Douglas Emmett, Inc. (DEI) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's earnings call for its 2012 third quarter results. Today's call is being recorded. [Operator Instructions] I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Thank you. Joining us on the call today are Jordan Kaplan, our President and Chief Executive Officer; and Ted Guth, our Chief Financial Officer. This call is being webcast live from our website, and will be available for replay for the next 90 days. You can also find our earnings package at the Investor Relations section of our website. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings which can be found in the Investor Relations section of our website. [Operator Instructions] I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thanks. Good morning, everyone. Thank you for joining us. Our markets continue to recover with strong support from many of the United States' most competitive industries. Contributions from entertainment and technology have been well publicized, but healthcare, education, foreign trade and tourism have also been very strong. While the nation saw a 1.4% job growth over the past year, Los Angeles County saw a 2% growth, adding 74,000 nonfarm jobs, the best in a decade. The increase in employment has been broad-based, with the largest job growth coming in professional and business services, education and health services. I am pleased to announce that our same property cash NOI in the third quarter grew by 2.7%, fueled by increased revenue from our office and multifamily portfolios, as well as good expense controls. During the third quarter, our leasing fundamentals were strong. For the seventh consecutive quarter, we had positive net absorption in our office portfolio, increasing our total office lease rate to 90.4%. Over the last year, we have seen office rental rates turn up across all of our Westside and Encino/Sherman Oaks submarkets. Our multifamily portfolio remains fully leased, with rents moving up at a very strong pace, exceeding 7% annually. We have begun planning 2 multifamily projects on sites we already own in Los Angeles and Hawaii. The zoning of these sites currently supports a significant number of additional units. However, as you know, development in our markets is a long and difficult process. On the acquisition side, we're still not seeing many quality for-sale assets in our markets. Nevertheless, we continue to work on acquisitions and still hope to use our ample liquidity for external growth during this part of the cycle. I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everybody. After beginning with our third quarter results, I'll address our office and multifamily fundamentals, comment briefly on our balance sheet and finish with an update on our guidance. Compared to the same period in 2011, our third quarter 2012 FFO increased 4.9% to $57.3 million or $0.33 per diluted share, treating debt interest rate swaps as fully terminated in the quarter of termination. We increased revenues in both our office and multifamily portfolios, controlled our expenses and enjoyed the benefits of lower interest from our refinancing program last year. Compared to the same period in 2011, our third quarter AFFO increased 13% to $44.7 million, or $0.26 per diluted share as we continue to improve cash revenue and replace noncash items. For the first quarter of 2012, our G&A totaled $6.6 million or 4.5% of total [indiscernible] revenues. We continue to run one of the most efficient operating platforms in our peer group, with our G&A expense among the lowest as a percentage of revenue. Comparing the results for our combined office and multifamily same properties in the third quarter of 2012 to the third quarter of 2011, revenues increased 1.3% on a GAAP basis and 1.9% on a cash basis, largely from increased occupancy in our office portfolio and increased rents in our multifamily portfolio. Expenses increased by 0.3%, both on a GAAP basis and on a cash basis, as a result of modest increases in employee and insurance costs, largely offset by expense reductions in other areas. As a result, net operating income increased 1.9% on a GAAP basis and 2.7% on a cash basis. Now turning to office fundamentals. During the third quarter, we increased the lease percentage for our total office portfolio by 30 basis points to 90.4%, while our occupancy rate remained unchanged at 88.2%. We signed 191 office leases covering 654,000 square feet, including 207,000 square feet of new office leases. As Jordan mentioned, we have been increasing office rents throughout the Westside and our Sherman Oaks/Encino submarkets compared to a year ago. Although rental rates still have a ways to go before returning to peak 2007. As expected, given our 5-year average lease term, we continue to show rent rolldown for leases signed at the 2007 peak. During the third quarter, on a straight-line basis, our average rent on executed office leases was 5.2% lower than the average expiring rent for the same space. On a cash basis, our beginning cash rent on executed office leases was 13% lower than the average expiring rent for the same space, largely reflecting the impact of our annual rent bumps. As we mentioned before, the negative impact on rent rolldowns of our office -- cash office revenues, which affect approximately 11% to 14% of our office portfolio each year, is effectively offset by the positive impact from the annual rent bumps in our remaining leases. On the multifamily side, our 2,900 units were 99.8% leased as of September 30, 2012. Our markets continue to support strong increases in residential rents, with average asking rents in the third quarter 7.4% higher than in 2011. Recurring capital expenditures for our apartment communities during the third quarter of 2012 averaged $96 per unit. Turning now to our balance sheet. As we disclosed during last quarter's earnings call, in July, we closed a 7-year $285 million term loan with fixed interest at 3.85% per annum. We have no material consolidated debt maturities until 2015, with over $360 million in cash on our balance sheet at quarter end. Overall, our net leverage is now 43% of enterprise value and we have ample liquidity for potential acquisitions for development and for other working capital uses. During the third quarter, we replenished our ATM program but did not sell any shares. We believe that the ATM provides another tool in our bag to raise capital if needed. However, as we previously announced, we don't expect to issue more equity for deleveraging. We are comfortable with our current leverage levels, which we expect to continue to define organically as a result of our improving fundamentals and strong retained operating cash flow. Finally, turning to guidance. We are updating our full year 2012 FFO guidance to between $1.35 and $1.37. In providing that guidance, we are updating our estimate for the 2012 growth in our same property cash NOI to approximately 2.5%. We continue to estimate that our office occupancy at the end of 2012 will be approximately 1.5% higher than at the end of 2011. We still expect that our multifamily portfolio will remain essentially fully leased. We are narrowing our estimate of interest expense after adjusting for terminated swaps to between $137.5 million and $138 million. We continue to estimate that our G&A will range between $27.5 million and $28.5 million. We continue to estimate that our FAS 141 income will range between $17.5 million and $18.5 million. We are narrowing our estimate of our straight-line income to between $5 million and $6 million. We continue to estimate that our recurring capital expenditures for our office portfolio will be approximately $0.25 per square foot and that our recurring multifamily capital expenditures will range between $400 and $450 per unit. As a result of our higher stock price, we are narrowing our estimate of our weighted average diluted share count to between 173 million shares and 173.5 million shares. With that, I'll now turn the call over to the operator so we can take your questions.

[Operator Instructions] And your first question comes of the line of Jordan Sadler with KeyBanc Capital Markets.

I wanted to just get any incremental color insight you may have to offer on the development opportunities you discussed.

Well, we have sites where we could still build some residential and, of course, it never really easy ones in the Brentwood area and L.A. and the other is in Honolulu. And so we are now pursuing that because the economics are quite [ph] makes sense to us.

What do -- and just as a follow-up, so what's the type of scale, how many units in each project or dollars? And when you say economic expense, what type of yields should we expect?

The one in Brentwood is in a 300-unit range. In Honolulu, that site, it literally could take almost a couple of thousand units, although some of them will be phased in over time, so we're doing sort of a community plan right now. We're still working through some construction numbers, so I don't want to come out with some -- I don't want to a pin on the wall yet, but I would say that as you would typically be looking for in a development project, we're going to be hundreds of basis points above, let's say, a cap rate that the stuff will trade at. And in some cases, even maybe a little beyond that.

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

It's Josh Attie. On the office side, how do the lease economics today compare to what you are able to achieve historically? Both with respect to rent escalations, are you still able to get 3% to 5% bumps and also with respect to free run?

Well, let's see. I think both of those I would describe as stable. So running through them quickly on a straight-line side, there was a brief period at the very end of last -- of the top of the cycle, where we were seeing in a few of our markets things beyond the 3% rent bumps. But -- and those went away right at the beginning of the recession. Since that time, the rent bumps have been consistent throughout the portfolio. They stale in L.A. are -- the overwhelming majority of them are at 3%. The -- and on the concessions, we have not seen significant changes in concessions, either over this entire period and that includes the current quarter. I did notice your note, which was a little concerned about why some of these things happen and I think that you might want to focus on the fact that the spread between gap and cash roll down is more related to the shorter term this quarter of the leases. And if you'll look at it, you'll see it's almost -- you can explain it pretty well by doing that.

Okay. And I just have follow up...

Let me explain it very quickly, which is that when you have a short term since the annual rent bump effect each year, if you go almost a year shorter, which is it happens to be what happened this quarter, you end up with one less rent bump over the course of the lease. And that, on a straight-line basis, make the bigger gap between cash and straight-line.

Yes, right, I guess it's -- even after adjusting for the shorter duration, it seemed a little bit tight versus what you used to be able to get.

Well, if you want to, we can talk about it offline, but the concessions and so forth are fine.

Okay. And if I could just ask a follow-up, can you give us an update on the AIG lease, where you are in discussions with them? And also can you remind us exactly when next year that expires and what market it's in, and maybe when the original lease was signed just so just we can get a sense for what the mark-to-market might be?

The -- some of that is easy to give you. The leases in Warner Center, it expires in August of 2013 and I believe it's a 10-year lease, but I'm not sure where that [indiscernible]. We are not in a position to give any further color on that pending deal.

Your next question comes of the line of Rob Stevenson with Macquarie.

It's been a while since you guys acquired much on the office side. Just curious, as you're sitting there today, I mean, is it pricing or quality of product that's been on the market that's been keeping you on the sidelines and sort of how is the sort of book of deals that are sort of coming across your desk these days?

Well, it's been -- it's been pricing. It's not perfectly accurate to say stuff hasn't come to market. I mean, some stuff came to market, which I think we might've been the high bidder on, but the seller didn't end up selling it. So certainly, we -- so certainly, they're not getting their price, but let's say the price we would have to pay to be the high bidder, we were willing to pay that, but the seller wasn't willing to sell at that. And there hasn't been -- but the other thing you said is probably right, there hasn't been a ton of deals that have come to market even that haven't traded that were ones that we really pursued hard. But they've been out there.

I think that what we've been seeing is that sellers, over the last couple of 3 years, have been rewarded for hanging on to the properties. And I think that with the leasing and fundamentals seeming to be improving in the markets, I think that there's not been a lot of pressure on them to sell, so there's been relatively, as Jordan said, there's been relatively few transactions that have come to market and those that have the sellers who've had expectations that nobody, including us, has been prepared to meet.

Okay. And then as a follow-up, on the apartments side, especially the Brentwood side, I mean, is that a situation where once it's fully entitled, you guys are going to evaluate whether or not the return are greater to sell it off or are you guys committed to having that developed in the Douglas Emmett portfolio longer term?

Well, typically, we build stuff to hold it, but I can't tell you. I mean, if some incredible opportunity came, I guess, we'd -- I don't want to say. We're never willing to sell anything. It's -- but I think you should take it that -- it actually right now is owned for what we want. It's just that it's hard to get stuff to the city. There's always something extra you got to go through and do and therefore, it just takes some time.

Your next question comes from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just first, going to the leasing, when we look at whatever schedule this is, it's Page 20 on the 8-K, it looks like rents sort of peak in second and third quarter of next year. And obviously, if you -- as you guys work through the lease role, these rents sort of change depending on what activity you've done. But just very curious, the elevated rents in Q2 and Q3 versus the lower rents in Q4 and Q1, is that a reflection of being the absolute peak of the market legacy deals? Or is that more of a building or a type of tenant mix type issue?

I don't think we're really going into that granularity to be able to tell you which it is -- there's data on the page that gives you which markets they're in. So I guess you could sort of see from the submarket piece we've given you in the Internet. But I don't think we've gone through and done that sort of analysis. For us, it's more of a working through each lease as it comes up. And in addition, from our leasing people's perspective, they're not looking -- the leases come up when they come up, so some people are renewing a year early, some people 6 months early, some people wait to the last minute. So I don't think we've done the analysis.

It's not going to be a building thing. It's not as though like 5 years ago, we bought a building and leased it all up right at that time and now those leases are all rolling off. I mean...

Well, it could be in the sense of if you had a big lease in one quarter in one of the -- like 100 Wilshire, that would make a difference. But it's probably not that. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then my follow-up question is just out of yesterday's election. Jordan, sort of curious on your take on Prop 30 and Prop 39. Do you think that changes the economic outlook for California or it's typical that California will suck it up and continue marching on?

Well, we've spent obviously watching -- I went to bed last night taking Prop 30 laws and then woke up this morning and found out that I was just having like a good dream and it actually won. But I'm -- California was facing maybe not a fiscal cliff but I mean, we had a lot of debt and we certainly had a pretty like tricky base jump we were getting ready to do to deal with this next year. I think those problems are solved, just probably take some heat off the whole discussion of property taxes, although I never thought that was that serious. You've heard me say a lot of times in the past that at its core, I think one of the economic engines, the economic engine of California, the greatest one is the education system and the universities are getting a ton of money out of it. I mean, am I thrilled that this is happening? No. Do I think that people are going to leave from it? No. We'll probably suck it up and pay our taxes and move on. We are taking the pain, that's not my problem. Other states have these problems. I don't see them taking their pain and see how they're dealing with it. But it's -- I hope that on the bounce it ends up quieting things down here and getting our state government back to business because they're certainly around the fire drill over the deficit.

Your next question comes from the line of Brendan Maiorana from Wells Fargo.

Question, I think a few years ago when we had talked about stabilized occupancy numbers, you had suggested kind of like 93% to 94%, maybe 92% to 94%, was sort of where you thought the portfolio could run. And if I strip out Warner Center/Woodland Hills, you're kind of at that 93% level across the other submarkets. Do you think there's much occupancy upside in your portfolio outside of Warner Center/Woodland Hills?

Well, I actually think that we should be able to stabilize the portfolio around 95%, but...

If you recall, at the height of the market before, we were at 96%, we think that's achievable but hard. At 95% is I think where we would say we're running the buildings at that...

It's what we're aiming for. But I think that as -- I mean, you got to go back and you've been following us for a long time, but if you go back and think about when we ran into the recession and we started saying to people, hey, I mean, we have negative absorption, don't talk to us about rents. And then we started having some positive absorption and we said, hey, the good news is positive absorption, but you want to talk about rent, let's wait until we get up into a lease strip percent that is -- create some price tension. I do think now and we thought about this a little bit in the script. I mean, I like -- we like announcing seventh quarter of net positive absorption, which is a great step, I mean, and it's great that, that's going on. But the real key now is, now it's almost like we're there and we're not getting the fireworks, which is we're really seeing across our markets that rents are turning up so. So finally, I would be able to answer the question, when do you think rents are turning up? I'll go, right now, but no one has asked. But the rents are moving up now across our markets and that is going to be -- that combined with some additional hopeful positive absorption going forward, which I think we feel pretty good about saying, that should -- I think our folks is going a little less -- we're going to have quarters when -- as you get up into this range, you're going to have some positives and some negatives in terms of absorption, okay? But the key now is, can we now see rent start pushing? Can we see rent start moving now. We're seeing a movement, I thought that was a very meaningful thing that we'd put into the script this time. And maybe I said it too fast or slow or in Spanish or I don't know. But we're now seeing rents rise across all the Westside markets and Encino/Sherman Oaks, that's a great day and that's just getting going.

And Jordan, I think it was last year at the Investor Day we're talking and you said -- I was asking you about rents and when they start moving up. Are they going to move up a nickel or is it going to move up quarter? And you said it was probably likely that they move up a quarter or move up pretty significantly when you start pushing. Are you pushing them up that significantly or is it the more modest increases?

I would say it is -- okay, so when I -- if it was a nickel, I wouldn't be announcing it starting. Now it is -- we see in that light, let's say, that quarter range it's still spotty where you can point exactly to it. But I still hold by the statement that as it gets going, I think the moves will be more pronounced than let's say, we live with working our way through the absorption of the '90s. And we got to a point in the '90s where we were getting pretty well leased but people were still moving like in small numbers. But then, we saw in the 2000 recovery that went from 2003, '04, '05, '06, all of a sudden, rents did start moving to sort of let's say the quarters. And we are seeing that same attitude is here today. So when a tenant feels like they could or could not get the rent, you're seeing even numbers not like a couple of pennies here and there that are going from -- you're saying 2 -- there are 2.60 or going 2.75 or you're going 2.85. I mean, it’s not 2.60, 2.63, 2.65, that's not the kind of negotiations that are happening, and that is -- obviously supports what we expected.

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

[Indiscernible] suggested that Farmer's Plaza and Warner Center was under contract, can you comment on that?

Who suggested that?

That was on Real Capital.

Well, he doesn't come and ask me what's going on or I don't talk to him, so I can't really -- I'm not going to talk about an individual.

So we should assume that you're not going to be closing that deal when you report next quarter?

You mean, you want me to change my mind and talk about it? I'm not -- I mean, look, any deal, whether -- and I'm not going to say this is about Farmer's. I'm saying this is about anything we're working on. Everything goes through ups and downs and the deals made, the deals broken, the deals made, the deals broken, that's anything you work on. And that's why we've been very careful to only just say, look, we don't want to end up kind of leading on something and then person goes, hey, what happened to it? So we try to announce our deals when they're done. And whether it be Farmer's or anything else that we are working on, that's going to be -- we would announce it.

If I can ask 2 quick follow-up questions. One would be, the fund is now past the investment period, if I understand that right. So curious how you proceed from here. Just on your own balance sheet, are you going to raise another fund? And then the last question would be, do you guys -- have you developed multifamily pro forma? My understanding is you've acquired your portfolio?

Actually, let me do it in reverse. It's funny that you asked that because the roots of the company, we develop multifamily. That's what we did. And then in the '90s, when we wanted to get into managing office and we were trying to get investors for our funds, investors are saying, what are you talking about? You guys are just multifamily guys. Now, I guess, I mean, obviously and reasonably so, people have forgotten that, that's what we did was to develop multifamily, which we developed thousands of multifamily units in and around the Westside. So we're pretty comfortable going back and doing that. It's been one of the reasons why in the past we've gotten a lot of criticism for having our multifamily portfolio mix in with the office and we would say to people, well, that's the skill set we have, it's multifamily and office, so that's why that's what we do. In terms of your first question, what was your...

Funds.

Oh the fund. In terms of the fund, we are past the acquisition period in the fund. I mean, there's still stuff that the fund has -- can have a right to do if it was a deal that we were working on or something like that, or something could still close in the fund. It's not our intention to start another fund though if that was the core of your question. It is our intention to move forward using our own capital or for very large deals to do joint ventures style or something else, but not to raise a blind fund the way we did in the recession when it would have been very expensive for us to issue equity or do one of the other techniques.

Yes. At this point, we've got -- the capital markets are wide open for us, so we don't have any issues with raising capital directly ourselves. And as Jordan said, the reason we did the funds back when the stock price was in single digits was that we did not feel that was an appropriate way to raise capital and I think it worked out well for us. But now, it'd be just as easy to do it on the balance sheet.

Your next question comes from David Harris with Imperial Capital.

Here's a question for you. Next year, we've got no Olympics and we have no election. Would that normally mean that we have a little less vibrancy in terms of space demand from the media and entertainment group?

That's a very interesting question.

I don't have plain vanilla questions, guys.

Yes. The media -- I don't think the media guys here in L.A. got that much of a bump because of the election, because all that would happen was both the presidential candidates came here to collect money, but they were spending it in the other -- in the states where they were the battleground states was -- who got the, I don't know, $2 billion that went into media. So I don't know that much of that came here.

I don't think there was any impact on the Olympics out here really either.

Yes, I don't think we had any Olympics impact. But maybe if you look a little further forward, we'll have a football team and then they'll all be chatting about football season and we'll get more out of that.

Okay. And here's another election-related question. Is this -- obviously, there is now a distinct possibility we're all facing higher taxes, in particular, capital gains taxes. Do you think there will be any greater sense of urgency amongst the potential sellers of assets in the light of last night's events?

I don't -- I'm going to tell you something. I spent the last -- for however long, Romney and Obama have been going at it. I've been warning sellers that their taxes were about to go up next year and they got to sell us a building. Now let me just say, I didn't get much traction out of that. I don't know that -- I don't believe most of the people I've been focused on trying to get to move or do something. I don't believe they are going to do anything as a result of Obama winning the election, if that's what you're insinuating. I don't see that having much of an impact at this point. And with respect to property in California, what -- if you are concerned the California taxes were going up, it's already happened and it's over. So you're going to pay that higher rate today if you want to sell a building.

What about the use of OP units?

Well, that's what I tried -- that's what I was -- in a weird way, those 2 would go against each other because if you're trying to say to somebody, I've tried them both, just so you know, but if you say to somebody, your taxes are about to go up, [indiscernible] your taxes than saying take OP and it's a job set [ph], right, because that's like saying wait and pay your taxes in a future period when maybe taxes could be higher. But I have tried both and neither seems to have gotten traction. I tell you, the things that's dominating in terms of value and seller expectations here is that the fundamentals recovery that we're seeing. And you just can't overwhelm that in terms of someone's thinking by pointing out higher tax rates or any of the other things.

So people don't feel that cap rates may have peaked out here?

Well, cap rates are very low, but rents are moving. And so you don't -- rents could move up and that justify those cap rates and then you could look back and go, hey, regardless where the cap rate was, I'm glad I didn't sell it because that would have been a very low dollars per foot sale, and that's kind of what's going on.

Your next question comes from Steve Sakwa with ISI Group.

I was wondering if you could just give us a little more color on the leasing between kind of the smaller tenants that you're dealing with and some of the Westside markets and then maybe some of the larger tenants and some of the larger blocks of space that you have kind of farther north. And just what are those discussions like today? What are the tenants telling you? How much longer deals are taking to get done?

I don't think deals are taking longer to get done. I think that the tenants, many of them are also sort of perceiving that there is -- rent increase is on the way and so I think compared certainly to a couple of years ago, I think they're moving faster. I also think that our operations group has done a phenomenal job in terms of increasing our ability to just move leases and so forth through the pipeline.

And I think that's applicable to the large and small types.

I think that's right, too. I think that, first of all, you want to be careful because an awful lot of our leases, even in Warner Center, are the smaller leases. It's just that there are almost no larger leases, large for us 20,000 square foot bigger in the Westside and Sherman Oaks side, but there also are a lot -- most of the leases out in Warner Center are actually fairly small. There is a different dynamic with big -- we've talked about this before. There's a different dynamic with bigger tenants. It's -- there's a lot more negotiation, there's a lot more just dealing with them and there's a lot more TIs and buildouts, which is one of the reasons why we've always said we like to have the smaller tenants in place. I think the dynamics haven't changed in that way. I do think that we're seeing less of the -- we're starting to see some of the larger tenants who are now taking more space and that expansion stuff is coming in more than it was a couple years ago.

Okay. And then if I could just follow-up I guess on the development comment, Jordan, on the 2 apartments, I guess I wasn't really aware that you guys either had kind of a land banking or had bought parcels. Can you just kind of walk us through how you sort of got control of these parcels? Were these things that came with other assets that you bought or were these land parcels you went out and discreetly purchased?

It came -- we bought -- there was a -- in the past, we had bought a couple of blocks. It's funny because we hadn't talked about it in a long time. When we went public, one of the big things was, what should -- you had external growth, it could be development and new acquisitions and people kept asking what is development. We'd say well, we have some development sites, but it's unlikely that much have happened on them today. And those sites came along with buildings that we bought where we had some special zoning or opportunity that was -- we don't control the whole block and we had some excess, let's say, capacity. And as things have changed and markets have shifted and you need kind of politics and economics and the city and everybody to be lined up going the right way, some of these sites where we had an opportunity to build, let's say, some additional SAR, a few hundreds of thousands of square feet of SAR, also came about some rules that allow you to do that -- where you're also allowed to do residential. And we thought, you know what, residential seems so strong here on the Westside. Let's go and think about doing these as residential. And when we looked at it and looked at sort of the trades you had to make, it was just -- when I say compelling, it was very compelling. So we're pursuing that road now, that's with respect with the deal in Brentwood. The deal in Honolulu, I mean, it was just a matter of waiting as the rents there were recovering, and as rents are increasing and as we look at what the sort of what's happening, you're starting to see people to -- buildings being built and we have [indiscernible] very close like, let's say, like the central point where you'd want to be is right around downtown for traffic and everything. Just down from there or just near Tripler Hospital, we have a very good site with a great amount of capacity that we originally bought that had 700 units on it. But we knew when we bought it, it had a huge amount of additional capacity. And so we've been going there, trying to evaluate what's the most cost-effective way to do this and it just seems to clearly cross that threshold for us now and we're now spending money on that direction, too. I mean, it's just that these 2 sites now very clearly make economic sense and we're working on it.

Your next question comes from the line of John Guinee with Stifel. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Over the last couple of years, you have artfully and discreetly raised your dividend often. Can you talk about your dividend policy?

Sure. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: And when it's coming next?

You know what, we -- you and I could agree on it on the phone right now, but we have to get the Board in on it somehow. Maybe we could conference them in. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: I'll wait.

Okay. So generally, we want -- one rule that we want to follow is we never want the dividend to act as a drag on the stock price. We want to be within a reasonable range and we also don't want to pay dividend that uses cash that we could otherwise put to work more effectively in, let's say, development and stuff like that. We also recognize that of late, the dividend plays a larger role in, let's say, incremental returns for people and current cash dividend is meaningful. I've also said, aside from the fact that we went through that recession where the dividend dropped off and I guess it did for everybody and we're building back up, it is our goal to be able to be in a situation where we have fairly reliable annual dividend increases, which are patterned after what we expect to be the increase in the income of the company. So we take all those into account and discuss with the Board and I'm hopeful that we will be able to have a fairly reliable dividend increase schedule going forward on an annual basis. But beyond that, I mean, we got to go over it with the Board.

Your next question comes from Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a quick follow-up -- 2 quick follow-ups on the development. It sounds like you guys, if you go ahead with this, it would be 100% on balance sheet, you wouldn't be JV-ing these, is that correct?

Well, certainly, as we sit here at this moment, yes, that's correct. I mean, depending on what the other cache of opportunities are that come up and you'll never know how, in the end, you're going to want to finance on equity and debt basis, these things. But as we sit here right now, we're 100% doing it ourselves. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And just so we can play along at home, for land, should we think of the land basis essentially being 0, so if we want to run some quick numbers, we just have to think about cost of construction? I'm assuming this is going to either be podium or garden or something like that. Is that the way to think about it or is there some sort of land value issue we should be thinking about?

For what you're doing, I'd say it's the land value that would effectively be 0 because both of these sites are -- already have like good operating projects on them that are making a lot of money and I know, if any, you don't have them more separately segregated as like, here's the separate land cost of this that we have to make something out of... I mean, it is going full blast right now, so this is 100% additive without us buying any land, and there's -- and maybe even a little better than that. So it's one of the reasons why the economics work so well. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And just confirming -- these are -- they're both podium or one -- or Brentwood is podium and Honolulu is garden?

Honolulu is garden and Brentwood is a tower. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Oh, a tower?

Yes.

And your final question comes from the line of Michael Knott with Green Street Advisors.

I figured, to give you one more chance to talk about your rent growth comment, first question would be is that sort of -- it sounds like if I'm doing the math right, it sounds like maybe you're talking about rents are moving kind of 8% to 10%, something like that? And is that better than you would've thought, say, 90 days ago?

I think that the -- first of all, it obviously varies from submarket to submarket even from building to building as we try and get things done. So I think that you're probably -- I'd probably end up with a wider range just to cover things, so I would have said in those markets 5% to 10% over last year, maybe. And I think the answer is, yes, it's better than we were -- where we were last quarter in a sense that last quarter, we were getting there, we were adding one quarter at a time. But at this point, we're prepared to call it across the -- all of those submarkets.

So if that pace continues, is there any reason to think that the pace might say improve 10% to 15% or do you feel like the overall economic backdrop is not good enough for that?

Well, we think there's a possibility that at some point, there's going to be an inflection point where when we go back to the prior period of times, if space really starts to get tight and tenants are really worried about losing their space. There's actually -- if you compare, for example, our rents to rents in other submarkets, at other global markets, if you compare our rents to what comparable businesses are paying in New York or San Francisco, there's actually a fair amount of economic room for the tenants to afford more, and we saw that in the last peak when rents could be moving up close to 20% a year. That means...

Let me say this. There's plenty of reason to think that it can speed up and there's plenty of reasons to think...

There's a back up.

I mean, our comment was they can move in these chunks. I would say that if we have lost 30% off of our peak from before, we have regained back 5% to 10% of that.

Okay. And if I look at your lease expiration schedule in the supplemental and you're kind of in the high 30s for '13 and '14 and that's obviously lower than where you're signing leases today, that seems like '13 is probably -- the expiring rent is high enough above where you're at today that you're not going to threaten, breaking even on that. But maybe if the rent growth pace continues, maybe '14 has a chance of being only a slight rolldown potentially. Is that a fair way to think about it?

Yes. It's difficult to make any precise predictions, but that certainly sounds reasonable.

I think we have a chance at '13. You could see the thing reverse itself. But it's hard to tell when it's going to happen. If you're just talking about rent rollup and rolldown -- I think more important, I'm hopeful and obviously, there's just so much national stuff going on that could impact this. I'm hopeful that in '13 -- it's not as telling you we're seeing rent turn up, it's everybody talking about the fact that rents are moving up, which is what really matters here.

And just a follow-up on that comment, Jordan, I think you guys are signing leases in the, call it $33 range, maybe a little below that. And that's below next year's average expirations, like 13% below. So when you say that, that you'd -- there's a chance that it could sort of breakeven or flip itself, you're sort of saying that rents would have to go up another 10% plus from here?

It's hard to say that because you have to look at when those deals get renewed. And I mean, you have 2 lines that are working against each other. And as I said, stuff doesn't -- like tenants don't renew or new deal goes in, the day of that when that lease ended. So everything that you look out, I mean, if you can go back and look at our roll schedule from years ago and you look forward and you go, wow, we have like 14% coming out next year. But as the year approaches, it goes down 13%, 12%. So you're always sort of entering years with some smaller percent roles. That's because people do their deals earlier. So you don't know how '13 is going to end up. Of course, rent is going up, it's going to make a difference, which leases end up being [indiscernible] make a difference, people coming in and do early renewals that maybe are worried rents are moving and they might even have lower leases that they did in 2009 to make a difference. That's why we're having trouble telling you guys which quarter, but I'm saying I think you have a reasonable chance that '13 is the year, one of the quarters in the '13 year, when you see this change. More important than that, I think most -- I mean, you're looking at this change, you're trying to predict the model, you're trying to predict sort of FFO or something like that, but what I think is more important in terms of predicting long-term value growth, whatever you want, income of the company, is trying to see how rents are moving. And I think this -- these numbers are sometimes sort of a little bit mistakenly used to do some rental direction calculations. But you're doing a comparison that typically, let's say, at 5 years ago, whereas when we look at sort of the year-to-year looking back, when we look at how the leases we're signing and leases that we signed a year ago, what -- and on average, what are we doing now? Are we getting higher rents or lower rents or the same rents across the 200 deals we do a quarter, or the 800 deals we do a year, whatever it is? We're saying, hey, we're telling you guys now, rents are moving up. And I think that if you see covertly rents moving up next quarter as it's obvious to everybody that's coming through in terms of like the brokerage reports, et cetera, I think you'll see some focus go off of that number and onto the pace at which rents are moving up because they'll obviously be moving up.

[indiscernible] let's spend a couple of seconds of this because I think it's important to a lot of you. The first thing that we would say about this is that, and Jordan touched on this, is that in many ways, the ramp rolldowns is more about the peak of the market than it says what's happening now, and the big change is not going to come likely just because we are increasing rent. It'll actually come because you're suddenly going to go from comparing against the very peak of the market to comparing what's -- they're going to be a trough of the market. The second thing though is that when you're doing the comparisons, because you talked about 13% and so forth, remember that even in a flat market, because of the 3% annual rent bumps, you're actually looking at the cash rent -- the cash rent is going to roll down by 12% or thereabouts. So that's the second thing that it'd take into account in doing this. And as Jordan said, we really think the more important thing is to -- for our economics right now is what's happening compared to last year and the year before more than what's coming from the prior years because again, as we said, on a cash basis, these rolldowns are pretty much offset by the rent bumps going up.

I mean, the straight-line comparisons, there was a 5% on some point.

5.7%, yes.

Yes. 5% straight-line comparison, little moments in which lease you do and [indiscernible] like we already said we think it's already moving up by 10% will cause it to eclipse that number next year, which, I guess, if you care about comparing it to 5 years ago, it would be a little bit more of a fair comparison than sort of a peak number for the old lease to a trough number for the new lease. But I'm still going to say, in terms of trying to calculate rental -- rents going up, we're looking at those numbers not from 5 years ago, but from like, in the last year, deals we have done over -- as we follow the quarters and we're telling you, rents are moving up 5% to 10% off of what you might call the floor from years in the past.

Right, that's really helpful. I appreciate it. Just one quick one on development. It sounds like you're still working on some of those that doesn't sound like it's imminent. What's kind of a basic timeframe should we expect groundbreaking next year, is it more like a 2014 event?

I think it's -- I mean, we're obviously updating [indiscernible] and the amount of work and time that's being spent on this and we just wanted to notify you that, that was going on, but I believe that you're talking about 2014 events. Things will presumably be able to move a little quicker in Honolulu than here, even though here we have really like -- you would think you would be able to just walk down there and go, here's our situation, and then go, good, you're approved and signed up. But that just doesn't seem to be the way L.A. works, so -- and I don't know how that will be stretched out and we have to go through that process.

Okay. And then just last one on -- when you talk about a perspective yield hundreds of basis points above a cap rate, is that based on -- is that math based on a market value for the land or kind of a 0 historical cost basis in that analysis?

It's based on the yields we would get on our cost, not rebuying or allocating a portion of the land. Remember, this land is already 100% allocated to the other buildings that are there. You could move the allocation over, but we own it, so it's cost us. So what I'm talking about is our incremental returns on the debt and equity investments that we make.

And we do have time for one final question from the line of Jordan Sadler with KeyBanc Capital Markets.

I just wanted to circle up on the commentary surrounding the rent roll, but just maybe framed it a little bit of a different way. I mean, just sort of incorporating occupancy perhaps, I mean, this year, you're expecting, by year end, to pick up 150 basis points now. As we look forward to 2013, will we also continue to see an uplift in the overall portfolio occupancy? And ultimately, will that translate the combination of the rent roll and the bumps and occupancy translate into an acceleration in same-store NOI growth?

Well, first of all, we're not -- they're not providing 2013 guidance at this point, so we're going to frame that within the context of this. I...

But how about in theory?

Okay, that's -- I said and I was going to go on to that. But in theory, I would say that again, we will regard our portfolio as fully occupied at 95%. And so we have significant room for additional occupancy growth as well as rent growth going forward. So the answer is I think that assuming that there's nothing that pushes the market sideways on us, we would anticipate that 2013 would have growth potential in both areas.

That was a real long way of saying, in theory, yes.

And then lastly, there was -- when you talk about the small versus large tenants, it almost sounded like you're seeing some large tenants emerge from the depths and that there's some large tenants kicking around that could land. Is that the right read there? And if so, what's the nature of these tenants, what types of industries?

Yes. I mean -- the industries are the industries that we told you about. I'm saying, it's small and large, renewing and expanding, all going in the right direction. Now when you say some large, I mean, there are -- I mean, there was a time when there was no one to talk to. We were throwing a party, nobody was coming. Now, we are getting that on both the small and the large tenant side. And to the extent that we have space for large tenants, usually that's more concentrated than Warner Center, we don't have a lot of large tenant opportunities on the Westside area than Encino/Sherman Oaks, but they're all -- seem to be out making deals again. That looks like it. So thank you, everybody. It was a pleasure speaking with you and we look forward to our call next quarter. Goodbye.

Thanks for your participation. This does conclude today's conference call. You may now disconnect.