Douglas Emmett, Inc. (DEI) Q2 2008 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's 2008 Second 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.

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 markets, 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?

Thanks, Mary. Hello everyone and thank you for joining us. We are pleased with our second quarter and six months operating results. The national economy's substantial negative headwinds blowing from the east have not left us unscarred, but generally our portfolio is performing well, due most recently to the strong supply demand leasing fundamentals of our sub markets and the strength of our operating platform. There is virtually no new supply coming on line in the foreseeable future in our sub-market and modest amounts of new supply in the peripheral comparative areas. In fact our portfolio experienced positive absorption during the second quarter of 2008. Our stock of small tenants their well diversified across several vibrant industries provides a further buffer to the micro economic headwinds. Generally speaking, our tenant's businesses remained strong as evidenced by our low default rates during the second quarter and the fact that about 20% of our tenant renewals included additional expansion space. However the national economy has had an impact on our markets. Asking rents have pulled back from the extraordinary rental increases of 2007. Tenants are seeking shorter lease terms and it is taking longer to complete lease negotiations. The conservative pause we took regarding new acquisitions in our balance sheet during 2007 has put us in a good position to take advantage of the acquisition opportunities in this more capital constrained environment and we are very pleased with our 2008 acquisitions to date. Notably during the second quarter, we not only have positive absorption portfolio wise from a healthy combination of new and newer releases, but our leasing team was able to reduce a 140 basis points of net positive absorption in the newly acquired office portfolio since our acquisition at the end of March. That recent acquisition is now 87.9% occupied and the capillary health [ph] program for the new properties is well underway. We continue to expect that a number of large attractive acquisition opportunities will develop in our core sub-markets. We are focused on increasing our capital availability without putting too much stress on our balance sheet. Much of my time, during the second quarter was spent on raising money for respective closed end funds that we have discussed in recent months. The total equity in the fund including Douglas Emmett's contribution should be between $500 million and $1 billion and we anticipate that the initial closing of the fund will occur during the third quarter of this year. The recently acquired six property office portfolio would be contributive to the fund and the fund will become the primary acquisition vehicle for the REIT. Now I'd to update you on the Los Angeles and Honolulu markets statistics. During the second quarter, average asking rental rates within Los Angeles County increased 6.1% year-over-year to drop 1.7% sequentially. Honolulu County asking rents increased 5% year-over-year but dropped 68 basis points sequentially. Asking rental rates within the ten sub markets where our office properties are located increased 6.9% year-over-year but dropped 4.5% sequentially. Office occupancy in Los Angeles County at June 30, 2008 was 90.2% compared to 90.8% at the end of the first quarter. Office occupancy at Honolulu County remained flat at the end of the second quarter at 91.8%. Within the 10 sub markets where Douglas Emmett's office properties are located, occupancies declined sequentially by approximately 80 basis points to 91.6%. As I have mentioned in the past, these asking rents and occupancy declines are within expected normal course of any real estate cycle. To-date we haven't identified any one economic trigger that will significantly impact the health of our particular portfolio or our markets. This is the point in the real estate cycle when the expertise and experience of our operating management group and leasing team is most evident and I am gratified by their performance to date. Our management team in general has worked together in these markets for more than 20 years through many real estate cycles. We will use our past experiences to guide us through this next cycle. It is my hope that as we have in the past we will turn this cyclical downturn into a growth opportunity for the company as a whole. Now I would like to turn the call over to Bill Kamer who will provide specific details on our second quarter operating results. Bill?

Thanks, Jordan. First of all, I should say that we have survived this shaky environment quite well. Of course by shaky, I am referring to the earthquake that went through the Los Angeles area last Tuesday. Seriously the 5.4 magnitude earthquake was the largest quake in Los Angeles, since the Northridge earthquake that occurred in January 1994. We are happy to report that there was no damage to any of our properties and that we are confident that the quality of our portfolio makes it resistant to future shocks, be they seismic or economic. I will now provide details on our quarterly financial and operating results, and I will conclude with updated guidance for the year. For the second quarter, the company reported FFO of $51.6 million, for $0.33 per diluted share compared to $48.7 million or $0.29 per diluted share for the second quarter of 2007. For the first half of 2008, the company reported FFO $105 million, or $0.67 per diluted share compared to $95.1 million or $0.57 per diluted share in the first half of 2007. As you may have noticed from the earnings package that we sent out last night, we have begun to report same property operating results. Comparing the second quarter of 2008 to 2007, same property net operating income increased 6.1% on a GAAP basis and increased 11.5% on a cash basis. Same property office revenues increased 5.2% on a GAAP basis and 8% on a cash basis. Same property multi-family revenues decreased 2.4% on a GAAP basis and increased 3.6% on a cash basis. The GAAP decrease is explained by a decline of slightly less than $1 million in FAS 141 income for the second quarter of 2007. This decline resulted from the expiration during the second quarter of approximately one-half of the multi-family FAS 141 amortization, that commenced at the time of our IPO. Going forward FAS 141 multi-family income should total slightly less than $900,000 per quarter for the remainder of 2008, gradually decreasing thereafter. Moving away from same property statistics, total revenues for our entire portfolio increased 17.7% to $149.4 million in the second quarter of 2008 compared to $127 million in the second quarter of 2007. Office rental revenues increased 20.8% year-over-year to $132.4 million in the first quarter. Our total FAS 141 income for the second quarter of 2008 was approximately $11.5 million. On the expense side, for the three months ended June 30, 2008, office operating expenses increased 16.7% to $36.6 million, compared to the second quarter of 2007. Multi-family operating expenses for the second quarter were $3.8 million, down 2.9% compared to the same period in 2007. G&A in the second quarter of 2007 totaled $5.7 million which was 11.9% higher than the same period last year. We are maintaining our previous estimate, that total G&A in 2008 will be between 23.5 and $24.5 million. Interest expense in the second quarter of 2008, increased to $51.8 million from $38.3 million in the second quarter of 2007. This increase is partly attributable to the non-cash amortization of pre-IPO swaps, which totaled $5.5 million in the second quarter of 2008, as compared to $3 million in the second quarter of 2007 and $1.8 million in the first quarter of 2008. We expect that we will continue to have significant volatility, in our quarter swap amortization, interest expense, until the pre-IPO slots are amortized to zero. Recurring office capital expenditures averaged $0.20 per square foot for the first six months of year and $0.13 per square foot for the for the second quarter. Recurring multi- family capital expenditures averaged $192 per unit for the first six months of the year, and $100 per unit for the second quarter. Due to the timing of CapEx projects within our portfolio, we are still estimating that annual recurring capital expenditures for our office portfolio in 2008 will approach $0.50 per square foot, and that annual recurring capital expenditures for our multi-family portfolio in 2008, will approach $600 per unit. Now I would like to turn to our debt position. At June 30, we have an outstanding balance of $74 million under our $370 million secured revolving credit facility. We do not have any debt maturities through the end of 2009, excluding the bridge loan that we obtained in conjunction with the six property office portfolio acquisition at the end of March and our revolving credit facility which matures on October 30, 2009, but has two one year extension options that we have the right to exercise. We are currently in the advanced stages of obtaining long term financing to repay the bridge loan and anticipate that we will have further information to announce, concerning this debt within the next few weeks. On the operational side, we had positive absorption during the quarter. Excluding the six property office portfolio that we acquired at the end of March, our office portfolio was 95.5% leased and 94.5% occupied at June 30. On both counts, up 20 basis point sequentially. Including the six property office portfolio that we acquired at the end of March, our office portfolio was 94% leased at June 30, up 20 basis point sequentially and 93.8% occupied, up 40%... 40 basis point sequentially. Our multi-family portfolio was 99.2% leased at the end of the second quarter of 2008, down from 99.6% at March 31. We entered into approximately 114 new and renewal office lease transactions, totaling approximately 396,000 square feet of office space. Our office TI's leasing commissions and other capitalized leasing costs, during the second quarter totaled $13.66 per square foot, compared to $12.54 per square foot for the first quarter of 2008 and compared to $14.93 in the fourth quarter of 2007. In general, our capitalized leasing costs have remained relatively flat since the third quarter of 2007. Our mark-to-market and rent lower metrics remain at healthy levels. On a mark-to-market basis, the spread between our in place cash rents and our asking starting rents was 27.7%, down from 33.9% at the end of the second quarter of 2007 and down from 32.4% at the end of the first quarter of 2008. 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 second quarter of 2008 increased to 43.4%, up from 34.8% in the second quarter of 2007, and up from 38.2% in the first quarter of 2008. On a cash basis the ending cash rent from expiring leases compared to the beginning cash rents from new leases signed for the same space, increased to 26.8%, up from 16.5%, in the second quarter of 2007, and up from 21.4%, in the first quarter of 2008. In conclusion, I'd like to now turn to guidance. We are revising our 2008 FFO guidance range to between $1.30 and $1.32 per diluted share. The previous FFO guidance range was $1.28 to $1.32 per diluted share. This range assumes the first closing of our ... of the company's closed end fund, which is anticipated to occur during the third quarter and excludes any the impact from future acquisitions, dispositions, additional equity purchases, debt financings or recapitalizations. With that I will now turn call over to the operator so that we may take your questions. Question And Answer

Thank you Kamer. [Operator Instructions]. Our first question from the line of Michael Bilerman with Citi. Please go ahead.

Hey, earlier got some sort of thing as well [ph]. Jordan you talked about how do you spent the most of the second quarter I guess in planes, going around and looking for capital. Can you just give us a little bit more color on some of those discussions and sort of what the appetite was, how you sort of dealing with trying to raise capital in this sort of environment, especially given, at least the lower initially yield that your going in to some of these acquisitions.

Okay, I will to answer the first part of the question, the first which is... its... people are generally have some trepidation about investing. They worried about the market continuing to go down. So it isn't easy to raise this type of money. So we are having a lot of discussions, and it hasn't been easy. But I still feel like, we are going to successful and we've had very many good discussions. So I think we are generally on track there. In terms of the returns, when you say lower return environment, I am not sure lower return environment compared to what, the higher return environment compared to the last year.

I am just saying in the perspective of trying to get people over the goal line in the core type product, where they are being faced with going in on this assets and the fours, low fives. A difficult financing environment and rent growth which is going the opposite way. I would assume that it's a more difficult thing to raise that capital today.

I think it generally hard... it's just generally hard to raise capital, All right. And so whatever your story, and I agree with... I guess like the premise of what you are saying, which is that, I talked to lot of people that there is a sort of shutdown; if I am not talking about distressed list, this distressed CAP, distressed debt, distressed equity. I mean, people really are looking to the invest in distressed situations right now, which means they are chasing... some very high returns. Our history is that we have not operated that sort of higher risks, higher returns end of the curve, but we have still been able to produce a pretty solid returns and on convertible debt we in what we are doing now and all said we are working on now, we will continue to be able to produce the pretty good returns that we have produced without having to take those, that cause distress to higher risks, make those higher risks bet. I don't think, unless someone is highly focused on concept of... doing only distress deals that hasn't really been much of a problem for us, I think more what we are facing is people that are, that have found themselves as a result of what they called the denominator affect, essentially, in many cases over allocated or over committed to And so they are more staying to us, at times when I' m surprised with some of them not coming in. its more because, hey we're just tied all the way around and we' re looking for ways to generate cash not make more commitments right now because they've been so surprised by how quickly the markets swipes all around. Then you got to guide us maybe in investigate funds for many years and is used to a certain level sort of. Put money out and the money coming back with their various fund investors, fund managers and now all the sudden, they are getting bad news and very little money being returned. And so its changed, its changed the way they look at things, and they become concerned, just like in any hide market or tough market, people shift to lying to hold a little more with liquidity and it been just a so much here in it state thing. And, I see that happening across the broad, but that we' re I still think that were, our Trap record and our stories good knock that we are going to succeed in raising this fund, and we would tell you guys if we thought that, this was happen that we feel it pretty good about it.

How much are you thinking by the raising in the first go around, in the first closing?

I don' t want to because the trying to get Emmett a bunch of people circled outside point I don' t but I think comment anything' s, but I think we'll have a healthy first closing but I also think we'll take months, to the end of the year, to really collect the fund.

Do you have enough capital on first closing to take down, the $600 million portfolio that you purchase.

It should about, yes, yes.

and then just a second question, you talked in your opening comments about, your renewal activity in 20%, was expansion was that the you said 20% of the tenants took expansion space?

Yes, I mean what this is it as [ph] bills been following a while aren't it and we stuck it in here, because if we just thought it was interest stock which is people focus a lot on the new renewal mix, a lot of time, and I think its cutting your mileage, your driving sort of TI high levels, but within the renewals its interesting to see I mean you can look at what' s happening with people are they shrinking are they expanding and, I will just look follow that step for a while and I was just that this market look, where we've got that help those passionate you are we are everybody has and I was just surprise to see still we were 20% of these people that renewing or actually taking additional space

And just for perspective how would that been trending and your 20% represents if the 200,000 square feet of renewals, you're saying it was an 180, or 160,000 and then it took in extra 40

Yes I don't want to get in to that fine line on it

Lets then understand what the 20% means?

Yes the 20% it's a snap shot in the most recent month that we have some data and that full month enclosed in the Jan and in terms of from a historical basis its roughly inline with what we seen there have been higher month there been some lower months over the last year or so, but roughly inline. The point of it really was in trying to get handle on early indicators of the health of the underlying health of our tenant businesses that's one measure that you still oppose that this business is that is still expanding another is the default rate which we alluded to which trended particularly lower in this last quarter well below our trend line. We are anticipating over future quarters little more than mean which is you recall we've discussed this previously. We have been running for the past eight quarters or so about 25,000 feet of tenant defaults quarter-to-quarter and so we were down like a 7,000 this past quarter I think it's going to do a little bit more than you have some higher quarters that coming up that it will get back more in line with that long-term trend. Another metric which we also like coding quarter-to-quarter because it' s volatile number when you look at the snap shot which is our account retention rate that was particularly higher this past quarter again I don' t like talking about the individual numbers because it sets an expectations that been little bounce around but it' s a little bit that better way looking at it is over the past eight quarters, we've averaged, definitely averaging in the trend of between 70% and 75% retention, which is ....the long term trend we've talked about and that trend is continuing on as well, so we feel that there is the mix of businesses that we have here in remain strong on the tenant side obviously...there is some factors feeling better and worse than others.

I think what you are seeing is we are probably, were as or more nervous than you guys and we are looking for ways to see kind of leading indicators of way things are going with our awful and the population and Bill hasn't work in through trying to follow some of these finer things to see if prove out be good indicators and we are [ph], I think his that questions before was when we say 20% is a 20% of the tenants or 20% lets call further tenants. Okay.

Tenant Okay, alright thank you.

Thank you.

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

HI Bill [ph] on a research side on line 5 and open for you.

Thanks Chris, it's happy to work for you.

We're looking at some of the same strategies. And to the indicators, so actually I'll be interested in what you guys are thinking over the next six months 12 months on the leasing side. What delivers term rent capital, are you more likely to pull today, than where you were six months ago?

You mean where do we see things backing up more?

Yes in terms of the deal that is 4 or 5 deals.

Beyond rents.

I think if you want to use rents too. That's fine with me.

Rents is where, its rental rate is flattening of run rates as where you see the most, we may get some gains in this last round. The market is still very strong. But in the last round sort of tenant fear that they want can a get their state I think we made some gains in terms of other let say little more subjective terms that you talking about and I don' t think, I think most of for our company and it varies and one point you are making which is the vary good point is these other terms can actually dramatically impact our lease but for our company we tend to let rate sort of move and we need to market and trying stay well leased and we trying hold on to some of those other more little more subject is not the right term for a head but its slightly that' s a economic terms because they make a difference for a long-term holders trying to build a good tenant population in good control on the a building. A point that Kenneth made with respect to these two terms that you are asking about to also then in past is that because some of the other land lords in the market may be that shore term land lords and they are trying to show higher face rates, they played a lot of games as some of these other terms [ph] when we saw in at extremely strong market, we saw some of our co-owners here it is free rent, which is very ...I guess lot of time you will see free rent down market you don' t see it any it up market. And they will do that because they want to show very high face rates and that has had some interesting benefits because it so confused the market with respective rental rates that still I think its hard for particularly small tenants and even a tenant brokers to put their finger on exactly where [ph] in any particular sub-market or building for that matter and its create a confusion that might you know swing thing as much as $0.50 where a guy [ph] can't get a handle on where $0.50 for the month, where a particular building is or a lease should be. That helpful to us, because we have a wide range of very strong data. So we aren't confused about where things are at, but having confusion on the other side is useful. I mentioned in my script part, that we are seeing a little bit of shortening of terms and that's because, I think panic... concern. I mean there is an attitude, more than anything, there is an attitude shift in the tenants, it's the fear that we are all having about where this economy is headed and that causes people to shorten things up, because people will negotiate a little longer, be a little more nervous about whether rental rate they are signing on to is right or has market shifted and they don't know it. That's all going on and that's were you see it.

Is there any positive. Thank you for that. Is there any positive offset with a short- term or you able to hold on your either contractual on rent bump or little higher initial rent?

Yes, that's a good point Chris, the... as Jordan was saying, we can... we tend to adjust rent rather then a lot of other terms and we've even in the recent deals and even with the flattening of the market, we are generally holding onto the contractual rent bumps of between 4 and 5% in the sub-market in the building, that's held up... pretty well, as a result. So we are getting back where I mentioned in my prepared remarks, that we are not at this point seeing a tick up in TI... TI packages. So generally, coming back your initial question, the driver that we are seeing adjusting is on the... is on the base starting right now, really on the other terms.

Thank you. And last question, it looked like although you had provided specific details on the San Fernando assets, the lease of assets. In fact there was minor progress, made. Could you give a little bit more color in terms of year-to-date?

Okay. This is on the portfolio we just filed for six buildings?

No, I am sorry. This is on the Warner and Warner Center et cetera.

Well. That the data that we did give were in the Warner Center within those markets were 91.2% leased at the end of June and we are on the... both the older assets that we owned in that summer, which is everything other than the one building we just... we acquired as part of the six building portfolio. We are... in all those buildings, we are up in, into the nineties. They are continuing to make progress. We had positive absorption in the Warner Center/Woodland Hills sub market in the second quarter. The newest acquisition which we acquired at about... I think it was about 75% occupied at the end of March. We are in the process turning that asset around. We made some physical changes to it, we focusing our leasing more on that mode, starting to see little bit of traction there.

And Sherman Oaks. Thank you.

Sherman Oaks were the... Sherman Oaks/Encino market were about 94.3% leased and we are... that's been a market that has been for us pretty close to the full occupancy level that we indicated that we see in our portfolio with the smaller tenant mix and that market is continued along very strongly.

Thank you.

Thank you and our next question comes from the line of John Guinee with Stifel Nicolaus. Please go ahead. John Guinee - Stifel Nicolaus & Company, Inc: Thank you, usually we don't get into this level of detail and I realize that FFO per share is of limited value here, given the amount of FAS 141 income that's flows through every quarter. But having said that, it looks to me like you have got to hit below that $0.32 quarter for the third and fourth quarter 2008 and you were at $0.35 for this quarter, if you back out a couple of cents and non-cash finance charges. So my question is how do you go from $0.35 to $0.32 a share in the third and fourth quarter?

Right, we... your initially part of the question which is trying to avoid getting into that level of terms, if you call and [ph] obviously we can follow up on details later. But let me just try to answer your question in a general way. There are two things going on; one is there is some significant non-cash income that we reported in Q1 that pre-set number of the... one of the big drivers was the significant drop in our non-cash swap amortization interest expense, was down at a $8million versus the call to normal run rate of that $4.6 million a quarter. I hesitate to refer it as a normal run rate because we not likely to ever see that actual number cause they just, as I mention remarks, it's a above the number that dances quarter-to-quarter, but just straight lining, it its about 4.6 million a quarter. So that pushed it up there. The second big driver and then I think I'll leave it there is the assumption that we are gone have an initial fund closing in the third quarter which in ... there is a lot of moving parts to that, but the general overview in terms of ongoing FFO is if it you reduces down ownership from a 100% to smaller percentage in the fund structure that reduces the ongoing FFO from those assets and that's the... that's probably the most significant item in terms of impacting the... particularly the fourth quarter. John Guinee - Stifel Nicolaus & Company, Inc: Great, thank you.

Thank you, and our next question comes from the line of Richard Anderson with BMO Capital Markets, please go ahead.

Hey, thanks... hello everybody.

Hey, Rich.

Hey, I... back on fund, if we could... are you... your conversation with potential fund investors, does the conversation ever get to a point where they say well, I know that this is sort of an open ended type of fund where you can do acquisition, development, re-developments and whatever office, multi-family. Did they ever ask you, well we will be an investor but could sort of maybe consolidate the structure, or what the fund can actually do. Is that happening in the negotiating process or you are going to stick with an open ended type of strategy?

What we say to them is the same thing we are saying to you, which is the fund is going to execute the external growth strategy that we have been articulating through the REIT. And so we are as you guys know, we are probably one of the easiest companies to understand in terms of our strategy in our markets and where we are and that's the same thing we tell them we are going to do with the fund. I mean I have been asked by you guys and we might get asked by them. I mean you can also set on Douglas in New York and I will not, no we are not. I mean when they ask about our pipeline and what we expect the character and nature of the fund to be, we pretty expect and we tell them it's going to be all the lines of the company and whatever we are 85% office, 15% residential less than 10% wide and then 90+% here, I mean we expect the fund to have similar attributes and I mean it's along those lines that we are the most confident of our ability to perform.

Okay. Got it, thank you. And then when you, you are talking about raising equity for the firm but how was the process or you know talk about the challenges that might be that might be face you guys when it comes to raising debt capital for the fund?

Hey, Richards, it's Bill. The big experience we have as probably is the best one talk about is I mention in my remarks where we're close to completing our long term financing on the re-file of the our Bridge Lands, so we're in the market with that and I have to say we have been extremely pleased by the very enthusiastic response that we had the benefits in the current market place of the long term landing relationships we have are really paying off plus, we been able to identify and I think we are going to making some new relationships in this financing, with some new lending sources. There seems to be a real stratification in the market right now and our kind of product, with our sponsorship, our leverage level, our asset level, hardly is actually... really in demand right now, and because if there is a flight to by the lenders to our kind of products. So we're very, very pleased with that, and from the bright color [ph] I'd like to call the...we're very pleased with that response and I think it sets up well for the debt financing that we're anticipating doing for the fund.

Okay, great. I wonder if you can respond to this question. If you would have to hypothetically take the $200 million investment done by the fund or done a 100% on your balance sheet. What would be the difference, bottom line difference in terms of your earnings power of that investment? I assume with a fund which is seasonal the rest would generate more FFO for you, but could you quantify how much more you think the fund gets you from a pure FFO standpoint.

I think the......actually, I mean to directly enter your question, I am not sure I can do that, to more globally answer your question, what the fund does for us, is allow us to continue our acquisition program in the market, well I think it's good to be making acquisitions without putting our balance sheet at risk or stressing our balance sheet and that's the primary objective of what we are... that's our primary objective for the fund. I mean we want to continue to gain greater control in these markets that we think are good, we want to continue, we wanted to still able to make the deals that we think are good and that positions that we think are good, but we don't want to, we don't want to take on unnecessary risks and if we do, we have three choices, I mean increase your stock, you can do debt or this and debt puts, our equity at risk gets you in stock but dilutes us, and we certainly don't want to do that, and so this achieves our goals there, and allow us to spread the capital that we have more widely and Bill, if you want to add.

I just, I mean a good way looking out at it Rich is, in the short runs, when fund is formed in the initial quarters, there is a very modest increase resulting from fees and that's the way, its always been our philosophy which is we are very light on, fees we like to be well aligned with our fund investors. And we're our business strategy is to put the emphasis on the back hand, when we produce the results for the fund investors, and so that's what makes it hard to really talk about this and quantify it because I think you see hopefully if we make all the right moves in terms of the acquisition and building value through our operating platform is the returns really paying off down the road as we produce the results and that in addition to the diversification and helping out on the balance sheet that's really where I think you see that impact, its really long term value creation.

Got it, thanks for that. To the Arden occupancy up to 87.9% is your target that market which I think was 94% do you think you can get there and if so what's your time frame?

I think initially we look to try and get those assets such that lets say stabilized occupancy, I mean either 18 to 25 months. I think we are really ahead of where I mean I was shocked and we have only had that asset for three month, I was really pleasantly surprised by how quickly we got the ball rolling and got some positive absorption on those because its taking the assets over and, getting kind our brokers in position, and then getting deals work, I mean you start, you kind of start cold or like you have you have a stock at deals that transfer very easily to a new owner and so these guys were really cooking to make that kind of progress in the first three month, and its good sign, I mean I am not feeling very good, that we are go beat that performance. Now our performance is very conservative. So, I am used to beating our performance, but I was happy to see that.

Excellent, Jordon, last time, last call you said that you thought a property value around town were down, 10% or 15% that was given way to some opportunities for you, is that same range today, or has it deteriorated maybe a little bit further since the first quarter comments?

I think, I'm real comfortable dropping the ten staying with the 15.

Okay, and then the last question, I guess I was a little surprised by the 4.5% sequential decline in office rents in your market. What's surprised you more, that sequential decline or the run up in rents that you saw over the past few years?

Definitely the run up on rents surprised... I mean the run up in rents shocked me. We had 25% a year for two years. I mean for 20 years, I didn't even have the guts to dream those kind of numbers. Forget about thinking, it really happened.

Yes, but if you annualize 4.5% I mean you get pretty close to 20% right?

A quarter?

Yes.

Yes I've not... I'll tell you something... that statistic is based on... it's obviously asking rents, and what we saw I think to be fair built in certainly in the '07 year, not necessary the '06 year, but in the '07 year we saw the asking rents which I described a little earlier, was it John guiding [ph] that question, but what I described a little earlier was that we add a half market and then because there is sort of the big portfolio transfers into the hands of guys that will... let say instantly sellers again in some sense, we had guys given free rent to move the face and asking rates way up, right. So when you sell a building you want to kind of perform with huge numbers and so you are trying sort of buy data points at that level and so I think we had super accelerated asking rents, that may not be... may not have had the typical relationship to where people are truly signing economic deal, going on in the previous years. And now I think that's adjusting its way back down, may be some of these owners are more resigned to our a longer term hold, which is over the longer term, it's not a good economic move to give a guy free rent, right because you just increase your risk, your credit risk and you are sort of essentially lending him those first months of rent. So I mean you wouldn't do that, if you can the building to turn [ph] and so I think that we saw the 25% that certainly the second 25% wider then it maybe really was because of asking rents having their own inflation index going on. And now we see that contracting now up that asking rent number contracting a bit. So we... may be there is a lot of noise right now.

Okay great that's helpful thanks guys.

Thank you sir and our next question comes from line of Michael Knott with Green Street Advisors. Please go ahead

Hi guys.

Hey, Michael.

Hey, Michael.

Hey, Jordan, pretty well thanks. Question for you in the same store disclosure, I appreciate that by the way, thank you very much. Why did the operating expenses go down year-over-year and is that at all related to top 13? And can you just give us an update on sort of how your operating expenses on the income statements does that include sort of non cash estimates on you part for top 13 resolution?

The operating expenses I would just say that the operating expenses went down, I don't think there is any particular driver that caused them to go down, they didn't go down by in particular version, there is some, there is probably some timing affects, from one quarter to another. I don't think we view the trends in operating expense are down, I don't. I think they are... there were very tightly controlling and I don't think we are seeing any increases. One thing that you might have expected to see but we are not seeing at this point is, any significant increase on our utility cost side, in '08 there hasn't been any proposed utility increases by the two local utilities. There was some increase earlier in the year in Honolulu but that was largely picked up directly by tenants and doesn't impact us. So I think, I think, answer is that the numbers are pretty flat.

Okay and then can you update us on top 13, any idea?

I think top 13 this is largely if not entirely, played out and what there might... we were having to make estimates obviously and what I would call our first one in the year which is the '07 year. And we... there might be some noise from that but the noise is trailing out real fast, and so fast that, I mean only in that comparison, I think may be it is adjusting things up a bit, but this relates not much... there is really no story left on that one.

Okay. And then can you just talk about the roll over schedule for the next 12 months. It looks like there is maybe $0.5 million fee and--?

Yes, there is some larger for us as you know we are a very small size tenant size focused company in with the average size of less than 6000 feet. For us there is a couple of larger leases that are rolling in that time period and that we are dealing that we are going to be dealing over that time period. So I think when you factor out of a couple of big leases that are coming out low, is pretty in keeping with the size of that market, but we do have few larger deals that we have to address over the next couple of quarters.

Okay. But that roll over schedule as of now?

Excuse me.

You talk here about the roll over in that particular sub market even though it seems like from the statistics we seen on that market it's weakening. Do you any comment on that and than also it is just in front the do you feel okay about that particular roll over schedule?

Yes. We the market stat was you said that sub market occupancy is down somewhat, is down I think in 86% to 87% as of the end of the second quarter, there definitely has been some weakening of market as one a it is for among our sub markets it is softer sub market. But the issue will certainly play out the fleet negotiation we have with on some of these larger tenants we are optimistic but in the current climate we will non one will get through the end of that see what happened but we are at the moment... we are addressing leasing issues out there, we have, we did see as I noted earlier, in Q2, we ourselves in our portfolio had positive absorption in that sub-market in Q2. Clearly our leasing team is doing lot of focus on that sub-market and...when the game gets played out, we'll let you know how the score, but score in.

Michael you are right, that, that market gets lot of our attention, all of our attention right now... honestly with right over wrong, that kind of wrong stand that outlook we have.

Okay and then just last question before, sounds like you did not do any share buybacks this quarter?

Correct.

How you are viewing that, proper allocation opportunity on sort of your many of opportunities today?

This... You really differently than we have the last quarters, I mean this start an opportunity by building opportunity and we are still equally opened above.

Thank you.

And our next question comes from the line of James Feldman with UBS. Please go ahead.

Thank you, first just a quick follow up to Michel's question, so it sounds like on these big roll over you are not expecting vacancy as just a matter of pricing. Big rows over you are not expecting vacancy just a matter of pricing, we could have vacancy I guess price everything we do in this business, by it could be vacancy we are hoping it's not we are certainly, proactively working, as I said we are very focused on that market, we realize that market is somewhere we can outperform and underperform, and we got both opportunities there, into the other market, that we're in, we're very helpfully with at least very fall with not a lot role, and small guys coming up there, we have a vacancy. We have a lot of role. We have to do very well there to do well, and we have a chance to do purely there and then we'll purely well. So we're hard on it.

And then the rent question, so if you would had say like net effective rents. How would you say those changed both sequentially and year-over-year?

I mean the best steps through in region to you just use the steps that we have been reporting. I don't like same, and that you know staring rents, and same space average rents, and the market to wave those percentages are moving. They're one with these technique, we give you three steps and the one step it goes to asking rents, as we said I think. There is a lot of noise there, but if look at the... the sort of same space. They are not perfect because you just look at a quarter but their probably better to look at directionally any other numbers annual.

Okay that's helpful and then I will be looking south tenants. So helping that is number three and you... bad impression in 2008, can you talk little bit about by what's going on there?

We can talk about individual, there you know their on the schedule they want to one took that its indicated there as come as there here in you know in that market place and we would in we are in discussion.

Okay. They have no any option.

I don't know.

Thank you, it is okay. Hi, sir that mean you wanting an update you are talked as measures that is mortgage either.

No, I don't want get into those individual kinds of discussions on...

Okay that's fine, thanks.

Thanks.

And our next question comes from the line of Mitchell Germain with Banc of America Securities, Please go ahead.

Hi, good afternoon guys, I just skip up for a seconds of how part I missed it to just give thoughts on how much are you guys are currently underwriting for investments?

How much you mean what's our, you mean what's our pipeline replies for adjustments, its pretty strong I mean [indiscernible] very good about it I think there is a, there is, I think our pipeline really well reflects the demographics of our existing portfolio in terms of the market where we see optimistic to be purchases as and the product types whether the markets [indiscernible] West LA, Dallas, et cetera and then product types office and residential I mean, that will make is holding to our pipeline, and our pipeline looking very dead.

Okay. Thanks. One other question is that,

what is that?

thanks. My other questions are answered.

Okay thank you.

I said thanks all my other questions were answered.

Thank you sir. And our next question comes from the line of David Aubuchon Robert W. Baird, please go ahead.

Thank you. Your portfolio, your current portfolio right now, is essentially forward, would you think about investments with the funds, in these part of values seeing lot, of opportunity out there, do you tend to graphed it or more value at this point?

If I just had my choice between two buildings I always take one in more vacancy, where you can pay less, you are just paying for the building and location, our strategy historically is under trying by the best buildings in the best locations and not focused too much on the particular leases in place and lets see absolute big above market leases or some large leases where other people might pay more for the credit or for that stability, because we don't want to pay for that. I don't know.....the difference between core value add opportunity and we historically been successful of buying what I think a lot of people would and some one answers would call kind of almost core type properties, because the markets we are in we buy the higher quality properties, but we have been able to give, most opportunity level returns in our past funds and I think a lot of that is because we do a lot with respect to the properties operationally I mean we are yet put some property where there wasn't some adjustments we made in terms of way we have and then we really sort of overtime we characterize the tenant base and for the way from being dependent on let's say one or two large tenants, so we are driven our we are driven in that direction but of course if some one wants to sell me full building cheaply you thought me I am going to pay for the rent having [ph] and we're we are more in market and in good location and good basic bonds focused

Okay. And what are you seeing so far, are you seeing any difference in pricing between those various property type?

Oh, yes, and there in fact we are seeing a difference and I don' t think there is much of difference far this year and now there is big difference I mean if you have a building it takes of real operations like fatties a lot of tenants excreta you got a difference stock of people that can even handle it I mean there you need pretty big and aggressive operating platform where you are dealing with these small tenants I mean you guys hear the numbers every quarter we are doing a 100 transaction plus a quarter, so one of guy coming here to buy a building you just depending on more outsiders on everything you got, and you don' t have in the third party leasing any third party management, and there going to have concerns about how those are going to perform for them. So I think its given us real edge, that has come up above just in this market I mean we have no edge last year because they can see more almost with more than have an occupied building when people were selling last year because people pro forma their way into high returns because vacancy there which is the not the case any more.

And if you had to quantify the different, in the pricing or just says.

Dependson the difference in the building, I mean between if a building is 10% vacancy 15, 20 whether building is lot of we have a little but I do think we are paid for all those things now. Your paid for the building really need to rehab, then you get a discount for that. If a building has real vacancy, and as a result lower cash flow, as a buyer you get paid for that. If there is a lower rents in a building, because we later have financing [ph] worked. The better the buildings were because those guys can't put us large a loan on in. therefore the returns and you for their equity are going to be there. So those things have all come dramatically back in the balance and the other things come back in a balance is size. I mean larger deals which almost anyone can bid on any large deal, because they give you the financing to do it. Larger deals now have fewer or real bidders where the sellers confidence that the guy has the money who is going to be able to close. And so having equity and track record and notability to make and take over those larger deals has value which is did not have last year.

Thanks Jordan. Bill Just one question for you did you talk about FAS one 41 guidance or any type of comment there for the year full year?

Yes did.

Can you repeat it, I am sorry

I did previously have a specific on the you want talk about at our point.

Just state what was the total number you expect for 2008?

The total thousand [ph].

Which way though but...first half of the year?

It's about $38 to $40 million for the full year.

Very good thank you.

Alright thank you and that does conclude our question and answer session for today I would now like turn the call back over to Mr. Jordan Kaplan for any closing remarks.

Well I just like to thank you all for joining us today and we look forward to our next quarter see you then.

And ladies and gentlemen, that does conclude our conference for today. Thank you again for your participation and for using ACT teleconferencing. You may disconnect.