Douglas Emmett, Inc. Q4 2007 Earnings Call Transcript

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

Operator

Ladies and gentlemen thank you for standing by; welcome to Douglas Emmett's 2007 Fourth Quarter and Year-End Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode and a question-and-answer session will follow management's prepared remarks. At that time, instructions will be provided to queue up for the questions.

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

Mary Jensen - Vice President, Investor Relations

Thank you. With us today are Mr. Jordan Kaplan, President and Chief Executive Officer; Mr. Bill Kamer, Chief Financial Officer; and Mr. Andres Gavinet, Executive Vice President of Finance.

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 7 days. Our press release and supplemental package have been filed on Form 8-K with the SEC, and both are available on our website. During the course of this call, management will be making forward-looking statements, we caution investors that any forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect, as a result our actual future results can be expected to differ from our expectations and those differences maybe material. For a more detailed description of these risks, please refer to the Company's press release and the current SEC fillings which can be accessed in the Investor Relation section of the Douglas Emmett website.

Please note that the market data sources that are referenced in management's prepared remarks are CB Richard Ellise for Honolulu and Los Angeles office markets, 3 [ph] for the Los Angeles office market, MTF Research for the Los Angeles multifamily market, and Property & Portfolio Research for Honolulu multifamily market.

With that I would now like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Jordan L. Kaplan - President and Chief Executive Officer

Thanks Mary. Hello everyone, and thank you for joining us today. I would like to begin the call with a brief overview of our 2007 accomplishments as well as some of the current market trends; Bill Kamer, our CFO, will follow with a more detailed account of the year and the fourth quarter. After our prepared remarks, we will be happy to take your questions.

It goes without saying that 2007 was an extremely volatile year for the real estate industry. Despite the erratic capital markets, we are very pleased with results of our first full fiscal year as a public company. Throughout 2007, our underwriting remained disciplined and we did not deviate from our historical valuation metrics. As a result, we did not acquire many office or multifamily properties, still while facing 2007's very challenging acquisition climate, we were able to consummate two favorable off-market acquisitions.

We acquired 1801 Century Park West in our Century City submarket during the second quarter and we acquired Cornerstone Plaza in our Olympic Corridor submarket during the fourth quarter. These acquisitions added approximately 224,000 square feet to our office portfolio. In addition, at the end of December, we exercised our option and acquired fee title to the land under 1801 Century Park West. We also anticipate closing on a small off-market acquisition very soon that we've been working on in Honolulu, details of that transaction should be disclosed in the press release later this week.

We were successful in completing two significant financing transactions during 2007, on attractive terms. We increased our borrowings with Fannie Mae by $150 million at an effective fixed interest rate of 5.87%. We also obtained an increase in availability on our secured revolving credit facility from $250 million to $370 million in September. The interest rate ranges from LIBOR plus 70 basis points to LIBOR plus 80 basis points, depending on the outstanding balance.

Last year was a year of extraordinary strength in our leasing markets, asking rents increased over 25% across our ten submarkets in Los Angeles and Honolulu. For the first time in our Company's history, Douglas Emmett's commercial portfolio reached 95.7% leased. Looking forward, we are beginning to be increasingly optimistic about opportunities to acquire office and apartment projects in our markets on more attractive terms. Unlike other markets, our markets do not contain a significant number of buildings owned by overleveraged parties or likely forsellers nonetheless, we are seeing signs that sales activity will accelerate during 2008.

Now, I'd like to update you on the Los Angeles and Honolulu market statistics. During the fourth quarter, we continue to see increases in office rental rates. Los Angeles County rents increased by 3.6% and Honolulu County rents increased by 1.1%. The rental rate increase within the 10 submarkets where our properties are located rose 2.3% during the fourth quarter of 2007 and 25.2% for the entire year.

Office occupancy in Los Angeles County decreased from last quarter dropping 30 basis points to 90.8%. Office occupancy in Honolulu County decreased 90 basis points to 91.5%, within the ten submarkets where Douglas Emmett's office properties are located occupancies declined 50 basis point sequentially to 93.5%.

Our multifamily portfolio continue to be approximately 99% leased at December 31, 2007. Rent from newly signed leases during the fourth quarter is approximately 7.1% higher than rent from expiring leases for the same space, excluding rent increases from rent control units that are subject to significantly below market rental rates.

As we mentioned last quarter, we have been experiencing a period of extraordinary rental growth which we believe is unsustainable. There was some decline in office leasing activity in January, but rental rates remained strong. The slowdown in activity could be attributable to the December holiday season, but there is the possibility that the well publicized negative developments in the national economy are having some slight impact on our markets. At this point it is too early to tell. Of course, there is still very little new supply in the pipeline, and we are seeing well diversified tenant demand across a variety of different industries. Our most recent leasing activity continues to include many tenant expansions which is also a positive sign for the underlying health of the Los Angeles economy.

With that said I will now turn the call over to Bill Kamer who will provide more detail on our 2007 fourth quarter and yearend operating results. After his remarks, we will take your questions. Bill?

William Kamer - Chief Financial Officer

Thanks Jordan. Thanks everybody for joining us. Today I'll be providing details on our sequential quarterly results as well as our yearend results for 2007. I will conclude with our guidance for 2008.

For the fourth quarter, Douglas Emmett reported FFO of $49.2 million or $0.31 per diluted share. For the year ended December 31, 2007, FFO was $190.9 million or $1.17 per diluted share. Office rental revenues increased sequentially 3.4% to $97.8 million in the fourth quarter up from $94.6 million in the third quarter, contributing to the $3.2 million increase in the fourth quarter were approximately $700,000 attributable to our purchase of Cornerstone Plaza which occurred at the end of October, approximately $500,000 relating to lease buyout income for the quarter and an adjustment in the fourth quarter for a FAS 141 Kenneth write-off for early termination.

The balance of the increase is attributable to increased occupancy and higher rent. For the 12 months ended December 31, 2007 office rental revenues totaled $376.9 million.

During the fourth quarter tenant recoveries decreased 21.6% to $5.3 million, primarily due to the seasonality of utility recoveries and timing issues relating to the reconciliation of tenant recoveries.

Parking and other income increased 1.5% to $12.3 million during the quarter. For the year, tenant recoveries totaled $25.2 million and parking and other income totaled $46.6 million.

Total multifamily revenues increased 38 basis points over the third quarter to $17.6 million in the fourth quarter. For the year, total multifamily revenues totaled $69.4 million. Our total FAS 141 income for 2007 was 40.6 million. We have previously indicated that exclusive of new acquisitions, FAS 141 income will drop approximately 15% per year. We estimate that FAS 141 income for 2008 will be approximately $35.5 million.

On the expense side, office operating expenses for the fourth quarter were $31.8 million, down 2.9% compared to the third quarter, primarily due to the seasonality of utility expenses. Total operating expenses for the year were $382.7 million. G&A was $5.4 million for the fourth quarter. For the year, G&A was $21.5 million. We are estimating that G&A for 2008 will total between $23.5 million and $24.5 million.

Interest expense was $42.5 million in the fourth quarter, up from $41.5 million in the third quarter. This increase is mainly explained by the use of our revolving credit line to finance the Cornerstone Plaza acquisition at the end of October. The 1801 Century Park land acquisition in December and our equity buybacks. As of December 31, the outstanding balance on our revolving credit line was approximately $180.5 million. Total interest expense for 2007 totaled approximately $160.6 million. We anticipate that our interest costs for 2008 will be approximately $175 million which excludes the impact of any future increase in debt and assumes consistent swap amortization. It should be noted that we do not have any debt maturities occurring in 2008.

Fourth quarter recurring capital expenditures for our office portfolio averaged $0.19 per square foot, bringing the 2007 total to $0.46 per square foot. Recurring capital expenditures for our multifamily portfolio averaged $114 per unit in the fourth quarter and $470 per unit for the year, which was significantly lower than our prior 2000 estimate of $600 per unit.

We anticipate that the 2008 office recurring capital expenditures will be approximately $0.50 per square foot and that the 2008 multifamily recurring capital expenditures will be approximately $600 per unit.

On the operational side, we entered into approximately 91 new and renewal lease transactions, totaling approximately 462,000 square feet of office space compared to 109 lease transactions totaling approximately 326,000 square feet in the third quarter. Our overall office portfolio was 95.7% leased at December 31, 2007, which was unchanged from the previous period. However, rent paying occupancy increased to 95.0% at yearend compared to 93.9% at the end of the third quarter.

Our office TIs leasing commission and other capitalized leasing costs during the quarter totaled $14.93 per square foot as compared to $19.05 in the third quarter. This decrease is primarily attributable to one large lease transaction with no TIs that occurred in the fourth quarter which we believe makes the fourth quarter uncharacteristically light. Our mark-to-market and rollup metrics continue to be impressive.

On a mark-to-market basis, the spread between our in-place cash rents and our asking starting rent decreased to 35.4% down from 37.2% in the third quarter. On a straight line basis, the average rent from our expiring leases compared to average rent from new leases signed from same space increased to approximately 55% up from 53.1% in the third quarter.

On a cash basis, the ending cash rent from expiring leases compared to beginning cash rent from new leases signed for the same space increased to approximately 33.9% up from 29.7% in the third quarter.

As disclosed in our earnings press release yesterday, during the fourth quarter we repurchased approximately 1.7 million share equivalent for approximately $40 million or $22.86 per share. Subsequent to the end of the fourth quarter, we repurchased 1 million share equivalents totaling $21.5 million or $21.55 per share. To-date we have repurchased a total of 9.1 million share equivalents for a total consideration of approximately $215.9 million.

In conclusion, we are establishing FF... 2008 FFO guidance between $1.25 and $1.29 per diluted share for the full year of 2008. This guidance excludes any impact from future acquisitions or dispositions, additional equity purchases, debt financings or other recapitalizations.

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

Question And Answer

Operator

Thank you, sir. [Operator Instructions] The first question comes from the line of Michael Bilerman with Citi. Please go ahead.

Michael Bilerman - Citigroup

Hey guys, Ervin Kossman's here with me as well. Jordan, you referenced in your opening comments saying signs of transaction in markets maybe accelerating, and didn't know if that was astrological signs or what you are sort of referring to, maybe you can just give us a little bit more color?

Jordan L. Kaplan - President and Chief Executive Officer

Well, no. I said we saw sign you mean for sales of buildings?

Michael Bilerman - Citigroup

Yeah.

Jordan L. Kaplan - President and Chief Executive Officer

Congratulations on your new job.

Michael Bilerman - Citigroup

Thank you.

Jordan L. Kaplan - President and Chief Executive Officer

The... yeah we're starting... I mean, I see deals... no it's we follow the pipeline, we follow a lot of deals that are out there, and I am seeing there are deals now that we are working on. So, I am lot more excited. Where I think... where I am feeling positive about our chances. So it's true that there aren't a lot of people under significant pressure as a result of dramatic over leveraging, but still it seems like maybe the economy or just deal fatigue has brought more people to the table that are considering trades now, and we are now carefully following a few of them.

Michael Bilerman - Citigroup

What sort of volume can you characterize, and have you already, is your fund discussion is still underway so that when these things do come to market, you will be able to do them in a fund rather than on balance sheet?

Jordan L. Kaplan - President and Chief Executive Officer

Those two are in a race with each other. I am hoping the funds in place in time, I am not going to let the fund, not being in place stop us though, then we'll just do the deals in hurry.

Michael Bilerman - Citigroup

And the level of, I mean are we talking about 500 million, 1 billion, what sort of transactions are you following?

Jordan L. Kaplan - President and Chief Executive Officer

I would say, we are following transactions up in that range.

Michael Bilerman - Citigroup

All right. Ervin had a couple of questions also.

Unidentified Analyst

Good morning.

William Kamer - Chief Financial Officer

Hi Ervin.

Jordan L. Kaplan - President and Chief Executive Officer

Good morning, Ervin.

Unidentified Analyst

Can you quantify what the lease... what the most mark-to-market is specifically on your 2008 lease-roll.

Jordan L. Kaplan - President and Chief Executive Officer

What's the mark-to-market.

William Kamer - Chief Financial Officer

We are not... we don't normally give out what we're anticipating the mark-to-market is going to be on our roll. In the supplemental, as we have perspective four quarters, showing the least expirations that are coming off and we can make assumptions about where we think rents will be signed during this time period.

Unidentified Analyst

Well, since you lowered the overall portfolio of mark-to-market, how much of that or how much have you lowered your overall asking rents for the portfolio, roughly?

Jordan L. Kaplan - President and Chief Executive Officer

Well that can be a result also of the fact that our rents are up, right... we are signing leases at higher rates now. So, I mean, in fact, I don't think you've seen any real lowering of our asking rents, you've just seen our rents in our portfolio going up, and you guys are seeing it, obviously, in the performance of the portfolio on earlier time quarter-by-quarter basis.

Unidentified Analyst

Okay. Do you guys feel comfortable disclosing the cap rate on your acquisition in the quarter and the one you are expecting to close on this quarter in Honolulu?

Jordan L. Kaplan - President and Chief Executive Officer

We haven't been giving cap rates for couple of reasons, but primarily because I don't think cap, what we would consider cap rate to be would be the same as what you would calculate the cap rate as, and also I don't think cap rates are very... they are very weak to also figuring out what's going on or call them an acquisition or even, frankly, the direction of the market, but I know what they are widely used for, we haven't been using them or referring to them. In the Honolulu deal, well, I think we'll be giving you certain information, it's a slightly complicated deal, but we'll be giving you some information on it as soon as it closes which will go out in a press release, but literally days away.

Unidentified Analyst

Okay. Thank you that's it for me.

Operator

Thank you. Your next question comes from the line of David Harris with Lehman Brothers. Please go ahead.

David Harris - Lehman Brothers

Yes. Good afternoon... oh, good morning, I should say. Jordan do you have any sense of the media tenants that are starting to feel the pain when you talk to them about their business and the space requirements going forward?

Jordan L. Kaplan - President and Chief Executive Officer

You mean the pain of the writer strike?

David Harris - Lehman Brothers

Well, that, but also, obviously, with lot of fear about recession, I mean there must be a lot of concern that advertising revenue is going to take bit of a downturn here, and that obviously is the life blood of profitability in the media industry to large extent?

Jordan L. Kaplan - President and Chief Executive Officer

Yes. I mean, I know a lot... because a lot of media people have live in my neighborhood I do know a number of them, so I can't get as much from tenants because we have... I am talking to tenants, but I can tell you this. Everyone is... there is almost more, I would say, feeling of euphoria that the writers' strike is over. They are a pretty excited bunch, now to get back to work. So, I would say that if you are looking for some impact on the... from the economy on media, they would... they are going to be overshadowed by people excitement in getting things going again. So, I think they feel like they have been held back obviously during the writer strike.

So I haven't seen... I mean, we haven't seen anything like that, now, who knows, after they get going and whether they are going to not be writing as well and things will be off a little bit. But I haven't seen anything like that.

David Harris - Lehman Brothers

Okay. I know you answered the question on acquisitions just a minute ago, but is it possible to get a bit more granular... would it be anything in the Arden portfolio that's currently for sale, of interest to you?

Jordan L. Kaplan - President and Chief Executive Officer

That is a good example of a deal that's out there. Good example of... not an overleveraged portfolio where I guess GE, has said Arden I want to see a trade here this quarter, but I am not going to talk for our sales about specific transactions.

David Harris - Lehman Brothers

Okay, okay. What's left on, in terms of your share buyback capacity?

William Kamer - Chief Financial Officer

I don't think we have ever given out, exactly... we have a lot of cash, we can buyback a lot of shares. It's not easy, technically speaking, it's hard for us to buy... if we want you to go in the market and buy shares, you can buy at the beginning or the end, and you're coming through a... and I think it's 25% of average 30-day volume. So, you can't really move the needle much in that sort of, kind of, firefight fashion. So, more of what we have been given on share buybacks is looking for when the larger opportunities come and making purchases at that time. And then, of course, we are balancing that against, the feeling that... I tried to communicate in the script that I think this we are going to be making some deals. I am pretty excited about the deals I think are coming up, especially that there are some coming up that work extremely well with our portfolio where I think we will get... give people, we will get some good returns.

David Harris - Lehman Brothers

What metric are you using to judge whether you should allocate capital to acquisitions or to share buyback. I know that's a big picture question, and can you sort of just give us an idea of your thought process?

Jordan L. Kaplan - President and Chief Executive Officer

Well there's not a... I wouldn't use the word metric, because I don't feel like there is a mathematical calculation that we are dealing. We are looking in the same way that we are making decision between buying an office and residential. We look at the deals that come up, become available and then we make a decision at that time about that deal. So, we have had a number of opportunities come up, as you guys know with the release of our investors to purchase stock over the last, whatever, months and you have watched us many times say hey that's a good opportunity and make that purchase. We haven't gone in and bought in the stock market.

Now at the same times as we see a building purchases come up, we see those purchases and we say to ourselves that's a great deal. We should make that deal. What we see coming in terms of profit acquisitions in the future has caused us, as Doug [ph] said, to get a little more excited and to say to ourselves listen we need to make sure we have plenty of capital available to make those deals, which is what causes to decide to go and do this fund business and have the retake a very large piece of that fund, because now we are starting to feel like there could be some great opportunities there.

David Harris - Lehman Brothers

Okay, all right, thank you.

Operator

: Thank you sir. The next question comes from the line of James Feldman from UBS. Please go ahead.

James Feldman - UBS Securities

Thank you very much. Can you talk a little bit about what your assumptions are for the '08 guidance in terms of occupancy and same-store growth?

Jordan L. Kaplan - President and Chief Executive Officer

We have given a live guidance on that areas and our model where we thought it would be hard for you guys to figure out, and Bill gave, I don't know, 6, 7 things in his peace: interest and FAS 141, et cetera. For now I think that's as far as we are going to go in terms of giving this assumptions, and obviously we have a range of assumptions for a lot of the other things, because we gave you guys a range of where we thought we were going to fallout.

So, I think you can... within your model, you can play games with occupancy and some of the other large drivers and make decision about where we are going to come between $1.25 and $1.29, but the things that we were worried they would be hard for you guys within your model to nail down because of the accounting and whatever or tackling, it's really what we are paying in terms of debt service. We went ahead and gave you those numbers. So, that's as far as we are going to go for now.

James Feldman - UBS Securities

Okay, that's fair. And can you just give a little bit more color on what you are seeing by submarkets in terms of demand and maybe what markets are concerning you more than others?

Jordan L. Kaplan - President and Chief Executive Officer

So, far I think we are feeling pretty good across all of our markets. Let's see, Hawaii is still suffering a little bit from stuff we have talked about on other calls, where we have said that they need housing. I mean they just need more housing. Now maybe in other tourism thing is going to be impacted by things going on the economy there a little more, but so far they're sort of sitting pretty stable at extremely full employment with a sudden feeling if they should get housing going that economy with even get a bigger boost.

Out in the market share in Los Angeles, the only market that I would say is even a little bit on our watchlist would be to step out in the West Valley where there's still some larger tenants and you would expect larger tenants to be a little more impacted than the smaller tenants on the West Side, but with that said we are still getting very strong performance in both those markets.

James Feldman - UBS Securities

Okay, and then the occupancy dip in... on the residential side, is that seasonal or is that more a sign of things to come?

William Kamer - Chief Financial Officer

Hey, Jamie, this is Bill Kamer, the occupancy drop in the fourth quarter in the multifamily portfolio... the 60 basis points... is entirely attributable to the Hawaii market which was as a result in the fourth quarter they were troop deployments during the fourth quarter and there was a temporary drop in the fourth quarter of occupancy that's come back in the first quarter, we're so much sensitive to those moves because we get... we have a fair amount of housing demand that's generated from the military side there.

James Feldman - UBS Securities

So, we should expect similar drop in every fourth quarter?

William Kamer - Chief Financial Officer

No it's more random than that. Based on when the Commander in Chief chooses to...

Jordan L. Kaplan - President and Chief Executive Officer

Yeah, I would expect it during every war.

James Feldman - UBS Securities

Hopefully, we don't see that too much then. All right, thank you.

Operator

Thank you sir. The next question comes from the line of Chris Haley with Wachovia. Please go ahead.

Chris Haley - Wachovia Securities

Hey Jordan, I really appreciate that neighborhood that local knowledge. Two questions. First what type of success rate are you getting at least over the recent period 5% bumps. What kind of concessions are you making in terms of upfront rents?

Jordan L. Kaplan - President and Chief Executive Officer

We're having very, very good success on the 5% bumps which is smart of you to ask about because it would be a leading indicator of trouble and we are still strong and of course holding on to that we aren't seeing concessions at all.

Chris Haley - Wachovia Securities

Are you making any rent concessions upfront?

Jordan L. Kaplan - President and Chief Executive Officer

No we are not making them... we are not... no we are not.

Chris Haley - Wachovia Securities

Okay. On the... did you mention anything with respect to timing related to fund certain... JV fund elsewhere?

Jordan L. Kaplan - President and Chief Executive Officer

Well it's a process of going out and talking to many of our old investors and some new investors and sort of roundup the troops and making the decision about the liability and their receptiveness to it. And we are going through that right now. I am hopeful that we can conclude if that's a good move and get that put together quickly and be able to use it for acquisitions. But it won't stop us if that feels we want to do, we will do it.

Chris Haley - Wachovia Securities

Okay. The last thing is a question on share buybacks. I think either last quarter or prior periods, you may have mentioned that you guys were bantering around the additional detail on how much the buyback activity was between common versus unit. Have you offered... can you offer any color on that?

Jordan L. Kaplan - President and Chief Executive Officer

You mean where we have been making the buybacks?

Chris Haley - Wachovia Securities

Yes.

Jordan L. Kaplan - President and Chief Executive Officer

No, we still don't... I mean, I don't want to go into because it's too easy still for people to figure out what's going on. I don't want to go into where they are coming from but you are right in your assumption that it's brought from old investors. It's where we are finding the opportunity to make those buybacks. And so that's... and you can see, I mean, you can see your own... you can follow up the numbers and make some judgment about where it's coming from because you see where our new share count is and what we have bought back.

Chris Haley - Wachovia Securities

Is there anybody just in terms of future assuming the fund gets done, I would guess that or I would believe that there would be a fairly good level of conversion from the unitholders into potentially a fund given the success you've offered them in the past. I think it might be helpful to provide some indication as to what type of repeat buyers you got or repeat contributors on this fund? If in fact, did you have several entities that go into it?

Jordan L. Kaplan - President and Chief Executive Officer

We are hopeful that we will get a good number of our same old investors into new fund. I mean quite frankly there's not many people we are focusing on and having discussions with. They of course are typically more accustomed to investing with a non-public general partner as opposed to a public one. And we are talking to them and hoping that we can get over that but really get them comfortable. But they are certainly for us our best there are... if we can build the fund out of that group of investors that's our best group to go back to and make that deal. They work well as a group. They all kind of like the same sort of incentives to be in place. And we may owe a lot of money to get this. So, we are hopeful that will have a lot of success in going back to them.

Chris Haley - Wachovia Securities

Okay. Thank you.

Operator

Thank you, sir. The next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead.

Michael Knott - Green Street Advisors

Hi guys Jordan on the last call you had said you are expectation for an increase in sales volume was that asset values would flatten out. Is that still sort of implicit in your current comment?

Jordan L. Kaplan - President and Chief Executive Officer

Yes, I mean, well, I guess a reason why I am feeling better about us being able to make acquisitions is that, if you were to think of it... think of it this way, we haven't had a lot of trades and I know it sounds like a broken record. So, it's fairly hard to pinpoint where values are, in our markets. But if you were to take sort of the huge dream numbers that people were staking up that were considering selling properties in the midpoint of 07. And therefore not a lot of deals were happening because they had some wild number in their head because maybe they heard the New York dealer, who knows what.

Now I feel like, people are coming or becoming more realistic about the returns that people need to get. And so proposed numbers they come down, they come off and they are coming back down to a set of numbers that I think just, where people's head is back on 07 numbers where we can make some, make some money and kind of make some hay out of those deals.

William Kamer - Chief Financial Officer

Mike, the other case is about -- the other thing is, when we talked about the likelihood being more optimistic, there is two components, one Jordan just mentioned which is we think the pricing is stabilized at a point that's very attractive. The second is having trade occur that we can advantage of and is that latter point that we are getting... we are feeling better about it at this point.

Michael Knott - Green Street Advisors

What kind of unlevered returns are... is in the market at today on the West side 08 7%, 8%?

Jordan L. Kaplan - President and Chief Executive Officer

It's hard to say because really to date there really haven't been any trades. So we'll see after some trades happen but we have never been very comfortable as a company buying down at 8% un-levered return. So I think we are feeling that things are going to come out of higher numbers in that on an unlevered basis.

Michael Knott - Green Street Advisors

Okay. And then did you mention whether the Honolulu acquisition was office or multi-family?

Jordan L. Kaplan - President and Chief Executive Officer

No. It's office. I have to ask Bill to get permission and to give information out to you.

Michael Knott - Green Street Advisors

Okay. Can you just talk about why you can't share with us what the authorized buyback capacity is? Every other company to my knowledge does share that.

Jordan L. Kaplan - President and Chief Executive Officer

Well I guess it's because we in general aren't interested in sharing any information about the conversations that we have with our Board or any instructions that our Board particularly gives us and that will be part of that.

Michael Knott - Green Street Advisors

Should we assume that from a capital allocation standpoint, you sort of have to cart blanche [ph] to buy back stock or is it limited from the $215 million you have already done?

Jordan L. Kaplan - President and Chief Executive Officer

I think it's reasonable to assume that we and our Board together have been comfortable with all the transactions that we have done and I can't imagine they'd be any uncomfortable with any further transactions we want to do. But of course there are Board, we talk to them about what we are doing.

William Kamer - Chief Financial Officer

Mike, this is Bill. Just you understand our viewpoint on this. The... we don't want to be in a situation where we are making announcements of capacity that we may or may not exercise on in getting false impression of the market. We are announcing transaction that we do and we consistently said and we are saying now that our approach going forward is to have a balanced view between property acquisitions and equity. So it would be... we don't want to suggest that we are pursuing an expensive equity buyback program when we may not. It depends on the opportunities that present itself and how we balance our capital

Michael Knott - Green Street Advisors

Okay, and then my last question is, can you just a little bit about the rollover schedule in 08 in Valley and whether the concentration there is single tenants that have large spaces growing or whether those are 20 and 30,000 foot for tenants each quarter?

Jordan L. Kaplan - President and Chief Executive Officer

In the Valley, of course the size of our tenants are a little bit larger Michael. But nothing in particular, I mean it's kind consistent with what we have been... what the normal roll year-over-year is.

William Kamer - Chief Financial Officer

Yes I don't think we have any excessive rollout there. And in terms of those large tenant size I was more just talking about the West Valley, not that Ventura Corridor.

Michael Knott - Green Street Advisors

Okay, thanks.

Operator

Thank you sir. The next question comes from the line of Matthew Conned [ph] FBR Capital Markets. Please go ahead.

Unidentified Analyst

Hi good morning, gentlemen. The majority of my questions were answered. But following up on David's question, I know you can't comment directly on the Arden transaction. But did it surprise you that such a bulk of property would come to market right now when there just isn't much transactional velocity?

Jordan L. Kaplan - President and Chief Executive Officer

There is other stuff coming in the market too. So, no, it's not surprising. I mean okay and I have said this along in the past, I think we had an incredible shortage of transactions over the last couple years in our market. So I thought there has been sort of a backlog and then where there were transactions, it mostly... they transactioned in the hands of groups that are kind of financial engineering types and short-term holders. So I've always thought like that we had done our fair share of trades in the markets that we are focused in. So I think that there is going to be a swing of the pendulum back and there will be quite a number of trades that we will be able to take advantage of.

Unidentified Analyst

And with that said, has the type of buyer reverted to the mean? I mean have those financial engineers kind of moved away to the next picnic? And is it the more traditional buyer and have you seen an influx of foreign money come in?

Jordan L. Kaplan - President and Chief Executive Officer

Foreign... well Bill will answer the first question first.

William Kamer - Chief Financial Officer

I think we have shifted back to our operating buyers. So you need to have an operating platform to buy because you need to actually run the building and get cash flow out of it and make it work. Because if you're buying today you're still buying a building with rents. As you heard from our portfolio they are 55% below where you're renewing leases at and the difference between doing a good and bad job there can make a difference between the property and the investment being successful. So you need a good operating platform. We are in markets that are very hard on the organization running the property. It's small demanding tenants. So, when you take away that ability to sort of financial engineer your way and do a quick high IRR and you get back to a good operating platform to make real gains in terms of the NOI on the property. You get back to kind our hey day which is dramatically eliminating the amount of successful outside buyers that could come into the market. We are... you guys know very well... large and well oiled machines operating our property shares. And that's given us an edge and managed buyer in the past. So, I am... we are feeling pretty good out where things have gone back to.

In terms of foreign buyers they need a way in. I mean we have never... we haven't historically seen a lot of situations where a foreign buyer com in other than the ground of Japanese in the 80s. They come in just direct buy properties maybe to come through an organization that could run or set up the deal for them. We hope maybe we will tap into some of that equity in selling out the fund. The tougher buyers and we are back to kind of the world that we were operating in before the, tougher buyers for us to compete with are the local billionaires or let's say the Southern and Northern California billionaires. Because when they want to buy some things they are a lot less sensitive to return than we are, and we're typically both going over after the same very hyped class properties. I don't have a good feel to what extent they're backed but certainly they go into the biggest the toughest people for us to bid against.

Unidentified Analyst

Fair enough that's great color. And then as far as property transactions you said this before, I guess every thing that you are looking at continues to be in your existing markets?

Jordan L. Kaplan - President and Chief Executive Officer

Yes I still think I mean I think North and South I think the whole curve is still good and I think all the underlying economics of the West Coast are positive but right now with what we are doing we are focused on our markets we are focused on Los Angeles and Hawaii.

Unidentified Analyst

Great and then just one, one other quick one I know that you have been asked this as well now you have got a comparative year under your belt whether you think you will provide same-store NOI on markets in future supplemental?

Jordan L. Kaplan - President and Chief Executive Officer

We definitely will whether that's next quarter or after that is yet to be decided. But we definitely intend to as we get the few more quarters under our belt.

Unidentified Analyst

Perfect thanks a lot for your time.

Jordan L. Kaplan - President and Chief Executive Officer

All right.

Operator

Thank you, sir. The next question comes from the line of John Guinee with

Stifel Nicolaus. Please go ahead.

John Guinee - Stifel Nicolaus & Company, Inc.

Hi John Guinee here. Thank you. Given property view we would expect to see very few starts in your primary markets. Can you walk through what's going on at West Hollywood with Cowen Brothers, Playa Vista and then in Woodland Hills?

Jordan L. Kaplan - President and Chief Executive Officer

Okay. I don't know that's lots of detail that you implied this... Bill do you have --

William Kamer - Chief Financial Officer

Yes I do. The starting up in out in Woodland Hills I will start with that. That's the last... and it's been in our numbers for a while the last building there in the L&R project, it's a multi-phase project, is coming online right now 200 and something thousand feet. The not as familiar with the situation going on in Hollywood, West Hollywood. I don't think there is much supply there. Down in the Playa Vista... it's Playa Vista, Culver City, El Segundo down in that area. There's been about I think 800 to a million square feet. That's sort of planed and on your construction down there that's presumably going to come on a bit slower at this point and over the next four or five years and not very much coming on stream in the next couple of years.

We don't really view those areas as directly competitive and that we view them as an indirect safety valve for some of our larger tenants that we can accommodate as they expand in our market to stay generally in the West side. So we view it more as a complementary market than a competitive market.

John Guinee - Stifel Nicolaus & Company, Inc.

Great, thank you.

Operator

Thank you, sir. Next question comes from the line of Mitchell Germain with Banc of America Securities. Please go ahead.

Mitchell Germain - Banc of America Securities LLC

Good afternoon. Jordan how would you characterize the type of assets that you are trading, value add or more on the stable side?

Jordan L. Kaplan - President and Chief Executive Officer

Well, I guess there is two ways you can add value. You could completely rehab a building or and you can re-tenant it. I think a lot of assets are... I mean there is some rehab needed but I think has a lot more to do with re-tenanting. I mean we are dealing with the situation of 55% spread from old lease to a new lease comparative on straight line. If you want to get that like we are getting it in our portfolio you got to be good and you got to be prepared to just shoot it out at the skirmish level and re-tenant a building and get the rents, rents out of all those little guys.

And so that's where... that's why I am feeling real good, because if we could buy some good buildings that have very low rents which we always say give us a good and a good location we will deal with the occupancy. And I don't care if it's vacant. We can then rely on our skills to get the income upon that building and then once we do that we create value. And that's what we are good at. And that's exactly what's out there today. And you combine that with the fact that the capital markets are very dislocated, people have trouble getting debt. And then you compound out with the fact that when... right now coverage is everything. And if you have low cash flow on the building, no way you can get the rents out. Maybe you guys can bid very much for that building because he can get very much debt. He doesn't have enough equity or he's got higher equity returns.

So, that also in turn plays very well into our hands but we believe we've been comfortable taking very low cash flow early on and building the cash flow for properties that we know are good. And we do have access to debt and have a lot of kind of debt capacity within our portfolio.

Mitchell Germain - Banc of America Securities LLC

Those assets trading at a current or stable cap rate, obviously previously they have been trading more at the stable cap rate.

Jordan L. Kaplan - President and Chief Executive Officer

I don't know because I know cap rates are not, I can't --

Mitchell Germain - Banc of America Securities LLC

All right. I understand. And just one last question for Bill, the seasonality of the operating expenses, I mean is 2007 a good proxy of the seasonality?

William Kamer - Chief Financial Officer

Yes, it should be.

Mitchell Germain - Banc of America Securities LLC

Okay, great. Thank you guys.

Operator

Thank you, sir. Next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead.

Richard Anderson - BMO Capital Markets

Thanks and I am here with Jon Litt. I'm just kidding. Just a couple of quick ones, I know it's very long. The last call I was just on the HCP, a healthcare REIT mentioned that they are having some pushback or some retreating going on the JV market as they sort of figure out how they are going to finance themselves. Are you seeing any of that in your world? That the market has just changed and that there is a sort of resetting of returns in all of that?

Jordan L. Kaplan - President and Chief Executive Officer

I hope there has been resetting of returns because as you heard we weren't a very competitive in buying buildings before. The... in terms of the well, we have never been big in the JV market. I mean as a private company, we were in the fund business and we had essentially raised a fund almost ever year. Now we're out as a public company raising a fund and I think it's too early to tell. It's never easy...

Richard Anderson - BMO Capital Markets

Has the market changing made it more difficult than you thought that it was going to be to get something done?

Jordan L. Kaplan - President and Chief Executive Officer

I actually think it would have been more conceited [ph]... to the type of investors that we go to, it would have been more difficult in 07 than it is now. They are... they are pretty... they have a lot of on the ground knowledge. And if we would have gone then in '07 and said come on we want to raise a bunch of money, we're going to go make deals. They know what's going on. And they would say, how are you going to make deals that are good deals? I mean they would have the same problem that obviously we had making deals. And so I suspect that the climate today is working in our favor in terms of getting some of those guys back in because it is a lot more apparent now that we will be able to place some money well into good opportunities.

Richard Anderson - BMO Capital Markets

Got it. You mentioned the slight decline in mark to market at early on in your comments and it came from Bill. Was that more of an LA impact or a combination of LA and Hawaii?

Jordan L. Kaplan - President and Chief Executive Officer

I think that the mark to market decline is probably more... probably more LA isn't it? Yeah okay, it's more LA.

William Kamer - Chief Financial Officer

It's more on the LA side but again primarily a function of the increase of the in-place rents that percentage rising faster than the asking rents rose during the quarter.

Richard Anderson - BMO Capital Markets

Got it. And then last question if you pull off a big deal of some size would you... do you think it would be added to your FFO guidance?

Jordan L. Kaplan - President and Chief Executive Officer

When in this type of environment when rents are very low and then you buy a building and you get this carpet market on rents it... I think it almost always is on a FFO metric. I think it's so almost always accretive. But I wouldn't put much credence in that. There'll be good deals and normally on, let's say a real estate cash flow look, it will have very low cash flow.

Richard Anderson - BMO Capital Markets

Right, okay. Thank you.

Operator

Next question comes from the line of Steve Sakwa with Merrill Lynch. Please go ahead.

Steve Sakwa - Merrill Lynch

Hi good afternoon.

Jordan L. Kaplan - President and Chief Executive Officer

Hi Steve

Steve Sakwa - Merrill Lynch

Hi, I just want to kind of come back to the IRR question. I know you guys historically target a kind of 9 and obviously deals up until this point, haven't made sense for you. You're obviously feeling more optimistic. Is that more because the going in yields are better or because you feel more confident about the growth you can get?

Jordan L. Kaplan - President and Chief Executive Officer

Going in yields... I mean I think it's hard to tell what the goal... I think overall... I think the... you can apply it to either one of these but I think the prices will pay with the expected prices from the sellers now are back in the range where I guess... I guess the periodical going in yields from the mid 07 to what I think now people are feeling like the going in yield because they'd be willing to sell at. I think that would probably be better. And I also think that the predictability of rental growth that... our predictions with respect to rental growth are more in line with what people are predicting. We were sitting in the middle of the year at 25% rental growth. I am telling you I saw packages where they were acting like, you are going to get that for years to come. I mean it's just crazy. It was only the only way that it would have made the deal work. So I think people have little dose of reality, and I think your expectations have become more realistic. And especially with there being... without that financial structure and buyers in town, I think that we're going to be successful bidders again on some properties.

Steve Sakwa - Merrill Lynch

And is nine the right hurdle for you or have you moved that number up in the last six months.

Jordan L. Kaplan - President and Chief Executive Officer

When we look back on all the way to the bottom of the 90's, although it was surprising that we were always around the nine on an all cash. And now there is a lot that goes into that and the conservativeness of our assumptions and other things. But we are really stuck with... that's just one data point but we have stuck with those original metrics. And now I am going to knock on wood. I am glad we stuck with it through last year because I think some trades could happen where people aren't as happy about the trade now seeing where we are in '08.

Steve Sakwa - Merrill Lynch

Okay and just to make try understand the fund to the extent that you do it. I guess with all acquisitions going forward be done in that vehicle or that have special parameters around it?

Jordan L. Kaplan - President and Chief Executive Officer

I would say generally everything all acquisitions will go through it. There are some very limited exceptions that relate to the REIT, like a REIT needing to do a tax free exchange or needing to actually give equity to make it deal happen. But our intention is to make all acquisitions through the fund. The fund strategy is going to be exactly the same as the REIT strategy. I will expect to achieve internal external growth for the REIT through the fund.

Steve Sakwa - Merrill Lynch

Okay and then maybe just one more, just new markets I mean Orange County, San Diego, I know kind of long term you have some interest in expanding outside your existing markets. Just given the I guess turmoil that's happening do those present any opportunities today?

Jordan L. Kaplan - President and Chief Executive Officer

Well Don Brandt [ph] is still grazing around San Diego. So it's hard to get into his pasture. He is very good aggressive. He is one of those billionaire bidders that when he wants it you are not going to beat him. And you saw that he bought the EOP stuff and he has done other stuffs down there although I am going to say that's a great market okay.

Up in San Francisco, it would we... I think for now we are allocating... I still think long term thats... there are some great opportunities up there. There might be some opportunities on the Peninsula, there might be some opportunity across the Bay. But I think for now we are focusing ourselves on opportunities. We are feeling good enough about the opportunities that are coming up here in Los Angeles and Hawaii that we are staying pretty focused here.

Steve Sakwa - Merrill Lynch

Okay, thanks.

Operator

Thank you. We have a follow-up question from the line of Michael Bilerman, please go ahead.

Michael Bilerman - Citigroup

Yes, I just want to come back to the mark-to-market. So you went from 37 to 35, and the leases that you signed in the quarter were at 34. So I guess you had to decrease your... what your estimate of market rent is? Is that fair?

Jordan L. Kaplan - President and Chief Executive Officer

Yes, I don't know where the 34 is coming from, I'm afraid?

Michael Bilerman - Citigroup

34% was the actual leases that you signed in the quarter so if those, got into the base then?

William Kamer - Chief Financial Officer

Yes, they are different. As we have been saying, it's one of the reasons why we have been giving out all the metrics over time because of the fact that people want, want to look at them all, but they really come at get their slicing things very differently.

Michael Bilerman - Citigroup

Right.

William Kamer - Chief Financial Officer

The deals done in the quarter, the 34% roll-up on leasing, those are the differences in cash on leases actually signed during the quarter compared to the expiring rent and leases for the same space. The mark-to-market is a portfolio wide look on cash unrelated to transactions actually done in the quarter. And as I said before it's up... the relatively slight decline in that mark-to-market in the quarter is a function of the fact that we had very, very large increase in our in-place rents in the fourth quarter resulting from the fact as you know our occupancy, rent paying occupancy increased significantly during the quarter. Those are all brand new leases signed in current market that weren't in the data in the prior quarter. Plus the contractual annual bumps that occurred as well as the renewals on existing leases where there is a significant roll-up. So we... if the product really of what's been building over time, which is we are starting to see some significant increases in our in-place rents. That pace in the fourth quarter outstripped the increase in market rents in our portfolio.

Michael Bilerman - Citigroup

Okay, now that makes sense. Looking at the spread between occupancy and your lease percentage, obviously has narrowed through the years while on the leasing that you had done previously starts to take occupancy. How does that trend and what's your sort of forecast into 2008?

William Kamer - Chief Financial Officer

Yes, we have said before Mike that we believe over a protracted period of time that on rent paying occupancy that it will be hard... in any market, no matter the strength of the market have rent paying occupancy, average much more than 95% over any period of time. And in terms of following that, the delta between rent paying occupancy and our lease percentages over the last seven quarters has averaged between 70 basis points and 250 basis points. So that number is going to move around a lot and will be volatile depending on a number of factors. But I think the expectation should be that rent paying occupancy over a period of time won't be significantly higher than it is today.

Michael Bilerman - Citigroup

And your same store, so what your outlook for '08 on the same store basis, is what?

William Kamer - Chief Financial Officer

Again we are not providing same store, either looking backwards or looking forward at this point. Hopefully we will be able to give a better look looking backwards in another quarter or two.

Michael Bilerman - Citigroup

Okay. And you said you purchased land underneath one of your assets, what was the dollar amount of that?

Jordan L. Kaplan - President and Chief Executive Officer

We previously announced when we bought... it was HNO [ph] and Century Park west the acquisition we did in the second quarter. And as we announced when we bought it we had a fixed option to... fixed priced option to buy the land as a leasehold with a fixed price option of $800,000. And we exercised the option and bought the land for 800,000 in December.

Michael Bilerman - Citigroup

The last one is just dollar wise the Honolulu acquisition at the end of week

William Kamer - Chief Financial Officer

Well I think we will wait until we do the press release later in the week but don't get so excited. The emphasis in our remarks was small-off market transaction and frankly the only reason we noted that is because it's so close in timing to this call that we just wanted to give people little heads up.

Michael Bilerman - Citigroup

So we're talking 25 to 50 versus 100 to 200, pretty much smaller.

Jordan L. Kaplan - President and Chief Executive Officer

The deal we couldn't pass up, we'll announce it soon. We didn't want to look stupid and have a huge call and then few days later have it announced and the people go, why didn't you mention anything about it? But you will see in the press release.

Michael Bilerman - Citigroup

Okay, thanks.

Operator

: We have a follow-up question from the line of David Harris. Please go ahead

David Harris - Lehman Brothers

Just very quickly. Blackstone is still pushing rents aggressively or are they laid off?

Jordan L. Kaplan - President and Chief Executive Officer

That's a good question. I think by their nature they can't help but push rents aggressively. It's just like the nature of the bees. With that said, I also think they are settling in to becoming more of operators and they are focusing a little more on occupancy and renewal. But they are still leading the charge and taking the early blows on the shoulder ahead of us.

David Harris - Lehman Brothers

Are they managing all of these assets themselves or are they using third party?

Jordan L. Kaplan - President and Chief Executive Officer

Well I think they're generally using the structure that they purchase from EOP in this area as well as the cost. I mean, so they have some management company that if you will that they purchase and they're using those people and operating platforms.

David Harris - Lehman Brothers

Okay, great. Thank you.

Jordan L. Kaplan - President and Chief Executive Officer

Thank you.

Operator

Last question comes from the line of Michael Knott. Please go ahead.

Michael Knott - Green Street Advisors

Jordan, can you just give a little more color on... a little while ago you made some comments on the acquisition market and financing and coverages everything. Can you just expand on what maybe the maximum loan to value is today given that if you have a initial yield that's below the cost of debt. Are we talking 50% loan to value, 60%?

William Kamer - Chief Financial Officer

Mike this is Bill. I don't really know that the sweet spot for the best pricing for some for years in real estate loans has been between 60% to 65% LTV depending upon the mood [ph] of the market. I don't think that's changed. I think what has definitely occurred in the last number of months is debt is less than available overall. I think that's really hurting some people at this point. And I think in the cost and the underwriting standards, cost has gone up, underwriting standards have increased. We are extremely happy in the sense that we think that on the competitive level our decision over number of years to stay away from the securitized CMBS market, we focused on relationship lending. We think that that gives us a bit of an edge. But having said that the market is tough for everybody, cost's going up and we are working through that process with our lending group.

Michael Knott - Green Street Advisors

Will that factor potentially slow the increase in the sales market that you guys are expecting in terms of the increased volume you expect?

Jordan L. Kaplan - President and Chief Executive Officer

Well I am hoping that at some level it will speed things up because if someone owns a building and even if they don't have their back to the wall from over leverage they might have refi-ed out some cash and now they can... maybe they don't like they can replace that investment. So they feel like well I better just sell even though they have the equity and they made money. So I am hoping that helps to accelerate things, not decelerate them.

Michael Knott - Green Street Advisors

Thanks.

Operator

I found that there is no further questions. I would like to turn it back over to management

Jordan L. Kaplan - President and Chief Executive Officer

Okay, thank you everybody for joining us and we look forward to speaking with you again next quarter. Good bye.

Operator

Thank you ladies and gentlemen, this does conclude the Douglas Emmett fourth quarter 2007 and year-end earnings call. You may now disconnect. Thank you for using teleconferencing center.

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