Douglas Emmett, Inc. (DEI) Q1 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s 2008 first quarter earnings conference call. Today’s call is being recorded. At this time all participants are in a listen-only mode. A question-and-answer session will follow management’s prepared remarks. [Operator Instructions]. I 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; and Mr. Bill Kamer, Chief Financial Officer. Please note that this call is being webcast live on our website and will be available for replay for the next 90 days and by phone for the next seven days. Our press release and supplemental package have been filed on Form 8-K with the SEC and those are also available on our website at www.douglasemmett.com. During the course of this call, management will be making forward-looking statements. We caution investors that any forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. The actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of these risks, please refer to the company’s press release and current SEC filings, which can be accessed in the Investor Relations section of the Douglas Emmett website. Please note that the market data sources that are referenced in management’s prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office market, REIT [ph] for the Los Angeles office markets, MTF Research for the Los Angeles multi-family market, and Property and Portfolio research for the Honolulu multi-family 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 will begin with a brief overview of the company’s external growth program followed by an update on our markets. Bill Kamer will provide a more detailed account of the first quarter financial and operating results. While internal growth prospects remained strong, changing market conditions are permitting us to move more aggressively into the acquisition arena. As we indicated last quarter, we continue to be increasingly optimistic about opportunities to acquire office and apartment projects in our markets on attractive financial terms. Shortly after the quarterly earnings call, we acquired a small office building at Honolulu, Hawaii with our local partner. More significantly at the end of March, we acquired 1.4 million square foot office portfolio consisting of six Class A office properties for a contract price of approximately $610 million or $428 per square foot. The properties are located in four of the company’s core Los Angeles sub markets, Santa Monica, Beverly Hills, Sherman Oaks/Encino, and Warner Center/Woodland Hills. The majority of the acquisition was in Beverly Hills where it increased our market share from 7.8% to 18%. Each of the office building just located near and in some cases next to an existing Douglas Emmett office asset permitting us to realize significant marketing and operational efficiencies. The tenant mix is similar to ours, small tenants with no significant exposure to any one industry. The properties were 86.5% occupied as of the end of the first quarter compared to 94.3% for the rest of the Douglas Emmett portfolio. We expect that a number of large… a number of additional, large, attractive acquisition opportunities will develop in our markets. So we have undertaken a series of capital programs to generate liquidity. Bill will outline our most recent debt initiatives in his prepared remarks. As you know from our last call, our primary equity initiative is to raise a $500 million to $1 billion closed-end fund. We anticipate that the initial closing of the fund will occur by the third quarter of 2008. As we’ve stated before, barring any unforeseen circumstances, our intention is to contribute to recently acquired six-property office portfolio to the fund. Turning now to the leasing markets. 2007 was an incredibly strong year for both rental growth and occupancy levels in our portfolio. As we have discussed in previous quarters, those metrics are unsustainable and as we anticipated leasing was less robust in the first quarter of this year. During the first quarter, the ten Douglas Emmett office submarkets experienced a modest increase in office rental rates and a modest decrease in occupancies. Thus we see the office leasing markets as predictably flattening. Still, we feel the outlook for our office submarkets remains healthy and strong, both in the near and long-term. Tenant demand is supported by diverse and vibrant business such as those in the increasingly technology oriented entertainment industry. There is very little new supply coming online in this foreseeable future with only modest deliveries expected even in peripheral submarkets as such as Howard Hous [ph] Playa Vista, El Segundo and Culver City. Now I would like to update you on the Los Angeles and Honolulu markets statistics. During the first quarter, office rental rates within Los Angeles County increased 12% year-over-year while dropping sequentially 34 basis points. Honolulu County rents increased 6.2% year-over-year and increased sequentially by 33 basis points. Rental rates within the ten submarkets where our office properties are located increased 19.2% year-over-year and increased sequentially 1.7%. There was no change in office occupancy in Los Angeles county last quarter holding at 90.8%. Office occupancy in Honolulu County increased slightly in the first quarter to 91.8% from 91.5% in the fourth quarter. Within the ten submarkets where Douglas Emmett’s office properties are located, occupancies declined sequentially 1.1% to 92.4%. Now I will turn the call over to Bill, who will provide more specific details on our first quarter operating results. Bill? William Kamer – Chief Financial Officer: Thanks Jordan. Today I will be providing details on our quarterly financial and operating results. I will conclude with our updated guidance for the year. For the first quarter of 2008, Douglas Emmett reported FFO of $53.4 million or $0.34 per diluted share compared to $0.28 per diluted share in the first quarter of 2007 and $0.31 per diluted share in the fourth quarter of 2007. Total revenues increased 5.4% to $134.8 million in the first quarter of 2008 compared to $127.9 million in the first quarter of 2007. Office rental revenues increased 8.1% year-over-year to $99 million in the first quarter. Multifamily rental revenues increased 4.3% year-over-year to $17.2 million for the quarter compared to $16.5 million for the first quarter of 2007. Our total FAS 141 income from the first quarter of 2008 was $10.2 million. While we were still finalizing our FAS 141 amounts for the properties we acquired in the first quarter, our preliminary estimate for FAS 141 income is that it will range somewhere between $36 million and $38 million for the entire year. On the expense side, office operating expenses for the first quarter were approximately $31.4 million down 3.5% sequentially. Multifamily operating expenses for the first quarter were approximately $3.9 million, down 3.6% sequentially. The sequential decreases in operating expenses are primarily due to the timing of repair and maintenance and administrative expenses, which in the first quarter ran approximately $1 million below their expected annualized rate for 2008. G&A in the first quarter totaled $5.3 million, which was down 3.2% sequentially. We continue to estimate that G&A for 2008 will total between $23.5 million and $24.5 million. Interest expense totaled approximately $41.2 million for the first quarter of 2008, down 3% sequentially from $42.5 million in the fourth quarter of 2007. The decrease in interest expense is explained by our swap amortization expense being approximately $1.8 million lower than anticipated for the first quarter. The $1.8 million decline was caused by the adoption of FAS 157 during the first quarter, which required us to offset swap amortization by approximately $1.2 million as well as variations in the yield curve, which accounted for the remaining $600,000. The values of our pre-IPO swaps will be amortized to zero over their remaining life, so that $1.8 million swap amortization expense savings in the first quarter will be reflected in higher swap amortization interest expense in subsequent quarters. First quarter recurring capital expenditures for our office portfolio averaged $0.07 per square foot compared to $0.06 per square foot for the first quarter of 2007. Recurring capital expenditures for our multifamily portfolio averaged $92 per unit in the first quarter of 2008 compared to $80 per unit for the first quarter of 2007. We continue to estimate that recurring capital expenditures for our office portfolio in 2008 will total approximately $0.50 per square foot and that recurring capital expenditures for our multifamily portfolio in 2008 will total approximately $600 per unit. Switching gears, I would like to briefly touch on the credit markets. As is widely known, the turmoil in the global credit markets since last summer has resulted in generally higher financing costs and lower loan availability. Fortunately, due to our well established long-term relationships with various domestic and foreign lenders in the bank and insurance company syndicated loan market, we continue to have access to debt capital on relatively attractive terms. During the first quarter, we obtained a non-recourse $340 million term loan secured by four of our previously unencumbered office properties. The loan bears interest at a floating rate equal to LIBOR plus 150 basis points and we entered into interest rate swap contracts that effectively fixed the interest rate at 4.77% until January 2, 2013. The loan matures on April 1, 2015. $225 million of this financing was funded in late March and the remaining $115 million was funded on May 1. We also financed two acquisitions during the first quarter. For the Honolulu Club acquisition, we obtained $80 million loan at a floating rate of LIBOR plus 125 with a term of two years plus a one-year extension. We financed the six-property office portfolio that we acquired at the end of March with the $380 million bridge loan that matures on January 2nd of next year. We anticipated that we’ll obtain long-term financing over the next several months in order to repay the bridge financing. As a result of the financings that we obtained during the first quarter and the completion of the final funding on May 1st, we now have approximately $300 million available under our secured revolving credit facility. In addition, we don’t have any debt maturities through the end of 2009 excluding the previously mentioned bridge loan and the credit facility, which matures on October 30, 2009 but has two one-year extension options. As Jordan mentioned, we intend to contribute the six-property office portfolio that we recently acquired to the fund upon its first closing. This will result in a reduction of our current leverage. In the interim, we remain financially positioned to take advantage of acquisition opportunities as they arise. We continued to buyback shares this year. During the first quarter, we repurchased 1.1 million share equivalents for approximately $23.8 million or $21.48 per share. On the operational side, excluding the six-property office portfolio that we acquired on March 26th, our overall office portfolio was 95.3% leased at March 31st 2008, up 10 basis points year-over-year, but down 40 basis points sequentially. Rent paying occupancy was 94.3% at March 31st 2008, up 50 basis points year-over-year, but down 70 basis points sequentially. Our new six-property office portfolio was 88.9% leased and 86.5% occupied at the end of the first quarter. Our multi-family portfolio was 99.6% leased at the end of the first quarter of 2008, up from 98.7% leased at December 31st 2007. We entered into approximately 99 new renewal lease transactions totaling approximately 474,000 square feet of office space. Our office TIs leasing commissions and other capitalized leasing costs during the first quarter totaled $12.54 per square foot as compared to $14.93 in the fourth quarter of 2007. As was the case in the fourth quarter of 2007, these numbers are impacted by a few large low TI deals. In general, we believe our capitalized leasing cost have remained relatively flat since the third quarter of 2007. In February of this year, when our joint venture acquired a small office building in Honolulu, it also acquired the assets of the private membership athletic and social club that is located in the building. As of May 1st our joint venture transferred the assets of the club to an unaffiliated sports club management company and entered into a 20-year lease with them for the club premises in the building. Our mark-to-market and rent rollout metrics increased year-over-year and declined from last quarter. However, they remain at levels that represent healthy signs, with signs of healthy internal growth. On a mark-to-market basis, excluding the newly acquired six property office portfolio the spread between our in-place cash rent and our asking starting rent, increased year-over-year to 31.2%, up from 25.7% at the end of the first quarter of 2007 and down from 35.4% at the end of the fourth quarter of 2007. On a straight-line basis, the average rent from expiring leases compared to the average rent from new leases signed for the same space in the first quarter of 2008 increased to approximately 38.2%, up from 31% year-over-year and down from 55% in the fourth quarter of 2007. On a cash basis, the ending cash rent from expiring leases compared to the beginning cash rent from new leases signed for the same space in the first quarter of 2008 increased to approximately 21%, up from 14.7% year-over-year and down from 33.9% in the fourth quarter of 2007. As we wrap-up with our prepared remarks, I’d like to conclude by updating our 2008 FFO guidance. Our updated 2008 FFO guidance is $1.28 to $1.32 per diluted share. Our previous 2008 FFO guidance was $1.25 to $1.29 per diluted share. This guidance assumes that we will have an initial closing of the fund by the third quarter of 2008 and continues to exclude any impact from future acquisitions, dispositions, additional equity purchases, debt financing for other recapitalization. With that, I’ll now turn the call over to the operator, so we are going to take your questions. Question and Answer

Thank you, sir. [Operator Instructions]. And our first question comes from the line of Michael Bilerman with Citi. Please go ahead. Michael Bilerman – Citi: Hi guys [inaudible] with me as well. Just a quick question on the marked-to-market, you talked about it sequentially going down about 400 basis points, but I know we are mixing in that in a bunch of different things. But Jordan you talked about rents in your market sequentially actually being up and at least the leases that you signed in the quarter had cash rent spreads of 21%. So I am just trying to figure out if you have lowered your asking rents or if you have… or market rents really not up for that spread scenario? Jordan L. Kaplan – President and Chief Executive Officer: Well, market rents… first of all, I have never been in love with that metric, but the bottom line is that first you have got the rents that are rolling of being from a peer, you know being from a later and later period where rents were stronger. So you are making a comparison that doesn’t that’s still in both by the beginning rent, the rent from the old lease and then we are asking rents and so that would naturally narrow as it moves forward. The question is to where the rents were generally moving up on March. I think they are, the zestful of movements it’s really hard to tell. I mean you can anecdotally point to leases where you say look rents are going up and you can anecdotally point to leases where they’re flat. And I don’t' think there is a long enough trend to really make a statement that they are absolutely flat or they are absolutely still going up. They have certainly slowed down their pace. Michael Bilerman – Citi: Right. But thinking about 400 basis points sequential decline in your mark-to-market, that’s a pretty dramatic decline in one quarter when you talked about rents being flattish and even the lease that you signed, it shouldn’t cause that much of a decline? William Kamer – Chief Financial Officer: Mike, this is Bill. One of the things that has been noted is the metrics that we are using on deal signed during the first quarter, it’s heavily depended on the mix of transaction. So the actual leases that we are rolling off of the particular deal and the mix across various sub markets. So that number is going to tend to bounce around and I think we should expect that it will continue to bounce around as we go forward. Michael Bilerman – Citi: You talked about only reporting same-store NOI growth where you had a comparable quarter, which should be this quarter, just comment on what you same-store NOI cash basis was for the office and apartment portfolios? William Kamer – Chief Financial Officer: Right. We’ve been waiting for this to have data that we were comfortable going forward represents a good comparison. In Q1 of last year which was our first full quarter as a public company, based on estimates that we are using on the expense side at that point that got adjusted in the subsequent quarters, it wasn’t a good quarter to just start that comparison with. Our intention at this point is that we will be providing same-store data starting next quarter. Michael Bilerman – Citi: And your expectation for same-store growth for the year is -? William Kamer – Chief Financial Officer: We will talk about it next quarter. Michael Bilerman – Citi: Erwin [ph] had a question.

Hi, I’m just wondering realizing that you probably don’t want to get into which specific assets you are interested in, on the deal volumes that you expect to, to come to market that you are currently tracking, what it is the dollar volume of assets that you are tracking or that you expect to come back and what is the split between office and multifamily? William Kamer – Chief Financial Officer: Well, let’s see. There is a pretty strong pipeline, certainly $1 billion plus. In the actual deals that you do that number could swing dramatically. There are some residential and then there is some large office. So if you end up hint of hitting it on the large office, it could be mostly office, if you end up hitting a large residential and some office, I don’t know how that will play out. In terms of the pipeline itself, there is a good amount of both, but I think it is coming. Michael Bilerman – Citi: And can you just talk about, if you are seeing any movement at all from West LA into Downtown, I know this is something that people talk about, something that you hadn’t seen it until now. Is any of that sticker shop starting to take effect? William Kamer – Chief Financial Officer: No, not really. As I said before, when you hear about a tenant moving from West LA to Downtown, it’s the sort of exception that proves the rule. It makes into the paper whereas, there are tenants moving out of Downtown to the West side all the time. So the West side is pretty tight now. So maybe there is not as many tenants moving to the West side, but still going to hear about a lot of cases. I think I just read something somewhere that said there was one tenant that was maybe thinking about moving Downtown, but I am not seeing Downtown as a significant drop to West side. I think that just to answer more than you asked, I think the tenants are evaluating the West Valley and areas in the Valley more, because there they can do they might… you might have a law firm or something that has – because there are some pretty expensive housing out in the Valley and you might have a law firm that have some partners living in the Valley and have partners living on the West side. They used to have the attitude that, Oh, we all need to be together, team approach and then now that it’s gotten expensive and even more driven by commutes than cost. Some of the guys in the valley might have just been screaming for so long saying, hey we want a satellite office that we can work out of, so we won’t have to driven in every time. We have tenants in our portfolio that both have leases with us here on the West side and in the Valley where some partners go to Valley, some partners on the West side. Michael Bilerman – Citi: Thank you.

Thank you. Our next question comes from the line of Ian Weissman with Merrill Lynch. Please go ahead. Ian Weissman – Merrill Lynch: Yes. Good morning, good afternoon. Jordan, the West side has actually held up pretty well, if you look at the latest broker statistics, but maybe you could talk specifically about the North LA suburbs, specifically Woodland Hills, Warner Center where you had vacancy go from let’s say the high-single digits to the low teens. Obviously the mortgage market has affected that and there is a lot of sublease space, what is sort of your outlook for that market and where you expect rents to go over the next, call it 6 or 12 months there? Jordan L. Kaplan – President and Chief Executive Officer: Well, I think that it’s one of the markets that we are in that have some… still have remainder of some larger tenants, and it was a market that was still in the process of reaching its full potential as things started to turn. So it’s probably… I hate to use the word, tough, or say it’s one of our tougher markets to lease up, because we are leased up into the 90s there, it’s still a very good market. Over the short term now, I suspect that to the extent there is a fall off in the pace of rental growth, you will see it more there than you probably see it in some of the other places. In terms of the market over the long-haul, I still believe it’s a very good long term market to be in because there is a great mix of housing and the population or education and workforce and amenities and if you live out there and you work out there it’s a very comfortable commute to work as opposed to the tightness that we feel on the west side. So I still like that market a lot. That’s also got; we are starting to really develop a good set of [inaudible] and whatever you want to call all the people that don’t want building in their area. So I am really getting more and more comfortable that you won’t to see a lot of aggressive new product coming on. Ian Weissman – Merrill Lynch: I mean, rents were up 30% in that market over the last call it four years, but at mid teen vacancy, I mean, do you care to just put a number on where you think rents could pull back over the next 12 months? Jordan L. Kaplan – President and Chief Executive Officer: I don’t know. I don’t know. I mean, they’ve been climbing quickly for the last year or so. So it’s… maybe you loose 5%, maybe you even… yes, maybe you loose 5% to 10%. But even there it’s not as though you are so much space that there is tons of options for every tenant. So depending on what you are kind of what you are dealing with, I mean, there is some sublease space that’s coming on, but sublease space for large tenants doesn’t necessarily always work. I mean, they need a direct deal, they wanted different sort of deal, et cetera. And we bought a building out there recently. One of the buildings in the arm portfolio that had some real vacancy right next to the buildings we have, but they are over 90% and we are feeling pretty good about being able to lease it up. I mean, there’s good amount of deal flow out there. So, it’s not dead, guys are still going there and growing there. So, but it is, countrywide is farther than that, farther north than that and we’re all going to have all have that, they would have an impact on that market although they are not in as much in that market as markets that’s near it. Ian Weissman – Merrill Lynch: And my last question relates to the deal flow that you think you’ll see on the market. You guys have always had a pretty high hurdle rate in your underwriting, but you are obviously getting more excited about the prospects. That only tells me that pricing has pulled back let’s say over the last 12 months. How do you… I know your underwriting hasn’t changed, so what would say has happened to evaluations over the last 12 months in your core markets? Jordan L. Kaplan – President and Chief Executive Officer: Well, Bill has something to add to the… William Kamer – Chief Financial Officer: I was just going to say on the issue of the short term increase in vacancy in the West Valley, which goes to the issue of supply and which is one of the reasons that we’re really feeling bullish about things as we are moving forward. As you probably remember, that market… that sub market is one of the few where there was any new supply coming on stream at all and there, there was in this past year 250,000 feet got added on the L&R project. That hit the market; there is currently nothing, literally nothing under construction out in that market. So that is in part… that coupled with as you suggest to the extent there were mortgage tenants in our markets, they were located there. So, the combination of those two factors is the factor that is leading to the short-term increase in vacancy, but those issues are largely moving behind us at this point. So that’s the reason we feel good about things going forward. Jordan L. Kaplan – President and Chief Executive Officer: And then to answer your other question, we are feeling good about it because pricing has come back to more rational numbers and to answer your question directly, I think that pricing is maybe off 10% or 15%, it’s tough because 10% or 15% of work is I want a lot of trades like individual buildings where you could say, okay, that was the high point. So, I’m really coming up a kind of a set of values that I… few good things were out in my head even though maybe not a lot was trading, but that I could kind of extrapolate value from a few trades and maybe a few backup bids if they were. Ian Weissman – Merrill Lynch: Okay. Thank you very much. Jordan L. Kaplan – President and Chief Executive Officer: All right.

Thanks. Your next question comes from the line of David Harris with Lehman Brothers. Please go ahead. David Harris – Lehman Brothers: Yes, good day guys. Is it possible to talk about the terms that you are offering to the investors on the fund in terms of the management fee structure of the promote, what sort of leverage you might be adopting within the fund? Jordan L. Kaplan – President and Chief Executive Officer: Yes, I don’t mind saying that. It’s basically… it’s basically a fund where the asset management fee is 1.25% and the leverage, the expected leverage levels will really range between 50% and 65% for office with a maximum of 65% on office and for residential, that will range between 50% and 70% with a maximum of 70% leverage on residential. The promote is effectively there is some little minor twist to it, but it’s basically 20 over… 20% over an 8 and it’s expected that the we will invest… take a position also equivalent to 20% equity position. So, we will have a 20% equity investment and we’ll have a promote that’s 20% over an 8% return. David Harris – Lehman Brothers: And the GE buildings that you referenced or the six-tenth if I should be characterizing them in a different way, the recent acquisition of the buildings that you are putting, would those go in a cost for you, you with being able to mark up? Jordan L. Kaplan – President and Chief Executive Officer: Basically, they would go in at our costs plus an 8% return, an annual 8% return on the equity we have invested and we bought them into an LLC and we’ll just transfer, so we have a certain amount of equity, we’ll put in the LLC to make that transaction happen that came from the REIT and then when we transfer it over, we’ll just transfer that LLC interest over, not having taken out any income from the earnings of the properties and what we will receive back is just 8% on the money for so long as it… was in there before the transfer. David Harris – Lehman Brothers: Okay. One final point of detail on the structure is what the life of the fund going to be? What the overall [inaudible]. Jordan L. Kaplan – President and Chief Executive Officer: It is a four-year acquisition period with a ten-year life and then to have extensions it takes vote of the investors. David Harris – Lehman Brothers: Okay. And did acquisition trigger any probability in issues or could you [inaudible] Jordan L. Kaplan – President and Chief Executive Officer: It triggers a prob. 13 reassessment and as you guys know that and with us trying to get it, that’s not a quick process, but it’s in process. David Harris – Lehman Brothers: And then, could you give us any idea of the magnitude you are on the road? Jordan L. Kaplan – President and Chief Executive Officer: The magnitude of what? David Harris – Lehman Brothers: The magnitude of your underwritings in terms of the prop 13 impact. Jordan L. Kaplan – President and Chief Executive Officer: We’re not covering. I mean what we underwrite, it won’t far off from where it will end up, a lot… you can, when you buy a property and you just buy an individual, a single asset, a lot of times you can just do the 1% of that purchase price and it’s done quickly. As soon as you get into a portfolio with allocations and there is adjustments for a variety of things, you end up having a… numbers move a little bit here and there, not dramatically and so our… how those numbers fall out, I do not believe will impact our anything you guys are looking at in any material. David Harris – Lehman Brothers: Okay. And then one final point on the fund if I may, should we think of that being purely that your acquisition of stabilized assets would may require some repositioning CapEx, but certainly would exclude development. William Kamer – Chief Financial Officer: No, everything we do was very limited exceptions that are peculiar to the REIT or for different reasons, we would be done through this. So if we think there is a deal that’s good development deal, we would do it to the fund and whether it would be office, residential or any other product and it would be done through the fund. David Harris – Lehman Brothers: Okay. Forgive me, one final question and I will leave before, but is it conceivable that you could use OP units to acquire properties within the fund structure, without something you just wanted to keep on the balance sheet. William Kamer – Chief Financial Officer: You couldn’t use OP units to… of the REIT to acquire properties to the fund, but of course a fund, a person that has a piece of property that wants to invest in the fund and assuming we want the property, could contribute the property into the fund and then they have a healthy interest in the fund equivalent to the equity value that we had agreed to, that they contributed. Jordan L. Kaplan – President and Chief Executive Officer: And we are also maintaining the flexibility that if there was someone with the property that make sense as appropriate for them to come in without being into the REIT under that, that would be one of the circumstances where the REIT could still acquire. So we will maintain our flexibility. David Harris – Lehman Brothers: Okay. And just want to understand, in that scenario Bill that you just outlined, that property would remain 100% on your balance sheet or you still have the option to take it into the fund? William Kamer – Chief Financial Officer: Let me just say, we were pushed to having go in the fund. So it would only be in this situation where someone came and there was absolutely, they went out and do anything except for take OP units. If we could get in and go into the fund and take a position in the fund and that’s what we would do. So that’s for sure, our best interest and what we really want to happen. It would be in a very rare circumstance where someone came and said I will do this deal with you but it can only be done with OP units, I don’t want to go into the fund and if we thought that that was something that we wanted to do then it could end up being an asset of the REIT. David Harris – Lehman Brothers: Okay, great. Thanks very much guys.

Thank you. Our next question comes from the line of Rich Anderson with BMO Capital Markets. Please go ahead. Rich Anderson – BMO Capital Markets: Hi, thanks and good morning still guys. Jordan L. Kaplan – President and Chief Executive Officer: Hi, Rich. Rich Anderson – BMO Capital Markets: I just wanted to clarify, the mark-to-market numbers 31.2, that’s the higher office portfolio Honolulu and LA? William Kamer – Chief Financial Officer: Yes. Rich Anderson – BMO Capital Markets: Okay, I just want to make sure that. The higher guidance, is the increase in guidance a function exclusively of the fund? Jordan L. Kaplan – President and Chief Executive Officer: It’s primarily a product of the acquisitions that we did in the first quarter. Rich Anderson – BMO Capital Markets: The fund would… you would lose NOI, right the REIT would, you gained fees but I don’t know would the fund be initially sort of additive to your FFO outlook? Jordan L. Kaplan – President and Chief Executive Officer: Well, because we are assuming, we are doing the fund [inaudible]. So you mean if we removed the --. Rich Anderson – BMO Capital Markets: I am saying, you have six properties you bought, you are going to put them into the fund, lose 80% of the NOI, gain fees, like that? Jordan L. Kaplan – President and Chief Executive Officer: You mean over the long term? Rich Anderson – BMO Capital Markets: Yes. Jordan L. Kaplan – President and Chief Executive Officer: I think it depends on the success of the properties. I mean… I think we have so far the properties were contributing in the front, I believe will be very successful. So probably if you looked at and say, when you want to sell those on the REIT books and make a ton of money. But we are committed to this structure, the fund structure. The fees one way or another don’t… I mean they are not the big swing item. The big swing item is the properties are successful, then, yes; you would rather own them 100% on the REIT. But you will still do very well with them in the fund. Rich Anderson – BMO Capital Markets: Okay. Are you still able to get the 4.5% rent bumps without any problems in the market? Jordan L. Kaplan – President and Chief Executive Officer: We have been able in the first quarter and currently; we are still generally getting 5% bumps on the West side properties. And then outside the West side we are getting 4% to 4.5% depending on the deal. Rich Anderson – BMO Capital Markets: Okay. And where were the 5%, I missed that? Jordan L. Kaplan – President and Chief Executive Officer: West side. Rich Anderson – BMO Capital Markets: Okay. You mentioned that $1 billion plus acquisition pipeline Jordan. What do you think that number was this time last year? Jordan L. Kaplan – President and Chief Executive Officer: I think we were… there is probably, obviously the black stone [ph] so I don’t know how you are going to account that, but if you didn’t count that I felt it was real lonely sort of almost deserted. We were working on a lot and optimistic about almost basically nothing. Rich Anderson – BMO Capital Markets: Yes. Okay. Well figured. In terms of the portfolio acquisition fixed properties, how long were you looking at that, did you look at it maybe a while ago, and it went away from you and then now it came back, is that how sort of it went in this case or? Jordan L. Kaplan – President and Chief Executive Officer: No, no. What happened was, I think they were surprised by the fact that it became available, you remember that GE bought [inaudible] initially they made a sale and then sometime later they sold a huge number of their B properties making very large portfolio. And I think they have trying to gotten into the portfolio that they liked, and felt like it was big portfolio long-term in LA. And I think what happened was when GE saw it, we all heard that call when they saw that their earnings maybe going to be little loss the first quarter and in fact in their press release at the end of the first quarter when they closed earnings, they said one of the reasons they were off was value to consummate some sales before entering the quarter. So I think when they saw that coming they sort of sent an order down, the ordinance said we need to generate some earnings, you need to just make the sale of blank whatever was in billion, I don’t know what it was. And so Arden [ph] very quickly had to put up sort of portfolio of assets and try and generate those earnings and they had to close one in March. I think we were both surprised that that came up. But what happened was they actually… there was more than the six assets, there was 12, maybe 12 in LA, and 10 in San Diego, something like that and we started to working on it having gotten a lot of guidance that if we wanted to be competitive we would have to purchase the… all – maybe what we are going to do is San Diego stuff, they want us to do all 12 LA assets. And we really were struggling with that and that process really got going at a good clip let’s say at the beginning on February. And by the end of February, kind of launch in there we really felt like we could still get a very competitive price if we are… just for what we want it like really long-term want, not buying more than if we are going to sell so much, you’ve really never been very big. We’ve never been very big on and never like doing that. And so we put in our offer for just to six that we really want it and we are lucky enough that day and of course that time there is only 30 days less, so they really had to choose someone that they knew would when they made a deal will close because you are kind of documented the deal and closing at the same time and we were lucky they chose us and then we did do what we said and we closed even almost little less than a week early. Rich Anderson – BMO Capital Markets: Interesting. Last question, I think I don’t know if you used this word Jordan but at the beginning of your prepared remarks you said a tougher leasing environment were forced to look at externally and I think used the word force, but maybe not, but if that it was the word or some sort of derivative out, why would you use that word, what you feel force to look externally? Jordan L. Kaplan – President and Chief Executive Officer: I don’t think the word was force, I said while internal growth prospects remains strong changing market conditions are permitting a little more aggressively into the acquisition arena and really what I was saying was… Rich Anderson – BMO Capital Markets: Then I misheard you, I’m sorry. Jordan L. Kaplan – President and Chief Executive Officer: Okay. Rich Anderson – BMO Capital Markets: You don’t have to explain anymore, I apologize for that. Thank you very much. Jordan L. Kaplan – President and Chief Executive Officer: All right.

Thanks. Your next question comes from the line of Michael Knott with Green Street Advisors. Please go ahead. Michael Knott – Green Street Advisors: Hi, guys. Jordan, I apologize if I missed this earlier, but does the fund have any geographic constraints? Jordan L. Kaplan – President and Chief Executive Officer: It’s not worded very strongly right now, but it’s… the intention is pretty clear that the fund is constraint to Hawaii in the coast and the West coast. I mean I didn’t say, you absolutely can’t buy anything in Denver, but all of the purpose language of the fund is for acquisitions in the coastal markets and in Hawaii. Rich Anderson – BMO Capital Markets: But the coast probably defined not just your current markets? William Kamer – Chief Financial Officer: Up and down the coast. Rich Anderson – BMO Capital Markets: Okay. And what’s your observation if any about pricing movements over the last 12 months and markets outside of your existing portfolio and is that anymore attractive today than it was say six or 12 months ago? William Kamer – Chief Financial Officer: Well, I think San Francisco, I think one has a good long-term prospects and I don’t think pricing, I mean, may be it’s come off somewhat early to the way it has here, but for us to move into that market right now, we’ll want to come out even more, we have a higher comfort level here. San Diego, I’m seeing no assets that we’re intended to go and certainly want to – we would have wanted anyway and then I haven’t seen a lot come available there that you can really key into and say okay, here what’s happening with pricing there. Orange County is not a market we were ever focused in although there has been a lot of…. there is a lot of discussion of it because of its raw situation, but it’s not a market that we’ve ever had much of an interest in. Sacramento, I think pricing is off a little more, but hasn’t been a big focus for us. Does that give you an update on the markets? Rich Anderson – BMO Capital Markets: Yes, that’s helpful. I guess related to that, did you feel like the fund structure makes it incremental more likely that you could expand outside of your markets? Jordan L. Kaplan – President and Chief Executive Officer: No, it doesn’t make it more or less likely. It’s… the fund structure just… it doesn’t change what we would buy, I mean frankly our [inaudible]. So, maybe that I’m going to… I mean a reverse, which is being the public company was that changing what we would buy, but that wasn’t either obviously because we didn’t do anything last year because it didn’t meet the criteria we were used to dealing with in the fund structure. So, I don’t think it changes any of our thinking in terms of what we are… where we get to purchase. Rich Anderson – BMO Capital Markets: Okay, that’s helpful. And then, how much competition was there from other bidders on the Arden [ph] assets that you buy? Jordan L. Kaplan – President and Chief Executive Officer: Well, that’s a good question because I think there was very little competition for a larger portfolio and there was a lot more… I mean, they had multiple bids on all the single assets and I am pretty confident that the sum of their single assets bids were significantly higher than what we got the six assets for. But… and that’s… what’s interesting about that is that condition was reversed in ‘07. I actually believe that portfolios are trading for more than the individual assets would have traded for. And so, we’ve gone back to the more typical condition where if you are willing to buy a portfolio of assets, you’ll get them incrementally for a cheaper price and that’s what happened here, I mean they need someone with the money that could close quickly, give them a big sale, I mean it’s a lot of work to negotiate and purchase sale agreement and get a deal close. So, they wanted to have a real impact and I think it… my guess is that was worth between 5% and 10% beyond just the other pressures on the deal that got us a good deal. I think just the fact that they said to themselves, maybe even 10% maybe really… a real 10% on sales, hey, this is a… we could generate $600 million of let’s say the billion that we got to come out with, right here, bam, we know that’ll do it, okay, so it’s off by such $20 million, $30 million, so maybe it’s 5% of from what we could do on an individual asset deal, but it’s done. Whereas you do individual assets, one guy maybe does it and another tries to carve it and the other guy just blows out and you didn’t make your number. So, that’s a long way of saying I think that the competition at our level wasn’t very stiff, but on an individual asset level I think at really multiple bids on every asset. Rich Anderson – BMO Capital Markets: I’m sure, really helpful. Thanks. And my last question I’ll have before, what I’m assuming here, unlevered our expectation for your purchase is above the 8% hurdle rate at which the promote comes in the money, should we think of your fund as being seated with the big portfolio that’s sort of in the money with the promote from day one. Jordan L. Kaplan – President and Chief Executive Officer: Well, yes, my feeling about this portfolio is that I said this… I don’t know if I said this to you is that, when you are on a task… we have done funds. My best day is like okay the money is raised, we are done and that’s also my worst day, because it’s been on my… I am working on and also worried about placing the money effectively and getting the good returns out of it, so happy it’s raised and I am scared of not getting the money placed and nervous, like you caught frantic and working on finding good deal. And this is one of the first times when I feel like, I would like some… guys are good returns in the bank that we are contributing in this portfolio, I already know it’s a good chunk of the fund, it’s got good built-in, everyone… good returns for everybody. So I have got a little breathing room, having done my first big deal in this fund and knowing that it’s going to be a real winner in terms of going forward, it’s usually we raise the money and we haven’t bought anything yet. And so you are seeing there knowing that your first acquisition is going to be really scrutinized even though you know the investors don’t have really much say that what you buy, it’s still I will take a look at it. And so, it’s real nerve racking, but here I have this great winner that’s going in, so I am feeling as comfortable as I can ever feel in this business. Rich Anderson – BMO Capital Markets: Thank you.

Thank you. Your next comes from the line of Dave Aubuchon with Robert W. Baird. Please go ahead. David Aubuchon – Robert W. Baird: Thanks. Jordan, with regard to your acquisition opportunities, would you say… do you think there is more inefficiencies in the office market right now or the residential side? Jordan L. Kaplan – President and Chief Executive Officer: I think that the residential historically trades just tighter than office, and so I think the residential is more… a little more dislocated than office. I think there is a little more desperation on the residential side right now than there is on office and that doesn’t necessarily mean that you get better returns in residential than in office because residential always trades so tight anyway. But it’s loosened up let’s say more from where it typically is our office and then the office is loosened up, maybe that’s rightfully so though. I don’t know. Both have come off and there is product unavailable on both fronts. David Aubuchon – Robert W. Baird: And do you feel, since you’ve outlined a pretty good case that the initial contributed assets are going in at a pretty good return already do you think it’s likely that your next deals in the funds are going to be concentrated toward the residential side or should we not assume that? Jordan L. Kaplan – President and Chief Executive Officer: We are, I would say we have very good residential and office deals that we are right working on, I mean we’ve got good pipeline. I mean it’s really, and I’m feeling very good about it. You guys heard me last quarter or maybe last year, we are working on stuff and we are just getting there, it’s almost feeling like practicing instead of doing, now we are actually doing. David Aubuchon – Robert W. Baird: Your comments regarding large opportunities that applies to the residential side as well? Jordan L. Kaplan – President and Chief Executive Officer: Both residential and office. David Aubuchon – Robert W. Baird: Bill, a question for you, can you just update on the… where the share buyback authorization stands and how much it was? William Kamer – Chief Financial Officer: First of all, I want to welcome Dave Aubuchon back into our quarterly calls. We missed you last quarter. And on the issue of buybacks, we… what we have said before is that we don’t announce any authorizations we have, to the extent that we have, we do buyback, obviously with our approvals. But we are not putting out any number ahead of time to create expectations that we might buy when we are not… we will announce deals that we actually do. David Aubuchon – Robert W. Baird: Great. Thanks for you time.

Thank you. Your next question comes from the line of John Guinee with Stifel Nicolaus. Please go ahead. John Guinee - Stifel Nicolaus & Company, Inc.: Thank you.

Hi, John. John Guinee - Stifel Nicolaus & Company, Inc.: Hi there, couple of quick ones. Did you ever break down the price for building of the six assets you acquired for $610 million?

[inaudible]. The once we did on the buildings, it’s five buildings, separating value, allocating value, we did it. John Guinee - Stifel Nicolaus & Company, Inc.: No, did you disclose it an SEC document?

No. John Guinee - Stifel Nicolaus & Company, Inc.: Would it be appropriate to ask you to do that now?

No, I mean we have disclosed the amount we are going to disclose I think on the portfolio. John Guinee - Stifel Nicolaus & Company, Inc.: Got you. Okay. Second, just as a clarification, we're assuming you're paying... you are getting paid 125 bips on the equity, not the whole gross fund amount?

Yes. John Guinee - Stifel Nicolaus & Company, Inc.: And then, when you decided to go with the fund versus raising common, is this… are you raising the fund because it's in your D&A and you are very comfortable with that, or did you do a trade-off and say, look at 26 or more… $26 of share or greater, I’m more interested in raising common? And is there a cost of capital analysis that you did comparing the cost of capital raising the fund versus cost of capital of the common?

That's a very good question. I would say that we did announce as just what you are talking around. We looked at where our stock was, but it's… and we felt like it wasn’t even a close call, let’s just say, that we will be willing to be diluted. But I also think it's fair to say they were prejudiced by our D&A. John Guinee - Stifel Nicolaus & Company, Inc.: Got you. Thank you.

Thank you. Your next question comes from the line of Mitch Germain with Banc of America Securities. Please go ahead.

Hey, good afternoon everyone. Just a couple of quick questions, and I apologize if I missed this. The entire six-tenths [ph] can be contributed at once?

Yes. It's in an LLC. We're just going to transfer the LLC interest over to the fund.

You mentioned that, but I just wasn’t sure. And I know that you guys have planned some redevelopments on a couple of the assets. Just to clarify your comments, that'll be done within the fund?

Yes, it's going now.

Yes, it's all happening within the fund.

Yes. Well, It's all happening within the LLC.

Got you. And just... how does it work? Does the fund have right for first refusal on any future investments?

No. The… we're practically the general partner or we're in charge of the funds. So, I mean if we think something is good to buy then we're buying it for the fund. It's not... there isn't some other kind of fund group that decides that they want something to go [inaudible] we’re it.

So, basically the fund vehicle will be your sole acquisition vehicle on a forward basis?

Exactly. The entire external growth strategy of the REIT is being executed through the fund.

Thanks, Jordan.

Thank you. Your next question is a follow-up from the line of Michael Bilerman with Citi. Please go ahead.

Yes, just to clarify, the $500 million to $1 billion, that's the total enterprise value of the fund or is that total equity?

Equity.

Great. Thank you.

Thank you. Your next question is a follow-up from the line of David Harris with Lehman Brothers. Please go ahead.

Hi, [inaudible] fun question today. Hey, is there a chance that... does the… or should I say, does the recognition of the promo, is that going to be possible at any time other than the winding up of the fund, i.e. could you harvest this up to three, four, five years or something?

Well, actually what happens… and we've been spending a lot of time on this issue. It's funny you should ask about it or about how the fund’s accountings impacts the REIT and what isn’t reflected in the REIT's numbers and in FFO and going through the AFF. The... typically, funds and especially when you buy properties in a firm like this and you have these type of investor, you do... you're working on a very tax-efficient structure. Now, we happen to be very focused on being tax efficient as a REIT because we just like being tax-efficient. So, we’re actually as REIT managers more focused on tax efficiency than on, let's say, driving up some particular metric like the FFO or AFFO. So, we’ll always take sort of the tax savings route. The funds may... where you see the impact of the promo in a fund is as a property’s cash flow is growing value, you'll go out and you'll refy and you’ll generate distributions from those refis that are tax-free and I suspect also will flow through and not be taken in really as income, but when you are private and you own a fund you think that's a great day, right, because you're getting cash. And I think the REIT will be happy it's getting cash too. So, I'm not sure that I think you might see… other than the asset management fees, I think you might see a real lag in the recognition of the success of the real estate owned by the fund until we actually do go and sell the properties, even though we will be getting economics... published and pretty good economics from the fund.

It becomes a little challenge for us to include that by the way of valuation. Obviously, you can get at it more from an NAV perspective or an FFO. The other question I have got is you point out that starting a fund with $610 million of specified properties and it is in contrast to what you’ve done before where you have outlined pools, which is pretty standard model of course.

Yes.

Did that affect your hurdle, i.e., wouldn't the hurdle have benign have you not been willing to put the $610 million in? I mean it's a great comfort to the investor to see the $610 million rather than a sign-up to a blind pool, isn't it?

Yes. I guess. No, it didn't affect. We actually are using with very, very small variations. The terms are the same as our terms of our last funds when we were a private company. So it didn't affect anything. I think we actually I am glad we did that deal and it’s a real good deal because it's encouraging. It's helping speed investors along, let's say, in terms of getting subscriptions and commitments because even though we have an incredible track of record, which you guys have all seen in our S-11 our last… in the nine funds we did as a private company, I think we’re being looked at a little bit as sort of a new… a different sort of animal right now because we are... it's a public company, it is the general partner as opposed to Dan, Ken, Chris and I. And so, the same way, you're answering little bit that to the public, you have an obligation… public company, you have an obligation to the fund. Well, very similar questions you guys were asking. And so I think we have to prove ourselves up again with the public REIT being a good GP, a good producer for the fund, and so this deal helps us rebuild, let's say, in our new uniform credibility as good fund managers because that's a structure that we want to continue and get back firmly in place the way we had it in place in the past as a private company. The other little bit of a headwind that were running up against right now is that we aren’t typically… we don't typically promise [inaudible] the returns that we've actually delivered. I mean we have delivered returns that were well north of 20 IRR, and we typically promise once more conservative returns and we’re not… we don't go and say, we are doing… we're jumping around the markets where people are really on their heels. And so when we out raising money, I do hear a lot from people like they're kind of hopping today as they want to be in distressed debt or distressed equity. Distressed is just a word everybody is focused on. And yes, I love to buy those sort of highly distressed situations, but it's not exactly what we do and we are describing the fund as doing really what we do [inaudible] what we did on the last nine funds. And so that's a little bit of a headwind because I think most people are sort of allocating money, particularly money from foreigners, that are allocated in US dollars, I think they're allocating them for, let's call it, distressed situations. And we don't describe ourselves as being acquires of distressed situations. We have a strategy that you guys are today with in the markets that we're in.

What are the returns that you are indicating to investors that you are talking to today, the 15?

We are telling investors the same thing that we told them on all nine of our last funds, which is that we will deliver to them… to the investor between an 11 and a 14 IRR. Now, we dramatically outperformed that on every fund, but that's what we say.

And that's what, net of fees and net of taxes?

Net of everything. Well, not net of income taxes, but, yes. It's their distributions, which they received, their checks and the cash flow… they are making investment and the cash they get back to the investors after everything will be between an 11 and a 14.

Okay. Great. Thanks so much.

All right.

Thank you. Our next question comes from the line of Michael Knott [ph], Green Street Advisors. Please go ahead.

Hi, Michael.

Hi, Jordan. I missed the first couple of minutes for the call. So this may have been spoken about earlier, but it sounds like you're pretty far along with this fund and it seems like a pretty wide gap to have to have between $500 million and $1 billion of committed equity. What’s the likelihood that it’s hit the lower… upper end of that range, and what's the timing for when it will be settled?

Well, we haven't had a first closing. So, we’ve given ourselves room in terms if you guys don't want [inaudible], but the reality is… I mean I actually just described on the… maybe with the last question that was I asked that in one sense I think we are getting a good response, but we are running up against the headwinds of most of that like there is a lot of big foreign investors that can write very large checks. But they do seem to be incredibly focused on [inaudible] distress, whatever situations, [inaudible]. And so, I think… I have been doing a lot of traveling and I think that when we meet with them, we’re able to catch their attention and obviously when they see the returns that we’ve delivered in our last funds that catches their attention and when they see what we have done here in the markets that we we're in. But until we really lock those subscriptions down and see where they are at, I won't really know… we are comfortable giving that range of $500 million to $1 billion. And maybe the $1 billion and maybe $500 million.

Okay. And then just to be clear, the promo structure is based on everything over [inaudible] on an unlevered basis, right?

No, it's not levered or unlevered, it's the IRR to the investor. So once the investor has received their money back with an 8% return, then the promo kicks in.

Right. So an 8% on their equity?

Yes.

Okay. Thanks.

Thank you. Ladies and gentlemen, this concludes the Q&A session of the call. I will turn the call back over to Mr. Jordan Kaplan for his concluding comments. Mr. Kaplan?

Okay. Well, I guess that the summary from all of the discussion that we've had is that I feel like Douglas Emmett is very well positioned to weather any potential economic storm with our team and our position obviously of multi-family portfolio, and I also feel like we are in a great place right now to take advantage of what's going on in this market. So, I hope you all enjoyed the call and I appreciate you joining us today. And we'll see you next quarter. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for your participation. And at this time you may disconnect.