Douglas Emmett, Inc. (DEI) Q1 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's First Quarter 2013 Earnings Call. 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 today on the call are Jordan Kaplan, our President and CEO; and Ted Guth, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. [Operator Instructions] I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Thanks, Stuart. Good morning, everyone, and thank you for joining us. I'm happy to report that we had a very strong and busy first quarter. On top of excellent leasing and higher rents, we purchased additional interests in our funds, signed an agreement to buy a 225,000-square foot multitenant office building in Beverly Hills and paid down $90 million of debt. After the quarter ended, we fixed the interest rate on a new 5-year $325 million loan for one of our unconsolidated funds at 2.35% per annum for the next 4 years. Starting with our acquisitions, we already told you last quarter that we acquired additional interest in our funds. In addition, we have agreed to pay $89 million to purchase an office building at 8484 Wilshire later this month. This acquisition meets all of our criteria, great bones in one of the best said [ph] markets with small tenants and an opportunity to use our operating platform to add value through leasing up and repositioning the building as a stellar Class A Beverly Hills asset. Our portfolio of fundamentals continued to improve. Last quarter, we achieved 30 basis points of positive absorption in our total office portfolio, overcoming the headwinds we mentioned on our last call from the move out of year-end tenant holdovers. In particular, we increased leasing in Warner Center by a robust 70 basis points, on top of the 200 basis points we achieved in our strong fourth quarter. As a result of those same headwinds, occupancy declined by 30 basis points. We are raising office rents in Honolulu, and now showing higher net effective office rents in all of our submarkets, except Warner Center. Our multifamily portfolio continues to shine with full occupancy and average asking rents 5.8% higher than a year ago. Our same property cash NOI grew by 2.7% in the first quarter, fueled by higher revenue from our office and multifamily portfolios, as well as lower office operating expenses. We have increased our guidance for same-store cash NOI growth for the full year to between 1% and 2%. We continue to have great access to the capital markets. Our balance sheet is stronger than ever, and we have ample liquidity to pursue additional acquisition opportunities. I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everyone. I'd like to start with our results, [indiscernible] which I'll address our office and multifamily fundamentals and then provide some color on our updated 2013 guidance. Compared to the same period in 2012, our 2013 first quarter FFO increased 7.1% to $64.1 million, or $0.37 per diluted share, treating debt interest rate swaps as fully terminated in the quarter of termination. Our AFFO increased 21.8% to $50.1 million, or $0.29 per diluted share. We grew our first quarter 2013 total office revenues by 1% compared to the same period in 2012, with increasing parking and other income, as well as tenant recoveries. The increase in tenant recoveries largely reflects a timing shift as we completed more prior-year tenant CAM reconciliations during Q1 this year than we did in the same quarter of 2012. As a result, we expect less tenant recovery from prior-year reconciliations during the second and third quarters this year. As Jordan mentioned, our operations group did an excellent job controlling expense growth during the first quarter, with operating expenses rising only 1% from the same period in 2012. We currently expect that same-store operating expenses for all of 2013 will increase between 1% and 2%. For the first quarter of 2013, our G&A totaled $7.1 million or 4.9% of total revenues. We continue to run one of the most efficient operating platforms in our peer group, with our G&A and CapEx among the lowest as a percentage of revenue. Comparing the results for our combined office and multifamily same properties in the first quarter of 2013 to the first quarter of 2012, revenues increased 1.4% on a GAAP basis and 2.1% on a cash basis. Expenses increased by 0.9%, both on a GAAP basis and on a cash basis, and net operating income increased 1.5% on a GAAP basis and 2.7% on a cash basis. Cash same-store NOI on a quarterly basis is very sensitive to the timing of relatively small dollar amounts. As the result of the timing of tenant recoveries that I already mentioned, as well as AIG's higher free rent during the third and fourth quarters, we are projecting that our 2013 cash same-store NOI will be between 1% and 2% greater than in 2012. Turning to office fundamentals. During the first quarter, we increased the lease percentage for our total office portfolio by 30 basis points to 91.4%, while our occupancy rate declined 30 basis points to 89.3%. As we discussed on our last call, we had a number of expected Q4 tenant departures that were deferred until 2013. Excluding the effect of these delayed tenant move-outs, in the first quarter, our leased rate increased by 70 basis points, and our occupied rate increased by 10 basis points. During the first quarter, we signed 179 office leases covering 754,000 square feet, including 237,000 square feet of new office leases. Our annualized TI and leasing commissions in the first quarter are among the lowest in the last 3 years. We are now raising office rents in Honolulu and continue to show higher net effective office rents in all of our office submarkets other than Warner Center. Our rents continue to roll down from leases signed during peak periods, although those leases represent a smaller percentage of expiring leases each quarter. Excluding the AIG lease, during the first quarter, on a straight-line basis, our average rent on executed office leases was 3.8% lower than the average rent -- expiring rent for the same space. On a cash basis, our beginning cash rent on executed office leases was 1.4% lower than the average starting rent, and 13.7% lower than the average ending rent on the expiring lease for the same space. The difference in these numbers reflects the impact of our annual rent bumps. On a mark-to-market basis, our office asking rents were an average of 3.3% lower than our in-place cash rents. This differential reflects a number of factors, including our built-in annual rent escalations. On the multifamily side, our 2,900 units were 99.6% leased at March 31, 2013, with continued strong rental increases. During the last 12 months, we have raised our average asking rent on new residential leases by 5.8%. Recurring capital expenditures for our apartment communities during the first quarter of 2013 averaged $66 per unit, down from $110 per unit during the first quarter of 2012, largely reflecting timing differences. Now turning to our balance sheet. As we mentioned on our last call, in January we paid approximately $8 million to purchase an additional 3.25% interest in Douglas Emmett Fund X, and an 0.9% interest in Douglas Emmett Partnership X. These funds collectively own 8 properties totaling 1.8 million square feet of space in our core submarkets. Our weighted average ownership percentage in these properties is now just under 60%. During the first quarter, we used $90 million of our cash on hand to reduce the outstanding balance of our April 2015 loan to $150 million. At the end of the quarter, we still had over $292 million in cash on our balance sheet. Our net leverage was 41% of enterprise value, well within our target range. We continue to have ample liquidity for potential acquisitions and other working capital uses. As Jordan mentioned, we also expect to use a portion of our cash on hand to complete the purchase of 8484 Wilshire later this month. The REIT will own 100% of this multitenant property, and we will not use any debt to close. On April 30, 2013, we closed a $325 million loan to refinance an existing loan to one of our unconsolidated funds, reducing its outstanding debt by $40 million. The new loan matures on May 1, 2018, and we have effectively fixed this interest rate at 2.35% per annum until May 1, 2017. Finally, we have increased our guidance for 2013 FFO to between $1.43 per share and $1.49 per share. This increase primarily reflects better cash NOI and our acquisition of 8484 Wilshire. Somewhat lower interest expense and G&A is offset by higher share count as a result of increases in our share price. For more information on the factors underlying this guidance, please refer to the new schedule we've added to the back of our earnings package. With that, I will now turn the call over to the operator so we can take your questions.

[Operator Instructions] Your first question comes from the line of Jordan Sadler with KeyBanc.

I wanted to dig into 8484. If there was any incremental insight you could offer. I know it sounds like, Ted, you mentioned that it is incorporated into the revised guidance, the transaction?

Yes, it is.

What's pricing look like though? How should we think about the economics on the transaction?

Well, when you say what's pricing look like, we gave -- we bought it for $89 million, it's 225,000 square feet. What's the...

Cap rate?

We're not big on cap rate, and in terms of getting into too many of those details, I think, we'd like to wait until it actually closes.

Okay. How occupied?

It is mediocrely occupied. We signed a new deal with Larry Flynt, and we'll come out with some better detail after the deal closes. But we're real pleased with the deal. I mean, but it's a deal that's going to take -- we're going to do rehab, we're going to do lease up, and we're going to do much stuff to it. It's a building with great bones. It used to be the Great Western. Great Western headquarters? So it's well located, great bones, it's exactly what we look for and like to do.

Kind of like a core plus transaction?

Yes.

Okay. And then just on sort of the role expectations. The detail x AIG was helpful. I'm just curious, looking at sort of the supplemental, maybe drilling down some of the bigger role exposure over the course of the next 4 quarters is in Sherman Oaks and Warner Center. Specifically, based on sort of what you're seeing in market rents there in those markets, submarkets, what do you think we should expect in terms of what rents do?

I mean, I don't know that our -- if I'm understanding the -- I don't know that our role necessarily drives what rents are doing, but I will tell you this. Warner Center is a market that, I mean, we're real pleased and it's recovering now. It's not going to recover in rental rate until the occupancy gets up closer to the 90%. But in terms of the leasing activity out there, I mean, the numbers speak for themselves over the last couple of quarters, right? So we're really -- it's a market that's moving, and I'll just -- I know I've said this to being blue in the face, but there was a time when Warner Center rents were higher than the Encino/Sherman Oaks rents. And today, Encino/Sherman Oaks is a very hot market, and it's doing extremely well for us. As earlier was said, all of these markets and I'm pleased that this quarter, we were really able to make it clear that even including Hawaii, we're seeing rents move up now, with the exception of Warner Center, but maybe I'm not answering your question. So I'm not sure.

I was just -- I mean, should we expect the Sherman Oaks and Warner Center roll that happens over the course of the next year to roll down what magnitude or roll flat or what have you? I mean, it looks like you have 300-plus-thousand square feet in each market in the $33 range, call it.

God, I don't have the information on this call to answer that. I mean, maybe Ted can look into it or he's sort of studying, his face looks like he's thinking about it. I'm looking at him. I'm talking while he's trying to figure it out. I don't know. I think the 2 markets are very different. I think, that -- no, let's talk about each one of them maybe. So Sherman Oaks has been, as you know, one of the first markets to come out of the recession. It's been doing really well. There was a sort of quarterly fluctuation going down, which actually represents an interesting story we had. We've been trying, as you know, to sort of move tenants towards Warner Center. And obviously, with the growth in occupancy in the last couple of quarters we've been having some success. And then in Sherman Oaks, we had a 30,000 square foot tenant in the entertainment technology space that wanted to expand, wanted to have a bigger floor plate. And so they were -- as a result, they moved out to Warner Center. So not in our portfolio because we don't have bigger floor plates out there. But it's that movement of tenants is actually what we've been trying to do. We backfilled a bunch of that space already in the quarter, and we'll have very little doubt that, that market's doing really well, and rents are going up there. So I think we...

I could circle back to you on market rents after the call.

Your next question comes from the line of Joshua Attie with Citi.

Are there any changes or can you give us an update on the residential development opportunities in the portfolio that you mentioned a couple of quarters ago, and do you still envision starting some of those in 2014?

Oh, yes. We're working on them. I'm not sure there's going to be -- it's a slow process as I said before, but we're working on them. There's not -- I don't know if there's a lot to update in the real minor details of getting entitlements worked out and planning, but it's moving along.

Well, I guess now that we're close to -- now that we're closer to 2014, could you give us some sense of the dollar amounts of starts that you could see next year?

Well, I'd like -- can we wait a quarter, another quarter to get some things finished up, and then I'll give you a bit. Maybe we'll focus on that and giving you a better feel for that.

Okay. And kind of separate question. You had a large cash balance, and you put some of that to work and you still have some. But are you considering a credit facility again? I know, in the past, that you felt like having $400 million of cash kind of precluded the need for a credit facility, but are you rethinking that?

Well, what we've done is we're sort of storing cash and that loan that comes up in 2015, which is a floating rate loan. So we have a lot of kind of in that pool. We can pull equity out, I think, relatively easily. Now do we want to do it -- we've got to -- we're kind of looking out on the horizon of what's coming up, what the needs are, and we're going to refinance that loan. So should we refinance that loan and turn it into a credit line or should we refinance that loan and take the cash out? We're working through that right now, but it's going to be some mix of that because that's where -- well, there are some other places we're storing equity, too, but that's the main place we're storing it where it's very flexible and available. That's like the $90 million paydown we did?

Yes.

Our next question comes from the line of George Auerbach with ISI Group.

Just maybe ask Jordan's question a separate way, Jordan Sadler. Any thoughts on cash rolldowns for the balance of 2013? I know the first quarter was sort of impacted by AIG, but how should we think about the balance of 2013?

Well, I've been giving you this number that I look at, the cash generating. Where we -- we see obviously, you know we do a ton of deal leases, so we see the pipeline of the leases and where the sort of bid/ask is negotiating those deals to try and get a feel for what's coming in the future on them. And in my last look, we were up to 40%, maybe a hair over 40% where it was rent rollup instead of rolldown. Now obviously, that doesn't get you there, but that's moved a great distance in the last 8 quarters, all right? When it was like 10% or something. So it's moving in the right direction, but it's as we said a number of times, which quarter it hits, I hope it hits soon because I know everyone's waiting to see it. But which exact quarter it hits is a tougher call and the best way to predict it is we've been -- it's kind of looking at the pipeline of what's being leased, the deals are being in negotiating coming that'll close in the future.

Okay. Well, maybe on that question, can you maybe talk about your expectations? I know you're sort of pushing economics, net economics in every market except for Warner Center. Can you maybe quantify the growth in net effect over the last 6 or 12 months?

I'd say that we're up, in the last 18 months, a solid 10%, and maybe a little more. I don't know the exact for the last 12 months, I mean, because it's -- but in the last 18, we're up over 10%.

Okay. And last question for me. Jordan, you've been increasingly constructive on the Warner Center market the last -- especially 2 quarters here. How would you frame your expectations for leasing in that market over the balance of the year? I know you're almost 84% leased today. Where do you think that number is end of 2013?

That's tougher because as we get closer to 90%, obviously, it's going to slow down. We've been doing pretty -- we did 70 basis points this quarter and we did 200 the quarter before. I mean, I think that's -- if we can even keep going at the 70 basis point pace, I'd go, "Job well done, we're moving out of the cliff." And it's -- but I hope that, that's accelerating. I mean, Ken's sitting right here. I don't want to put too much pressure on him. So I'll just say that I'm optimistic that going forward, which I know you're focused on this because getting absorption out of there goes straight to the bottom line, and it has real material impact on FFO and all those numbers. And yes, we're focused on it too, and it's performing the way we had hoped, which we're getting a lot of good absorption out of that market, but I don't want to put a pin in the ground right now.

One of the things to remember, and it's the reason we don't give sort of submarket guidance on occupancy is when you get down into these smaller numbers and you saw it in Sherman Oaks/Encino where a single tenant moving out, even though we backfilled half of it, still shows up in the numbers. On a quarter-to-quarter basis particularly, it's really hard to make a judgment call. But as Jordan said, the trend lines in Warner Center, we told you last year that we really were excited about Warner Center over the longer term, and the trend lines, I think, we've been showing that. And I think we still are excited about it going forward, but exactly where it plays out each quarter is hard to tell.

Your next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Two questions. First up, on the apartments. Obviously, you got good accelerated NOI growth out of the apartments, but your expenses were definitely a lot lower, 1.6% this quarter. I know they can vary quarter-to-quarter, but last year, expenses in the apartments seem to average around 3% to 4%, and now it's dropped. Just wondering how much of this is sort of quarterly volatility versus there were a bunch of items and expenses that ratcheted up last year that aren't going to hit this year and curious what your outlook is for expenses as we think about apartment NOI growth this year.

Okay. So I think that -- I think, first of all, when you're having good increases on the revenue line, you're going to have sort of better NOI even if you have expense growth. I think that there also was some timing in the first quarter. So I think we're not looking for the expenses on that to be the big contributor to the NOI growth. It's really going to be at the top line. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. That's helpful. And then second, Jordan, I understand your hesitation to discuss too in depth the Flynt building but just for generic purposes, like if you look on the website, you can see that they're showcasing ground floor space that presumably could be monetized. But can you just sort of provide some generic color without being too specific that you don't want to disclose beforehand but just as we think about this acquisition, as far as the impact today versus what it potentially could be down the road? And if that down the road is within a year or so or if this is a multiyear underwriting, the way you're thinking about it?

Okay. Well, it's as I said a few minutes ago, the bones of the building are fantastic, and so it's really like it's a perfect Douglas Emmett asset. Larry Flynt and his organization were a pleasure to work with. We did a new deal with them for roughly 72,000 feet. So they're not -- they're super valued large tenant in the building, but not overwhelming. And we're -- I think that there's work we're doing in the lobby, there's some ground floor leasing, there's some other leasing. There's actually some very -- first of all, Flynt organization is a great organization and there's some other organizations that are in there. There's some embassy or consulates. And so we are starting with a good mix, and we're going to build off that. And we'll redo the space. We'll lease it up. We spent a little time getting them on to our form, but I'm optimistic that our kind of rehab and we'll be deeply into the re-leasing by next year, and you'll see a very well-performing building, and I hope that -- I'm an optimistic guy. I think it's even going to outperform our expectations hopefully earlier than that, but I think, by next year, it's going to be a very good contributor to the portfolio. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: So as far as the CapEx needed versus the $89 million purchase price, is there a meaningful amount of CapEx above that or not so much?

Yes. I don't want to -- I mean, I don't want to go too much in numbers, but it's like between $4 million and $5 million that we would put in, that we're going to put in to get it to where we want it. I mean, it was an owner-user building, and now we need to put it -- it has the ability to be one of the best buildings in Beverly Hills. The bones are that good. I mean, the floor-to-ceiling glass, and the whole iconic John Wayne statue. Anyone that's seen the building, I mean, everybody knows that building.

Your next question comes from the line of Vance Edelson with Morgan Stanley.

The asking rents in multifamily, they've been in the high 5s for a couple of quarters now and you are looking for some top line growth there. So do you view 5% to 6% as sort of a natural level for another few quarters or any chance we could see a change there?

Well, there's always a chance you can see a change. And I'm not quite sure natural, but here's the thing, I would say what we said in the prior quarters, which is we have not yet seen significant change in resistance at this point. So I think we're still looking forward to having additional quarters of good solid growth.

Okay. Great. And I might have missed it but just with regard to the acquisition pipeline, are you still characterizing it as still fairly limited or is there any uptick in the opportunities in either L.A. or Honolulu?

The pipeline in terms -- people we're talking to, cajoling, working on, it stays fairly similar because we're just in these markets and we're always working on people, but in terms of, I think, people's inclination to bring buildings to market, that's improving and more stuff's coming to market. And so, well, remember, you're talking to a guy that's almost always wrong and optimistic about how much we're going to buy each year. I'm feeling even better than I do -- have in the past that we'll get a few more good deals done.

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

With some of the occupancy in the West L.A. markets tightening, are you sensing any greater willingness for tenants to start lease renewal negotiations earlier than they have over the last couple of years?

I don't know that, that can be said. I mean, the primary place where you see the tightening up is in better rental rates, reduction of concessions. I mean, one...

I would just say, I think, with most of our smaller tenants, they're not thinking about it in quite that way that they're doing things. I think that most of our small tenants are reacting to things within their own world. And so when they're sort of thinking about renewing, they sit down and they're not really focused on what the markets for real estate are doing. And that's actually one of the reasons why it's a different process of negotiation for us.

Yes. I'll say this. One thing that's a clear sign is that we're starting to get some higher bumps in our leases. So I don't know if -- for the -- our longtime followers and well-wishers, I think going into when we went public, we were getting 4%, and even better in some instances in terms of the embedded bumps in the leases. And now we're starting to do deals again, where the numbers -- and then we fell back to 3% during the recession. Now we're moving back up again. We're signing deals now 3.5%, 4%. So it's moving back up. So that's a great sign. And another one is that focusing kind of off just the rent issue is that our parking revenue is moving again at a very good clip with not only improved occupancy but density that you get out of tenants kind of doing additional hiring and filling out their space.

That was responsible for the sort of millions-plus quarter-over-quarter gap there on the office parking line?

There are a variety of factors in that. It's not a single factor. There are changes in rate, there's changes in density, and then there's some other income factors in that same line.

Okay. And then in the Warner Center market, I mean, from an overall market occupancy, where is that today? And sort of what sort of needs to happen from a tightening standpoint? I mean, you guys normally talk about 90% occupancy, but it seems like that's going to be a fairly long way off at this point, right?

Well, we're a huge portion of that market, particularly the Class A part of that market. So it would be very hard for that market not to just move along with us. I think we're in that particular market, we might be 100 basis points or 150 basis points ahead of the market, but it's going to stay relatively close to us. But as I said, I mean, there's deals in our portfolio and out of our portfolio. I mean, the market is filling. So in terms of our long-range plans, our long-range expectations for Warner Center, I think that I always -- we always had confidence, even through this most recent recession, that it would play out in a good way for us, and now I think we even feel better about that because it is playing out in a good way.

Okay. And then last one for Ted. The same-store cash NOI growth on the '13 outlook, the 1% to 2%, is that just for the office or is that including the apartments as well?

That includes both -- that's both office and multifamily.

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

Actually, it's Jed Reagan here with Michael. Just want to ask a question. So there was some uncertainty on the last earnings call about the reliability of your same-store NOI model, and so I'm just wondering if you've fine-tuned that model at all or perhaps created a new model altogether. And then just kind of a related question to that, what are the key drivers of the increased same-store NOI guidance?

Well, that wasn't a great call. I -- the company is very good at forecasting, and your company in particular knows because you followed us from the day we went public that we've been very good at forecasting our numbers. Now at the same time, we're rightfully a conservative company, and our forecasting's conservative. I was more optimistic last quarter. I didn't do a good job of communicating that, and the good news is my optimism was warranted, and the numbers are coming out better. In terms of the exact reasons why the numbers are now -- why we're now projecting 1% to 2% for the year has to do with expense, we're taking a look at our expenses and expense performance that we have had in the first quarter as an indicator that our basic fundamentals across the board, parking revenue that I mentioned, it's things like that, that have given us the confidence to forecast the 1% to 2%.

Okay. But there wasn't sort of a major overhaul that took place subsequent to that?

No.

Okay. And then just another one. Just wonder if you can talk a little bit about how your current leasing pipeline is looking, and maybe how that's trending versus the last quarter or 2.

It's all green lights across the board. It's a strong pipeline. The last few quarters have been strong, and there's no reason to expect from us looking at the current pipeline, that it's not going to continue to be strong, and it's not going to continue to support increasing rents.

Okay. Would you characterize it as accelerating?

Well, it's hard to say, just looking at one quarter to the next, accelerating, but when I'm already saying supporting increasing rent, that's pretty good. I mean, you want to have increasing, increasing rents?

And just last one for me. How are you guys thinking about dispositions in the current environment? Do you have any non-core product that you'd consider harvesting at this point?

I don't feel that way. I mean, when we went public quite a number of years ago, the stuff that we didn't think was in the class that we wanted to be in terms of a long-term portfolio we did sell. We sold, I don't know, 15 buildings or maybe a few more. Now I feel like we've got a good concentrated portfolio in markets that we really like, and that as the markets improve, there's no reason to choose one out of the pack and say, well, this one's not going to do as well as others or I can put this money into another one in the same market and expect it to do any better. So no, I don't expect any dispositions anytime soon.

Your next question comes from the line of John Guinee with Stifel. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Here's a sort of a technical question, Ted. You've got about $50 million of FAS 141 FFO, which is about $0.08 or $0.09 a share, which I expected to be gone by now because I thought that had to do with acquisition-related accounting, but maybe it does, maybe it doesn't. The question is, I think, does the FAS 141 go away and offset growth in rents over the next 2 or 3 years? Or is that apples and oranges?

I think it's apples and oranges. I'm not quite sure if we're deep into accounting, I don't even know we can use fruit as an analogy here. But you are correct that most of our FAS 141 relates to leases at the time of the public offering, although every time you do an acquisition, there are some FAS 141 considerations that come in. But I think that the thing that you may not be thinking about is we have a number of leases that are still in place from the IPO, leases that were 10 years or even in some cases, like the Warner Bros. lease, it's longer than 10 years. And so that number will continue to come down by, I don't know, call it, and I'm making this number, call it about $3 million a year for the next number of years, and then it'll sort of level off until we get to the end of the Warner Bros.' leases, the big one, but there are actually some other longer-term leases out there. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: So that should burn off to the tune of $3 million a year for the next 4 or 5 years?

Yes, that's a rough number to use. So if you look at it next year, I'm guessing -- again, we'll have it, it'll be about $12 million next year, and again, there are always indications of what happens, so it just burns off like that.

It's only that you could even make predictions like that because we went public, and there was so much FAS 141 when we went public. I mean, as we're buying, you build FAS 141. And then as the leases in the buildings that you bought burn off, you burn off FAS 141. So there's -- I doubt there's any company out -- public company out there that doesn't have some chunk of this that's always floating around, and obviously, when we went public, we had a lot. Now I suspect that we have about an average amount. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: No, you still have a lot. And then the second question is you were nice enough to host me in Hawaii a year ago and that's a very thin market. My question is can you give us any more sort of a rationale as to why rents are going up in Honolulu?

Well, the Honolulu economy is actually doing fairly well. Tourism is doing great. The military is actually doing better there because they've been bringing people back from the wars, and construction has started up again. So the 3 big industries in Honolulu have been doing fairly well. Unemployment is approaching 4%. They have more people in jobs in Honolulu today than they had at the top of 2007. So all of those are good signs for Honolulu, and the market has been 90-plus for a while, and so it was always right at the edge. I think we've been telling you guys that while we couldn't call it at that point that it wasn't unlike Warner Center, it's right at the edge of going over, and we think it's gone over now, or it has gone over now.

Your next question comes from the line of Rich Anderson with BMO Capital Markets.

I just want to say, Jordan, "mediocre occupied," that was just priceless, I love that, I just want to say that. So when you look at the same-store portfolio, 1% to 2% up on a cash basis, it seems like things are going pretty well, and that maybe even still is understating what you'll ultimately do this year. But I'm curious if you could look back to the 2006 time frame, although you weren't able to produce same-store results then because you were so new to the public world, would you be able to hazard a guess at what the potential same-store internal growth prospects are in this portfolio when things are kind of back to normalized levels?

I don't know if I'd call -- I mean, essentially, because the expense side, I guess, you're not asking us to project. You're saying what was the impact of those rapidly rising rents for 2005 and '06, and '06 and '07. And first of all, I don't know that we're at -- I wouldn't kind of call our equivalent to be 2006. We're not seeing [indiscernible]

No, that's probably the peak, right? Yes, okay.

That's a good question. It's a good way of asking it because people keep asking us, as rents start rising, how quickly will we see the actual increase in rental rate reflected in our -- in that year's FFO and AFFO in those numbers. And I don't -- I mean, maybe you guys have a better handle on that in other markets where rents are moving quickly and where that impact is. As you just said, we haven't lived through, as a public company, a period when we were focused on this issue and rents were moving at a solid double-digit pace to see how much we were getting out of that. We haven't done that work yet, but it is a good question because once you get through the impact from just positive absorption, that's the next impact everyone's looking for. And we could do a little more work around that and think about it. But we don't have an answer. I don't have an answer unless Ted does, I don't know.

No, I think -- I mean, the truth is that before we went public, which would be the period it was, is the types of analytics that you use as a private company are very different. So I don't even know that we have that data easily available, but it's an interesting question, and we'll think about whether we can come up with some ways of addressing that.

There you go, Stuart's going to put a note down right now.

Get on it. And then the second question, unrelated. You probably didn't envision owning 60% of the fund at this point, when you're originally putting it together. I'm curious as to if you think that all this change in ownership over the past couple of years is actually a blessing in disguise in your eyes in terms of you getting more of that or would you prefer to be back to your private days' DNA and doing more in the way of fund activity in the more conventional sense?

I think that, as we've said, the fund was really designed to augment our capital at a time when our stock price was not the place where we wanted to hit the equity, so we did this as a supplement. It's not really the best way for a public company, in our eyes, to sort of buy things, especially when we've got -- if we could buy, we'd rather buy on balance sheet to be fair, and we are happy we're able to acquire it. Although I will say that even from the beginning, there was -- we were always contemplating that a very significant portion of the cash that went into this would come from us because as a public company, you guys reward us for what we invest in, not sort of managing other people's money.

Okay. So you don't think then that, at least for the foreseeable future, that it'll be 100% on balance sheet, no more kind of joint venture/fund activity, you want to just go it alone for now?

Well, we could still do joint ventures. I think joint ventures are a little better way for us to go on something that's large if we're looking at alternatives to just raising equity in the public markets. But this deal with the blind funds where when you don't have something, you still have the obligation to look for something. That's really -- a lot of energy gets put out and obviously, for all that energy, you don't necessarily get the whole bang to your company. So that would be less preferable.

Your last question is a follow-up question for Joshua Attie with Citi.

Michael Bilerman. And so just on the funds, I guess, is there about $100 million, $105 million of investor capital, equity capital left in those funds? Is that a fair number?

No, I think it's more than that.

I think, in the combined funds, it's probably close to 40%.

No, it's more in the neighborhood of -- it's 200 or 200 plus.

It's around 200.

[indiscernible] that we're managing of their investment, is that what you're asking me?

Yes, well, of their equity...

Yes, they're equity investments.

Yes, they're equity -- the amount of cash they put in.

Correct. And that's including the unfunded commitments or that's just what they...

There are no more unfunded commitments. The investment period for the funds have expired.

Right. So the $200 million just is -- and I guess, how chunky are those investors in terms of further opportunities for you to consolidate in the remaining 40%? I mean, is there more opportunities for you to buy those? You've obviously been increasing your stake. I'm just trying to figure out whether this is going to be something that's going to continue to be a source of capital for the company.

Well, I mean -- let me start out with none of these deals were -- I mean, we weren't happy about the deals because I want the people that invested along with us to get the benefit of having held these properties and doing real well. I mean, we want our investors to do well. The sales that you've seen happen have been driven by not market-related or anything, but regulatory things, one's a large financial institution that, under the new regime, doesn't feel comfortable having a type of equity investment, another was a European pension fund manager that for whatever is going on over there, they had to get out. I mean, so there are opportunities, I guess, if you look at it from the narrowest focus, but the best is when they stay with us through the whole thing, and we want us all to do real well, and they do well. So I don't know if there's any of that left, but frankly, I hope that our partner stay with us on these deals through the rest of the term.

So we shouldn't expect any of that 200, there's nothing sort of in the works...

We didn't expect the ones that came up, frankly.

It really depends on what their -- if they have issues that are individual to them, I don't think it's likely that anybody's going to butt sell because of the market or anything else. If they have regulatory issues or they have a need for cash, and so that's -- again, it could happen but I wouldn't -- we don't count on that.

And the composition of that 200 that's remaining, is there chunky pieces in there?

There's a good mix of investors there. I mean, it's hard for it to be very chunky when we're such a huge chunk. I mean, the rest are a mix. It's not as though it's 1 or 2 big guys, if that's what you're asking.

Yes. I was just trying to figure out what the -- and then, Ted, you had some new disclosure in the lease roll, Page 19. You broke out sort of short-term leases from the current year expirations, which I guess is the way you'd done it before. I guess, 187,000 square feet, is that a consistent amount of short-term? Is there anything chunky in that 187,000 that was a holdover that you're negotiating with? How should we think about sort of your month-to-month or your short-term leases ongoing?

Well, I think that, that number is made up of a variety of sort of factors that just come into it. Some of them are short-term leases. Actually, we have month-to-month leases that have been in portfolio for a decade or more that are in that category. But in general, I think that's not a bad sort of trend number. Now it's down from December, because at December, as we told you, we had an unusually high number of holdovers, so we had about 60 basis points of holdover we told you in December, that's why we told you that. And therefore, it's down from that by something on that order of magnitude. But I actually don't think -- my impression, I mean, we'll see it as we go forward in the numbers quarter by quarter, but my impression is that there's not a lot of -- there's a lot of bouncing in that thing, but it's not a huge number, up or down.

Is there any reason why those rents are materially below $30 relative to a portfolio average of $35? Is there any reason why those are materially weaker? I would have thought if someone wants to go short-term, you'd charge them an arm and a leg?

Well, it depends. The month-to-month stuff tends to be stuff that is sort of odd things in the portfolio, so there, it's not necessarily the...

Not necessarily the best phase.

Not necessarily the best phase, yes. And then also, some of the short-term deals you do, for example, we'll do production space when there's a company that's doing a movie, they need production space for a month or 2. And if it's depending on the deal, that might be actually cheaper for them if it's bad space.

There are no further questions at this time.

Okay. It was a pleasure speaking with all of you, and we look forward to speaking with you again soon. Thank you.

This does conclude today's conference call. You may now disconnect.