Douglas Emmett, Inc. (DEI) Q2 2013 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Douglas Emmett's Second 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. Good morning, everyone, and thank you for joining us. Our markets continue to strengthen. Both our leased and occupied percentages are rising, and we are achieving higher net effective rents in all of our markets except Warner Center. As a result, on a straight line or GAAP basis, the office leases we executed during the second quarter rolled up 3.4% over the expiring leases for the same space. Of course, as we have warned in the past, this is a very temperamental statistic, so it is likely to bounce around over the next few quarters. Still, I am very pleased that we are headed in the right direction this quarter. Our multifamily portfolio is also performing exceptionally well, with average asking rents at the end of the second quarter 5.2% higher than one year ago. Fueled by higher revenue from both our office and multifamily portfolios, as well as excellent control of our operating expenses, our same property cash NOI grew by 2.4% in the second quarter. These results reflect the fact that over the past year, Los Angeles has been recovering faster than the country as a whole, with the Westside leading the way. Supported by a wide variety of industries, including finance, health care, tech and entertainment, office employment in Los Angeles is growing. While employment for the entire nation grew by 1.6% last year, L.A. County grew by 1.9% and West L.A. grew by 3.4%. On acquisitions, we are already making good progress leasing and repositioning 8484 Wilshire, which we acquired in May for $89 million. In addition, we see the potential for additional acquisitions in the next few quarters. I will now turn the call over to Ted.

Thanks, Jordan. Morning, everybody. I'll begin with our results then address our office and multifamily fundamentals and finish with an update on our 2013 guidance. Compared to the same period in 2012, in the second quarter, FFO increased 9.9% to $67.7 million, or $0.39 per diluted share, treating debt interest rate swaps as fully terminated in the quarter of termination. AFFO increased 8.6% to $55.3 million, or $0.32 per diluted share. Office revenues increased by 1.1% as a result of several factors, including a one-time payment of approximately $1 million from a former tenant whose S&E defaulted. Our bottom line continues to benefit from our excellent expense control, with same-store operating expenses during the second quarter actually declining from the same period in 2012. However, because of scheduled increases in utility rates and other third-party costs, we expect same-store operating expense growth of between 1% and 2% for the entire year. For the second quarter of 2013, our G&A totaled $7.1 million, or 4.8% of total revenues. Our operating platform remains highly efficient in converting NOI to cash flow, with both our G&A and our CapEx among the lowest of our peers as a percentage of revenue. Comparing the results for our combined office and multifamily same properties in the second quarter of 2013 to the second quarter of 2012, revenues increased 0.7% on a GAAP basis and 1.4% on a cash basis. Expenses decreased by 0.5%, both on a GAAP basis and on a cash basis. And net operating income increased 1.3% on a GAAP basis and 2.4% on a cash basis. We are projecting that our same -- that our cash same-store NOI for all of 2013 will be between 1.5% and 2% greater than in 2012, slightly below our run rate for the first half of the year. Cash same-store NOI on a quarterly basis is very sensitive to the timing of relatively small dollar amounts. During the second half of this year, we expect increased operating expenses and pre-rent for AIG to hold down our cash same-store NOI growth. I want to mention one other issue relating to our financial statements. As we said last quarter, we are repositioning a 79,000 square-foot building in Honolulu, most of which was previously occupied under a long-term lease by a health club that went bankrupt. On June 1, we began operating that club while we restore and upgrade it. While we expect minimal FFO impact this year, you will see other effects to our income statement. In the second quarter, there was a one-time increased depreciation from the write-off of about $1.5 million in tenant improvements related to the old lease. While we operate the club, income and expenses related to the club, including rent paid by it, will be reported in other income and other expense rather than rental revenues and operating expenses. And because 1/3 of the building is owned by an unrelated party, you will also see fluctuations reflected in our net income from noncontrolling interest. Now turning to office fundamentals. During the second quarter, we increased the lease percentage for our total office portfolio to 91.5% and our occupied percentage by 40 basis points to 89.7%. These numbers include a small negative impact from the acquisition of 8484 Wilshire. As you know, we target new acquisitions with significant vacancy to take advantage of our strong operating platform, and 8484 fit that profile. During the second quarter, we signed 197 office leases covering 692,000 square feet, including 226,000 square feet of new office leases. We continue to show higher year-over-year net effective rents in all of our submarkets except Warner Center. The average starting rent on office leases we executed last quarter was 4.6% higher than the average starting cash rent for the comparable prior lease. In addition, the overall straight line economics of our new leases was 3.4% higher than the comparable expiring leases. As a result of our unusually high annual rent bumps, the beginning cash rent on our new leases was 8.1% lower than the ending cash rent from the matching expiring lease. On a mark-to-market basis as of June 30, our average office asking rents were only 1.8% lower than our in-place cash rents. On the multifamily side, our 2,900 units were fully leased in June 30, 2013, with both our in-place and our asking rents again setting all-time records. During the last 12 months, we raised our residential asking rents by an average of 5.2%. The current asking rents for our multifamily portfolio now exceed our in-place rents by an average of 21.4%. This embedded rent growth represents potential annual NOI of approximately $14.7 million and mostly reflects the deferral caused by rent control in a rapidly rising market. About half of this embedded rent growth relates to our remaining 252 pre-1999 units. Recurring capital expenditures for apartment communities in the second quarter of 2013 averaged $70 per unit. Now turning to our balance sheet. We've had an active capital calendar so far this year, investing $37 million in our unconsolidated funds, another $89 million to purchase 8484 Wilshire, and an additional $90 million to pay down our April 2015 loan. Even after these investments, we still had over $184 million in cash on our balance sheet at the end of the second quarter. We continue to have ample liquidity for potential acquisitions and other working capital uses. We are also looking at obtaining additional liquidity for future acquisitions by putting in place a credit line secured by a few of our under and unencumbered properties. Finally, we have increased our guidance for 2013 FFO to between $1.45 per share and $1.49 per share. This increase primarily reflects improvements in our fundamentals and cash NOI. For more information on the factors underlying this guidance, please refer to the schedule in our earnings package. With that, I will now turn the call over to the operator so we can take your questions.

[Operator Instructions] And your first question comes from the line of Michael Knott with Green Street Advisors.

A question for you, Ted or Jordan, on the cash re-leasing spread, the minus 8 for 2Q. Just curious where you see that trending for the rest of the year because that data point seemed a little better than we might have expected, since this seems like the peak year for that number to be the most negative this year.

Well, I'm sure that it's going to trend into a positive direction. It's a very tough statistic to get completely positive because it's always being compared to something that's probably 12% -- the ending rent typically in a lease like ours is going to be 12% higher than the beginning rent, where we're comparing the old lease's ending rent to the new lease's beginning rent. But with that said, the trend is definitely going in the right direction. And from what we're seeing, in terms of rental rates, as well as what's rolling off in the past, you think it would just continue to improve. Now I want to say -- so improving would be my answer, but there's one caveat. Quarter-by-quarter, these numbers jump around. I mean, they really jump around. Because depending on which leases you do, depending on whether someone renews early or whether -- now, in some of our markets, we're extremely well leased, and so we're starting to lease space that maybe sat empty for a while. Right? So you're comparing to something that might be a little -- come from a little older date. So that's also going to cause that statistic to bounce around. But in general, whether it be the straight line calculation, the beginning rent calculation or the ending to the beginning calculation, they're all going in the right direction. And on the long look, we expect them to continue that way.

Understood. Second question would just be, can you touch on the leasing costs for this quarter? It seems like that metric remains fairly elevated, still pretty high. Can you just sort of reconcile that data point against the idea that you are pushing that effective rent and seeing increases across the portfolio?

Well, I think as you -- I think our TIs and leasing commissions per square foot per year still are well below the average of our peers. And -- but they also fluctuate from quarter-to-quarter. So while they're up this quarter, if you go back to the fourth quarter of last year, they're about the same as they are this quarter. So I think we see primarily almost all of that in just quarterly fluctuations. There is a little bit of a trend line in the sense that as you have higher lease rates, you're going to have higher leasing commissions because they're based on a percentage. And as Jordan mentioned, as we move to lease-up space that hasn't been leased for a while because the occupancy is up, there may be sometimes when there should be a little more TIs. But in general, we still think that our leasing and TI commissions are going to be in trend and well below our peers.

And on a -- and with the increasing rental rates on a net effective basis, it's all improving.

Your next question comes from the line of Jordan Sadler with KeyBanc.

I'd like to follow up on, Jordan, one of your closing comments. I think you mentioned sort of a potential for acquisitions. I'd love to hear sort of what you were alluding to or seeing in the market that sort of drives the optimism.

Well, I'm looking at our pipeline, and some -- these are singles and doubles. I'm not talking about giant home runs, but I see deals out there that I feel -- I'm feeling better that we're going to start -- as we've already been doing, we're going to start getting deals closed in a little bit more regular pattern, if you will, than happened during the last, let's call it, year or 2. So my optimism is that I think we're going to -- there are buildings coming for sale or that are for sale that I feel we're going to end up with.

Sellers getting a little nervous with the move-in rates?

I don't know if that's the case. I think there's just -- I think more what's happening is kind of where values are, are back to an area that sellers are more comfortable with. They don't feel like they're selling out or selling super short. And at the same time, I think, for a buyer, whether it be us or someone else, the kind of visibility of the fundamentals going forward is feeling more comfortable, too, and it's just causing people to meet at price more often than we were over the last couple of years. So we're not the only ones. I just think more transactions are going to start happening.

Okay, that's helpful. And as a follow-up, just how do you size a potential credit facility, Ted? And what are you thinking?

I think it's probably going to be in the normal size of one of our loans of, call it, $250 million, $300 million, somewhere in that range.

Okay. Is this a third quarter event potentially?

I don't think so. It's not -- I don't think we're -- it all depends on what happens with things, but I think it's more likely to be later than that.

And we're not feeling rushed about it. We're working on it, but we have time and organize the portfolio of properties. We're doing it the way we've done the ones in the past.

Your next question comes from the line of Jamie Feldman with Bank of America.

Back to the acquisition question, do you have a sense of the total size of what you could put to work

Total -- I mean -- anyway, I could tell you sizing unlike the types of deals that are out there, that are like 200,000-foot buildings. So they're not like million-square-foot deals or anything like that, they -- just like many of the buildings in our market, they range from 150,000 to 350,000 square feet. So it's sort of in that size range. And when you're dealing in that size range, you're usually dealing with buildings that range in price between $50 million and $100 million. So it's my hope to do a few deals like that, that are in that range.

Okay. And then listening to some of the apartment -- or commentaries from some of the apartment REITs this quarter was that the entertainment job cuts were -- in L.A. were worse than expected. Can you guys talk a little bit about what you're seeing just in the job market overall? And maybe that doesn't even flow through to your office portfolio. But just kind of how things are feeling and what you're seeing out there.

Well, as Jordan said in his opening remarks, our submarkets are actually -- have been doing very well in the last year on -- in terms of job growth. And I have to say that in our apartment portfolio, we have not been seeing any sort of impact on that. We're still seeing it moving ahead with solid speed and good rental growth.

Yes. I mean, I guess if you're talking about literally entertainment jobs, I mean -- so entertainment job is driving entertainment tenancy, I haven't listened to Victor's call yet, but I had a drink with him recently, and he feels great about those numbers. I mean, he's very optimistic. So he's more involved in that industry and tenancy than we are.

Yes. I think they were talking about the seasonal job cuts in entertainment.

I don't think that sort of seasonality issue affects either our office space or our apartment space since I don't think many of those people, when they go on hiatus, that they suddenly move out of their apartments and live on the streets for 3 months.

So I guess just following up on that -- I mean, are there any -- this quarter versus prior quarters, is there any change in the types of leasing you're seeing? Any new types of tenants driving more demand?

No. I think it's probably -- I think that the overall thing remains a fairly balanced -- from a bunch of industries. So all of the industries that Jordan mentioned in his early things, plus of course the sort of legal and accounting and financial services that do on top of that. But no, I don't think we've seen any major change in that this quarter.

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

You've seen really nice growth in parking and other income this year, and I think that's probably contributed to the same-store growth rate. Can you just talk about what are some of the drivers of that? And is that growth sustainable?

I think that there has been both an increase in rate and increase in utilization, probably more coming from the rate than utilization at this point, but both are up. And I don't know that there's any reason to believe that we've hit the end of that part of the cycle.

Well, you'd expect parking to be able to move along with rental rates and everything else. I mean, when rental rates are off and there's a lot of vacancy, it's hard to put pressure on parking. When things tighten up, it's easier to put pressure on parking. And people, a lot of times, don't realize how big a number parking really is, and so when it starts moving, it's very beneficial.

And sort of a separate question but also on NOI, you lifted the same-store NOI guidance, but you kept occupancy guidance the same. What were the drivers of the NOI increase? Was it -- are you getting better rents than you thought that you would have? Or is it timing of commencements?

I think that the -- it's not in any one particular factor. It wasn't a big move. So there is, I think, largely a little better -- probably on rates and a little better on operating expenses also than we had anticipated.

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: Just want to follow up on Jamie's question from a different angle. If you look at job creation, the percent increase this year month-by-month versus last year, it definitely looks like there's a slow down. Like last year was ramping up from, call it, early in the spring, like March through June of last year, the job growth rate was increasing. This year, March and April were around 2%. And then suddenly, May and June, it's gone down to 1%. So presumably, job growth factors in the seasonal stuff. So is there something, bigger picture, happening in L.A. overall, and the market is just becoming more bifurcated that the Westside isn't impacted by what looks to be market overall jobs slowing?

I don't know how long -- I don't know the relationship between job growth and office space. I mean, leading? Lagging? Oh, does the guy take more office space? Planning to hire people? Or does he hire people and feel like he's too full? So other than looking at those statistics the same way you guys do, all we can look that is actually what's happening on the ground with leasing. And I can tell you this, really strong leasing pipelines across the board. We've told you we feel like we're able to continue pushing rental rates. I mean -- so the fundamentals are good, and I don't know whether the change in job creation is leading or lagging or how that works its way into it. And frankly, I think that -- probably the numbers you're quoting are L.A. County, and where we -- we're in more of the high-end markets. And just by that simple fact that we have the 3.4% stat for the Westside, and it probably it does apply along Ventura Boulevard too, where it's a very high-end market, we're probably moving out of step anyway with that stat. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then the second question is on the acquisition front. Are you guys considering entering new submarkets? Or are all -- the acquisitions that you're looking at, they're all within in existing submarkets?

Well, we're -- as I've said in the past, we look at those markets up and down the coast. But the acquisitions I'm talking about are in our -- markets we're already in.

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

Ted, I've heard your comments about higher operating expenses in the back half of the year. Can you just talk a little bit, in terms of the guidance, what else? Is that the sole driver? Because if I look, you did 37, 39 in the first half of the year, and it seems like basically, the top end of the guidance range suggests 36, 37 or inverse of that or something in that neighborhood. What's driving the sequential decline in the FFO per share other than just higher operating expenses?

Well, as I said -- as you said, a lot of it is in the higher operating expenses. We also mentioned in the call, I mentioned that there was -- this quarter, there was a onetime million dollar amount that was in there, and that impacted favorably the current quarter. And finally, you've got the AIG free rent, which is we've told you is -- while it hits in some respects, a lot of the first and second quarter, most of it's concentrated in the third and fourth quarters.

Okay. And then second, given the fact that you guys essentially control Sherman Oaks -- and Warner Center market, can you just give a little bit of leasing color in there? I mean, are you guys -- is the occupancy gains as a result of you guys taking market share? Or is it of -- you're starting to see some signs of health, or greater health in Warner Center and greater health in Sherman Oaks than what you've seen over the last couple of quarters? Can you provide a little bit of color there?

I'd say when you're talking about Encino and Sherman Oaks, they've been healthy for a long time and doing extremely well. I mean, I would say they've acted extremely similar to the Westside. So when we look at the markets, those markets are operating similar to whether you're looking at Santa Monica, Brentwood, Beverly Hills, et cetera. Now if you go over to Woodland -- and I will say extremely good. When you go to Woodland Hills, I'd say it's not that it's robbing Peter to pay Paul or musical chairs or whatever terms you can use to show absorption without it being kind of market impactful, I think it's really the markets absorbing. So we showed -- we went from -- what was our fourth quarter increase? What was it?

200.

200 basis points in fourth quarter, 70 basis points in first quarter this year, and now we just did another 20 basis points. And while it does look like a decline, I'm going to tell you, 3 quarters in a row with that kind of strong absorption and it is still looking very good out there. I mean, we're getting -- it's not that like we're stealing a tenant from the other guy, now he has a vacancy. I mean, it's -- and effectively, because we own so much of the market, we'd be almost, a lot of times, stealing it from ourselves. I mean, it's just generally, that market is improving.

As Jordan said, the rent in -- Sherman Oaks has been doing very well. It actually was one of, as you may recall, one of the first 3 markets where we started increasing rents 1.5 years ago or so. And so 2 things have happened for Warner Center. I think demand is up there for all the long-term trends we've talked about. But in addition, as the other submarkets, including Sherman Oaks, have moved up in rent, Warner Center becomes a more desirable market for tenants. And finally, as those other markets, including Sherman Oaks, fill up, if you want to find a 15,000 or 20,000 square-foot space now, it's really the place -- or anything bigger than that. It's really the place you end up having to go.

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

So you still have, I think, 90 to 140 basis points of occupancy gain in the back half of the year baked into guidance. Is it Warner Center where you expect to get most of that? If I look at your leased rate across your portfolio, it looks like Warner Center, Brentwood and Honolulu are probably the areas that are maybe a little under target.

I think that it's -- the gains in occupancy are spread across the portfolio. Although as you would expect, the areas with higher vacancy have a -- they have more room to sort of take up, and so you [indiscernible]...

In ratio, they probably are, of opportunity.

Yes.

And do you think that -- Jordan, you mentioned the leasing pipeline is really healthy. Do you think that, that leased rate goes up in the same magnitude as the occupied rates, that 180 basis point spread sort of stays the same by the end of the year, leased versus occupied?

That was a number we started focusing on when we went public, and I've seen it range from being 500, almost 600 basis points, or 500 to 300 to 200. And when we -- like when we first went public, it was like 200 basis points, and we were like, "What's going on here?" Now we've come to realize that it's a number that -- you would typically say that in a market that you're leasing up, the leased-to-occupied would widen, right? But when you look back and you look at that, and -- the leased-to-occupied, it doesn't even exactly operate that way. So I'm not sure it's a statistic that useful for predicting something. It probably moves more about -- sometimes, we have some big tenants that just haven't gotten in on the types of leases we've done and sometimes smaller tenants who are very good at getting them in quickly and, therefore, that number tightens up. I'm not sure it's an indicator other than what I just told you, like a market direction.

Sure. Okay. And then just last for Ted. The increase in OpEx in the back half of the year, is that just timing related? Or do you actually think that operating expenses, which you guys have done a good job keeping down, are moving up and then will move up again in '14?

As we -- as I said in my portion of the script, they're actually -- part of it actually comes from just scheduled increases. For example, utility rates going up by -- DWT took them up by 5% starting July 1. And so there's a lot of that, that's outside our control. And in addition, to a lesser degree, we're just -- it's very hard to keep doing the sort of expense control. Because again, we start the process not by saying, "Let's spend as little as we can." We start the process by saying, "Let's keep the buildings up to their maximum potential." And so you just sort of assume, over time, with this type of thing, you're going to have that. But a lot of it comes from actually scheduled things that we just -- we don't have any problems because the third parties just said, "Utility rates are up 5%. They're going to be up 5%."

Your next question comes from the line of John Guinee with Stifel. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: I guess, Jordan, this is for you. Metro is expanding towards West LA, and my understanding is they're up-zoning and densifying near those metro locations. Can you kind of walk through where the metro lines are coming and when within your primary markets, and if you're aware of any development starts at those metro centers and the cost to build at those metro centers?

Yes. I -- not in any very good expert way, and there's not a lot of -- there's a line that's coming down into Santa Monica, right, and we have a number -- probably the most buildings of anybody along that line as it comes down into the west side. Although to say development around that -- I mean, the only development is they're like building these bridges over Olympic and stuff for the train to go down. There's no one that's developing sort of new development, or there's been no upsizing around any places where there's hubs. Matter of fact, I've been a little surprised at -- they weren't even -- I haven't even seen, particularly substantially new planned parking structures or anything. So I'm not sure how that's going to work, because you know what L.A. is like, right? People aren't going to be walking to the metro station to take the train. I know that if you get out to the east end of the valley, around where Universal is and stuff, at one point, Jim Thomas had planned a big development around a metro station that was going in there across from Universal. I don't know if that's still on the books. I know...

I think that there are some relatively small scale apartment and retail, and then very small office components around some of the stations. But there are truly very small amounts of office involved.

I could tell you, in a -- not in a related fashion, not directly to your answer, is that when people are trying to -- so let's say you have a site and you want to build it to a larger density than is allowed, you certainly see plenty of people arguing, "Hey, with the new train coming through, the traffic's going to all go away and therefore, you're not going to have traffic issues so you should allow me to build a bigger building." But I haven't seen any city councils, I haven't seen anybody bank on that argument because nobody's getting any increased density, right? But -- and other than in the downtown area, generally, I haven't seen anyone sort of like building to deal with the fact that trains are -- or hoping for whatever, that they're going to be transporting people in easier, maybe -- being able to get gains from that. John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division: So the net, net, is you think it's a non-issue in your submarkets?

Well, long, long term, but pretty long term. Certainly, outside of the public markets or maybe even my lifespan, I'm sure it's going to be extremely meaningful. But in -- any terms we'd be talking about, I just don't think anybody can predict, although a prediction of no real impact is reasonable, what -- having that sort of public transportation coming through is going to do.

Sadly, for L.A. as a whole, I think that there's a major problem flaw, which Jordan sort of pointed out in the parking side, which is we did a rough calculation, and he stated -- because L.A. is so spread out horizontally, to get subway stops within the same number of people as, for example, you might have, in a city like Manhattan or D.C., it just requires enormous amounts of lines. Literally, I think it was something like 1,000 times what we're expecting to put in to get people close to that.

And you need -- people need to get -- they've got to like completely rethink their world and go to vertical housing. I mean, like a gargantuan rethink.

Your next question comes from the line of Steve Sakwa with ISI Group.

I Just want to make sure I understand, the $1 million of kind of extra benefit you got this quarter, that was the extra D&A from the gym? Or that was something different?

No, that was something different. We had a tenant that had assigned its lease but had stayed on the lease as sort of guarantor, if you like, but they were still on the hook, and that the S&E defaulted and then we had reached a settlement with them to settle up the balance of the unexpired lease term and the period that the tenant had defaulted -- I mean, the rent that was due when the tenant defaulted.

Okay. So that $1 million is up in rental revenue? Just to be clear.

That's correct.

And then, I guess, Jordan, as it relates to kind of the assets you're looking at purchasing, anything on the broader side as it relates to Blackstone? They're clearly in a selling mode. They've listed a number of their hotel entities and obviously, listed or filed an IPO for Briggsmore. So I'm just curious kind of what kind of discussions you might have had. They also seem to be doing some individual asset pruning in different markets on the office side.

Well, they are -- I have seen that they're doing that, and they are selling individual buildings and I think they're getting into the sales mode. And certainly, we still are hopeful to be able to buy some of the stuff that's in our markets. But I can't say that there's a lot more to report beyond that.

I mean, is there much on the West L.A. side, where individual assets have come to market or being shopped today?

On the West L.A. side, no. I would -- they just did the one deal in Century City, 1888 Century Park East. So that was probably the first big institutional sale Century City has seen in an extremely long time. They sold some very small buildings in Woodland Hills that would I -- think in -- we're only -- wouldn't be considered institutional and didn't go to institutional buyers. They're doing some stuff in Pasadena, 3 buildings, but it is -- I mean, I think your -- within your question, you correctly characterized what's going on, and that is the story.

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

Jordan, a question for you. Any updates or specifics regarding the potential resi developments in West L.A. and Honolulu?

Well, we've been working -- I mean, actually, we've been working pretty hard on them for the last couple of months, although I can't say that in the -- kind of through the time horizons of our quarter-to-quarter world, it would be an update. But we're -- they're both, I would say, well on track, and moving along, we're hoping to get the Honolulu one moving at a much quicker clip. The one in Brentwood has got -- as we've said a number of times, it's got just a lot of time in the process of meetings with city councilmen and the community and hoping that they are able to sort of share our vision of what should go in that location. But it's certainly a long process. The Hawaii stuff is moving along nicely.

Just a follow-up to that. When do you think we might see sort of concrete cost numbers or yield expectations and, say, the supplemental? Is that still a year away, 6 months away?

Well, in Hawaii, I think we're going to end up spending something between $125 million and $150 million. I think on a very sort of narrow interpretation of what we're doing, you'd come out in the 5% to 6% cap rate range. But that's -- I mean, it's not a super useful number because there's a lot of work we're doing that benefits the rest of the project center. If you remember, its a project, it's 30 acres with about 700 units on it now, and we're adding 500 units in the front part. And as part of doing that, we are doing some work to the other buildings around the new buildings that we're building. We're also putting in a new sort of club, gym, pool, making some changes to the -- some other common areas. And so that's obviously going to allow us in some of those other areas in that project, to increase rent. So I don't know what a good allocation would be to give a cap rate on just the new construction. But for what it's worth, those are the gross numbers.

And then if can just ask, when you look at your 2014 lease expiration schedule, is there any particular expiry that gives you pause or concern?

Other than we're always concerned about every lease, I think that the role is well within the normal -- it's sort of our normal role for a year, and it means a lot of work for our leasing team because there's a lot of leases to be done there. But the good news is, is we expect it to be a better market than the ones we've had in the last few years to work with.

And if I could just ask one more question, Jordan, if there is a wave of acquisition opportunity that materializes, give us your thoughts on whether you would look to form another fund. My understanding is that the investment period for your current fund is past, but correct me if I'm wrong.

That is correct. All correct. If this -- the nature I described and what I see, we would just do those deals in the REIT. It would take a much, much larger deal for us to do what I think would be a joint venture. I don't see the fund -- an actual forming of fund. I don't -- I mean, obviously, that's always an option, but I wouldn't consider it to be a high probability option. I'd say, for a larger deal, we did the work. We've done a lot of the spade work to create some good joint venture partners, and I think we'd go to one of those partners or 2 of those partners on a large deal on say, "Okay, here's what we all have planned for and discussed, and now let's do it."

So another fund is unlikely, but you would reach out to those capital partners in the event of a large deal?

Yes.

And your next question comes from the line of Jordan Sadler with KeyBanc.

A couple of follow-ups. Just circling back to Michael's question a little bit on the -- on the mark-to-market, I think in the prepared remarks, you said that 1.8% was the number that your asking rents are versus the in-place cash rents.

That is correct.

They're above. So is that -- if we sort of use that, is that a good number to use on, let's say, the rest of '13 and '14 as rents roll? Roll down somewhere 1% to 2%? Or will rent growth sort of trump that at some point later this year?

It's a very -- what you're looking at there -- you're sort of mixing and matching, so I'm not sure that they work. So just to go through it, first of all, rent growth will affect that number. And depending on how fast the rent growth is, that will happen. But the translation from that 1.8% mark-to-market to the impact on individual leases rolling each quarter is very hard to make because it's just a lot of variation. And in addition, the -- let's take the average lease, which is what you've got in that 1.8%. If your average lease is a 5-year lease, average, you've got 2 years of rent bumps. In the roll down, roll up number, you've got 5 -- or 4 years of increases. So it's really hard to get a translation back and forth on that. But again, as you said, we would expect that number going back to what Jordan said in terms of long trends on the other numbers, the long-range trend on the mark-to-market is going to be positive because you've got rents going up and you've got the older leases coming off.

Yes. So meaning that just to say [indiscernible] I don't know if the plus and minus signs were straight. Okay, our in-place rent is 1.8% higher than our asking rents right now, and what we're saying is I would think that would switch over time, and our asking rents will then be above our asking, and probably the deals we're doing, above what our in-place is.

Right. And given the trends, when we say eventually, it's not -- that could be fairly short actually.

That's helpful. The other question I had was related to 8484. What was the occupancy at acquisition or today?

I think we were around 85% in acquisition.

Oh, 85.6%. Stuart just held a page with the exact for you.

And that project's been very successful today. And today is not very long since we bought it. We're at [indiscernible]...

He's not writing it, but I think it's 93%.

93%.

Yes. And we still have our rehab to do, et cetera, but I'm really real proud of the team, how quickly they were -- they actually were almost working on it in escrow and working on some tenants set for some key spaces, and they just did a great job.

Wow. Okay. And that's -- there's nothing rolling anytime soon there at 84? I mean, you would sort of maintain [indiscernible]...

No, no, there isn't, and we have some great plans. So the building is going to be a very clean building. So when you come out, ask Stuart for a tour of it in a couple, maybe 6 -- I don't know when our capital project's going to be done.

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

It's Michael Bilerman. I wanted to -- Ted, in your opening comments, you talked a little bit of multifamily portfolio, which sometimes gets overlooked even though it's 14% of NOI and arguably would probably be a lower cap rate. But you've talked about $14.7 million, if I heard you correct, of embedded NOI uplift from the potential mark-to-market between current rents and sort of in-place rents. Obviously, a good amount of those units are pre-'99 and can't get access to that sort of uplift, but can you sort of hone in on that $14.7 million? It obviously -- up 25% relative to the current NOI run rate is a material number. How much of that is Santa Monica? Brentwood? How much of it is Honolulu just to sort of get an aspect of how quickly we may see some of that income come in?

Right well, first of all, I think everything -- most of everything you said is correct, other than the -- saying that arguably, it should get a higher cap rate. I [indiscernible]...

I said lower cap rate. Lower. Lower.

[indiscernible]. I don't see how it could be arguably that, but okay. The -- and it's -- so you're correct on the number. It is about -- what we said in the -- a moment ago was about 50% of that number is from the pre-1999s, and that we acquire as we do, and we have 5 units turned during the first half of this year. In terms of where it's from, about 3/4 of it is in Santa Monica, and then the remainder is split a little more in Brentwood, but almost equally between Brentwood and Honolulu. And the remaining piece of it obviously comes just -- part of it just increases and is -- as soon as it becomes vacant, we pick that up.

So half of the NOI increase is going to be very long dated, just because you're only getting back, call it, 10 units a year. So it's going to be very hard to get that $7 million of income. The other half we should expect given the normal turnover that we'd probably get, I don't know, let's say 60%, 70% of that next year?

I think that's probably higher than I would guess. But the truth is, it really depends on just when those particular units become vacant. So I think that in general, we end up with about a 40% to 45% turn factor on our apartments, but it'll just depend on exactly when they come.

In the...

[indiscernible].

Oh, go ahead. Sorry?

I was going to say, in addition, of course, we add -- as the growth continues, assuming it does, we will be adding to that on the top while we're taking it off the bottom.

We just noticed -- what happened was we noticed, as rents are moving up so quickly, we're just getting some more meaningful mark-to-market out of leases that we wouldn't even normally look at because you think of -- once a guy has gone to market, you think to yourself, well that's -- that turns often enough that it wouldn't -- you wouldn't have a big mark-to-market locked into leases. But rents have moved so quickly that even a guy that hangs out for 2 years, all of a sudden, there's some real money there. Because remember, at the end of the year, you can't move them up so the rent control layers back in even though it sets a higher rate. So when we looked at that, we just thought, "Well, it's worth pointing out to people a little bit." So -- because we get questions about our apartment portfolio and the value in it and future income and that was something that was worth showing.

Right. And then where's leverage right now in the multifamily portfolio?

It's -- I think there $600 million of debt on our multifamily portfolio, and you can make a decision looking at the amount of units we have here in the Westside and Honolulu about its value.

Right. So there's probably -- I think there's a lot excess proceeds you probably can pull out of that to lever it up. Any of the acquisitions -- or any of them contemplated to the unit transactions where effectively, you can use your currency? Your equity?

There's one. Yes.

But not a -- it doesn't sound like a lot of them there. They're predominantly all-cash deals?

Well, we continue to bring up -- I mean, it's one arrow in the quiver. And then you just see which ones come and how you can negotiate it.

It's not preferred. I mean, you'd rather just buy something for cash, but there is one deal that it looks like it could be very helpful.

Okay. And then just lastly, where -- just knowing of what you have in the back half of the year in terms of your occupancy gains, do you have sort of the August same-store leased and occupied, whether those numbers have moved up relative to June?

I don't think we've generally given out those monthly. They're just bounce around too much.

But you have obviously -- if you reiterate the guidance, you have the net absorption you're going to see in the back half of the year, you have full confidence you're going to get there.

We do have confidence in that as we did last year.

I -- we picked those numbers pretty well. So I have a lot of confidence in that number.

And 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: Just a quick question. I don't think you spoke -- or maybe you did, but Brentwood, that market seems to be the other one that's lagging. You guys have spoken a lot about what's happening in Warner Center, but what's the deal with Brentwood? With all the benefit that the Westside is getting, I would think that Brentwood would be doing better than 88%. So if you guys could you share a little color on that submarket.

I think that you're right. I think we have a lot of -- Brentwood has traditionally been one of the premiere markets on the Westside, and I think we think in the long term it's good. And I think we talked last quarter and said that the problems in Brentwood, really, you can divide it into the San Vicente market, which is absolutely full, and the portion along Wilshire, which has been less full and that we are -- believe that a lot of that has been as a result of the traffic that's been exacerbated by the 405 project, where it's -- Wilshire has become very backed up because of all the work that they're doing on the -- these big flying interchanges that they're building around the 405 and Wilshire. So that process is going to be continuing on into 2014, unfortunately, at this point. And I say unfortunately not just for the company but for all of us who have to drive into work from time-to-time. And I -- and so we're hopeful that as that gets finished, that Brentwood will return to where we would expect it to be. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: But if we look a few years ago, back in sort of end of 2011, you guys were 86.5% leased there. Right now you're 88.1%. So you guys -- so if people have been moving out of your properties in Wilshire, I guess the offset to that is everyone had more people more than that move into your San Vicente. Is that how we should [indiscernible] ...

No, it's not, and moving out isn't the problem. It's getting people to move in there when they go, wow, do I want to be along that? Or why don't I just go over to Olympic? Or why didn't I go over to San Vicente, because it's just very -- it's been aggravating. They're like over a year past due on this thing and you've got to come here to believe it. But I mean, the traffic backs up down Wilshire, and when you're trying to get to cross the 405 all the way down in front of the building. So someone comes to look at new space or expanding whatever and guess what, if you're showing in the morning or you're showing them anytime in the late afternoon, they're like, "What is this?" I mean, you would really not expect it. And then they're in this traffic. And even if you can quickly get free of it, you've got to fight through it, just get out of the building just to get a little ways away. And it's aggravating for all of us. And I think that when you look at the underperformance of those buildings along Wilshire, you can almost tie it perfectly, which I'll call it underperformance relative to the Westside. You can tie it almost perfectly to them jamming up the 405.

And as you've noted, by the way -- in fact, Brentwood -- the market itself has, in fact, been recovering not as much as we would like and not to the degree that we think it should be. But certainly, over the last year, it's down -- it's up a couple hundred basis points from where it was.

But if you go to the past, you would have said, if the Westside is recovering that Brentwood market would be like a leader, it would have been leading it not a follower. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Totally having been on a few property tours that got aborted because you sit for a half hour at a traffic light I totally know what you're talking about.

Okay. All right.

At this time, there are no further questions. Are there any closing remarks?

Well, I just want to thank everybody for joining us, and we look forward to speaking with you same time next quarter.

Thank you for your time and participation. This does conclude today's conference call. You may now disconnect.