened faster, but we're succeeding to see activity and working through that space, but obviously we're not given any timelines on lease upgrade for submarket.

Steve Sakwa

Okay, thank you.

Stuart McElhinney

Thanks.

Operator

Next we'll have Alexander Goldfarb of Sandler O'Neill.

Alexander Goldfarb

Good morning out there.

Jordan Kaplan

Hey, Alex.

Alexander Goldfarb

Just a few questions here. First up, can you just give a little more color on the apartment weakness, and then, specifically, what was going on in Hawaii and how much of this is resulting from that Hawaii property you mentioned versus general apartment slowdown? Obviously, in apartment land this quarter there’d been some a lot of sort of I don’t say bearish, but sort of negative commentary so just trying to dissect a few between your LA portfolio and that Hawaii property.

Stuart McElhinney

Yes. We have kind of seen a slowing of apartment rents, and you've seen that over the last couple of quarters. This quarter, the kind of exaggerated slowdown was attributable to the one property in Hawaii that we mentioned, there was some noise in that that one property with some students move-outs and military move-out there, so you saw kind of a lower run rate last couple of quarters, which we would've expected between more in that range than the lower number we saw this quarter.

Alexander Goldfarb

Okay. So in the following quarters for the year, we should expect more slowdown or do you think it will stabilize from here?

Stuart McElhinney

I think it stabilized kind of up from where we were this quarter, but we are not expecting it to go back to kind of the 5% to 6% we were seeing for years prior to a couple of quarters ago.

Kaplan Jordan

There might be a little - I thought some of that - we had the school kind of went through transitions, so we lost institutes from that and there was also military deployment that they’re able to account so their lease - instantly. And so, it gave us a bulge and I feel like that float a little into the next quarter, so there still might be some noise from that in the quarter that we're in today. But other than that, then everything - kind of back to what you saw in the previous run rate, the lower previous run rate.

Alexander Goldfarb

Okay. And then, second question, Jordan, is now that you have the XP in the market, and LA seems to be a popular market for outsiders to come into, does this change anything in the way that you see acquisitions or leasing, just given that people from different markets have one approach to leasing, you guys have a different approach and then same on the acquisition side maybe it's changed the way people do their underwriting based on comfort level of lease out versus taking on any vacancy risk, et cetera. So, just curious if this changes the dynamic in the market both on acquisition and leasing or if LA has always been sort of an active market and therefore, you don’t see any change.

Jordan Kaplan

Well, I don't know that those are wholly mutually exclusive. LA has always been an active market. So you put it institutional building up for sale, you're going to get better, so it's not going to be one better. That's never been the case. Now, it’s the fact that we bought some properties here, it’s here, going to change that dramatically, I don't think so, but I don't know, I mean that's hard to predict. They've obviously - we, they, we're all in agreement. We like the future prospects for LA and we’ve been felt that way for a while, and I think they obviously feel that way too. They are a large tenant company. We don't tend to be a large tenant company. So how many times are we going to intersect in terms of bidding against each other? Probably a few times, but maybe mostly not, but we'll see what happens.

Alexander Goldfarb

Okay. That’s helpful. Thank you.

Operator

Jed Reagan, Green Street Advisors.

Jed Reagan

Hey, guys. On the slowing apartment rents, just a little more color on that. What do you think is driving that? Is that nearby supply that's impacting your portfolio? And then, can you maybe quantify the magnitude of changes that you're seeing there on the rent side?

Stuart McElhinney

Well, you've kind of seen our growth. We've given you guys the growth the last couple of quarters, so we’ve dropped from 5% to 6% a year on the asking rent side down to I think in the three to four range in the last couple of quarters. I think the slowing this quarter beyond that, like we said, is attributable to the one property out in Hawaii. So I don't see any other major factors playing into that.

Jordan Kaplan

I got to tell you we're talking about generally pretty high numbers. So the five to six, it's hard to believe that was even just to stay in for as long as it was, just kind of the natural inertia and momentum of just rental rates. And I actually think even three to four on an annual basis, pretty strong movement, and apartment portfolio - and hopefully, I'm going to say hopefully, a more sustainable number.

Jed Reagan

Okay. That's helpful, I guess, but no discernible changes in local supply picture, demand equation changing?

Jordan Kaplan

Well, the local supply is increasing, but as a percentage of the total supply, I don't know that the increases are extremely meaningful, I mean it's increasing because people are - I mean we're just very, very underserved in Los Angeles in terms of how housing and almost at every level, I mean workforce housing, new entrant apartment, small apartments, larger ones, retired that just sold the house level, I mean all levels. We're just very short of housing.

Jed Reagan

And the new spot that’s coming, is that - that’s folks heading to downtown? Is it Playa Vista Marina Del Rey that sort of thing?

Jordan Kaplan

Well, you saw all the product that was added downtown, all the product that was added out in West Valley area where we’re in a center where it’s tough. And all that, while that was all going on, you've also been watching our rents continue to move up until just recently. We're moving up 5% to 6%. That is as lot you can be about how underserved these general, the broader market is here in terms of housing.

Jed Reagan

Okay, thanks. And then, can you give a little more color on the Brentwood acquisition in terms of average tenant size and mark-to-market rents in that building? And then, is there a going in cap rate that you can quote on that?

Kevin Crummy

Jed, on the average tenant size, it’s very much in line with the rest of our portfolio, it's a multitenant building with lots of tenants in it. So it looks kind of just like the rest of the portfolio. Mark-to-market same, it’s about the same as our portfolio currently, about 15%. And what was the last part?

Jordan Kaplan

In terms of cap rate, going in, it’s not very meaningful. And obviously, as you know, we're not in love with quoting cap rates because of the vacancy. But I think it will stabilize in the mid-5s, may be even a little better than that.

Jed Reagan

Okay, that’s helpful. Thanks.

Jordan Kaplan

Alright.

Operator

Kyle McGrady of Stifel.

John Guinee

Oh, great. Two questions, thank you. First, John Guinee here, I saw an investment sale brochure recently for a small office building in Warner Center, which I think implied some up-zoning going on at Warner Center, that general market. Is that an accurate statement that they're up-zoning certain blocks there?

Jordan Kaplan

Well, that's accurate but that happened already some time ago. The zoning was increased, but zoning has never been gating in terms of development on Warner Center and they're trying to steer with zoning, more concentration, more amenity - more amenity, they don’t want to create some pedestrian, and you're seeing a lot of results of that, I mean look at what Westfield’s done out there, look at the apartments that have been developed out there. It's a very active - you're not seeing anything on the office front because, quite frankly, rents just don't justify it. But it's an extremely vibrant area, and you're seeing it on all other fronts like housing and retail and amenities. Rents do justify it because of population demand, just population increases in the area, and you are seeing a lot of development in that on both those fronts.

John Guinee

Perfect. Okay. And then, the second question is if I look at Page 11 of your supplemental, which is very helpful by the way, and I look at the consolidated JV and I carved out that little 50,000 square foot Honolulu building, it looks to me like the first full quarter is about four-seven GAAP cap rate and a 3.0 cash cap rate. Is that the right math?

Mona Gisler

Yes. That's a good question, John. Maybe we can take it offline, and we can walk you through that.

John Guinee

Great. Okay. We’ll just chat a little later. Thank you.

Operator

Next we have Rich Anderson of Mizuho Securities.

Rich Anderson

Thanks. I don't know if this is meaningful, but the sell-down of Westwood interest to 30%, what was it before that? And do you have - maybe I should know, what's the dollar amount of that sale?

Mona Gisler

Sorry, was that 60% ownership initially, and our initial investment was at $240 million.

Rich Anderson

Okay. So 60 to 30. Okay. So you're cutting your - so 30% of $240, right?

Mona Gisler

It's not that easiest math, unfortunately. So we can walk you through it, Rich, if you want to give us a call.

Rich Anderson

Well, I guess I'm not talking about the total. Alright. We could talk about it.

Jordan Kaplan

Just in terms of investment, we're left with the $240 million investment, and we sold down a $240 million investment. So let's call it started for 80, sold down to $240 million, dollars, and that's 60% capital investment to 30% capital investment.

Rich Anderson

Okay. But that's not the equity part, that's the total investment?

Kevin Crummy

Well, that is the equity part.

Jordan Kaplan

That's our equity capital, but not …

Rich Anderson

Oh, your equity is $240 million, okay, because that was the number I was always thinking, but you didn't quite get there initially. Okay. I got it now, I remember. I know you don’t like to talk about cap rates, but - and I’m thinking about Sherman Oaks, you're not going to give any color on that, but I mean what do you think of generally about a stabilized cap rate in that area versus some of the - like the Brentwood and the Westwood in the area, is there a meaningful spread in terms of how buildings trade between those two markets?

Jordan Kaplan

Well, cap rates are hard way to compare markets because the variability of income and above and below market rents, but I think it's very fair to say there's a meaningful spread in dollars per foot value of buildings in those markets versus the Westside.

Rich Anderson

What would you define as meaningful?

Jordan Kaplan

Well, I'm not trying to price the two markets, but meaningful, I mean it’s more than $100 a foot.

Rich Anderson

Okay. Alright, good enough, Thanks.

Operator

And next we’ll have a follow-up from Manny Korchman of Citi.

Michael Bilerman

It's Michael Bilerman. I don't know if it's for Jordan or for Mona. Can you just walk through sort of a math on the option exercise, just in terms of the gross number of options, the exercise price, what was being counted in the diluted share count before, how it went down by $1.4 million and then the cash outlay and the number of shares issued ultimately the company made?

Mona Gisler

Okay. There were a lot of points in that roll forward there. So let me kind of just step back and try walk you through it. So there was about 1.4 million shares with the net impact, but are you asking for the total number of options that were initially exercised? Is that what you're asking for?

Michael Bilerman

Yes, I just want to better understand like we know the 1.4 net, but we also heard Jordan say there was a cash outlay for the taxes in the diluted share count previously - I assume previously there were some count for these options?

Jordan Kaplan

So that was. So, I mean I know that I'm going to give you very round numbers. Generally, we’re about half. So if there was a net negative impact of 1.4 million shares on our diluted share count as a result of the cash portion that was gone to taxes, that means that we retained roughly 1.4 million shares. So that would mean the net value, right, because it's just the profit part of the options, it was 2.8 million shares among everybody, although half of that was settled in cash, which was paid in taxes. Is that your question?

Michael Bilerman

Well, so there was how many growth options they would assume in the diluted share count previously you would've accounted for those options? I assume they had a pretty low - or even before…?

Jordan Kaplan

So, the way the diluted share count works is, they calculate the number of shares of stock that would have to be given to settle the profit portion, right. So if you have an option at $20 and stocks at $30, they figure out how many options it takes to settle the $10 spread, the profit spread and that's what's in our diluted share count. So that portion, that profit portion - because I know the taxes were around 50%, and that was roughly 1.5 million shares means generally that portion was 2.8 million shares, of which half was settled in cash. And because half was settled in cash, it lowered the diluted share count.

I could tell you on the other side of that, we retained the options, so as many change there and we’ve retained the stock. So you take that other half and then if you go the ATM, and you issue the 1.4, you give yourself back to EBIT. Is that your question?

Michael Bilerman

Right. The company from a cash perspective is back to even and back to a gross share count the same, and then the number of shares that you did receive as you exercised the option was how much?

Jordan Kaplan

It was roughly 1 point - it's about half. I feel like the tax were 51% or 49% or something like that. It was about half, so it's about 1.4 million shares.

Michael Bilerman

Right. Because your taxes on the total value, I think not just ...

Jordan Kaplan

Yeah, it's the ordinary income, state and federal, just like your pay check.

Michael Bilerman

Yeah, okay. Thanks.

Jordan Kaplan

All right.

Operator

At this time, we have no further questions. We'll go ahead and conclude today's question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Jordan Kaplan

Well, we're glad to have spoken with you today, and we look forward to speaking with you all again in one quarter. Thank you.

Operator

And we thank you, sir, and to the rest of the management team for your time also today. The conference call is now concluded. At this time, you may disconnect your lines. Again, we thank you, take care, and have a great day.

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