Good afternoon, ladies and gentlemen. Welcome to Douglas Emmett's fourth quarter 2013 earnings call. (Operator Instructions) I will now turn the call 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 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. When we reach the Q&A portion, in consideration to others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett. Jordan?

Good morning, everyone, and thank you for joining us. Our fundamentals continue to strengthen with robust occupancy growth and higher net effective rents in our office portfolio. Job growth in West L.A. has been twice that of Los Angeles as a whole, with total payroll employment in West L.A. now 1.5% higher than 2007 peak levels. We added 80,000 square feet of positive absorption last quarter, ending with our office portfolio at 92.2% leased. Excluding the impact of acquisitions, we increased occupancy in our office portfolio by 1% during 2013. As our leased rate continues to grow and vacancy decreases, spaces throughout our office portfolio that had been vacant for some time are now leasing up. Even with the strong fundamentals and rising office rents, new office development and our targeted submarkets continues to be severely constrained by restricted zoning laws and well organized community groups. Aside from Warner Center, there was no significant Class A construction, even at the peak of the last cycle, and we do not expect any significant new deliveries in the next few years. These trends support the higher valuations we have seen in recent office building sales. The performance of our multifamily portfolio remains excellent, with average asking rents 5.3% higher than a year ago. Our two multifamily development projects continue to progress nicely. We expect to break ground midyear on an additional 452 units at our Moanalua Hillside Apartments in Honolulu. Construction should take about 18 months and cost between $90 million and $110 million, which includes the cost of upgrading the existing 696 apartments and building a few additional structures, including a new community center. In Brentwood, we're making good progress through the challenging L.A. entitlement process with our new Landmark apartment's development. We expect 2014 to see continued property sales in our markets, as sellers and buyers seem to be agreeing more often on price. I will now turn the call over to Ted.

Thanks, Jordan. Good morning, everybody. I'll begin with our results, then address our office and multifamily fundamentals and finish with 2014 guidance. First, we're very pleased with the financial results for 2013. Our FFO per diluted share grew to a record $1.49, up 9.6% from 2012 and 27.4% from 2007, our first full year as a public company. We also increased our AFFO per diluted share to an all-time high of $1.18 in 2013, up 12.4% from 2012. Even with recession, our AFFO has grown by 66% since 2007, an average of 11% per year. Our business model continues to convert a significantly higher percentage of our NOI into free cash flow compared to other CBD office REITs. We continue to keep our G&A under 5% of revenues compared to a benchmark of about 7%. By focusing on small tenants and tightly controlling tenant improvement cost, our recurring CapEx during the fourth quarter was $10.7 million or only 7.2% of revenue. In addition, our straight line and FAS 141 revenues represented a lower percentage of our income than the average for comparable office REITs. Comparing the results for our same properties in the fourth quarter of 2013 to the fourth quarter of 2012, our revenues increased by 1% on a GAAP basis and 0.6% on a cash basis. Our expenses decreased by 0.2% and our NOI increased by 1.5% on a GAAP basis and 1% on a cash basis. Comparing our same property results for all of 2013 to 2012, our NOI rose by 1.7% on a cash basis and 1.2% on a GAAP basis. Now, turning to office fundamentals. During the fourth quarter, we increased the lease percentage for our total office portfolio by 50 basis points to 92.2% and our occupied percentage by 80 basis points to 90.4%.…

(Operator Instructions) And our first question comes from the line of Jamie Feldman of Bank of America.

I was hoping you could address across your submarkets and in your guidance, where you think you'll see the most occupancy growth? So I guess two-part question. One is in which submarket do you think you have the best prospects for occupancy growth? And the second part is will you include in your guidance?

Well, I can answer in terms of the best prospects for occupancy growth, it has to be in Warner Center, because it's where we have the most opportunity to do leasing. As we get tighter and tighter, and the whole company including that is at about 92%. It gets harder to move the number up, obviously, because there is fewer spaces that we have to entice people with to everyone.

So I mean, what we told you this quarter was that what happened is it spread to those prices with the most vacancy. And as Jordan said, that's where we probably see it. But in addition to that, something else Jordan said is that, we are seeing in the submarkets that it had more strength, we are seeing spaces which we've not been able to lease for some period of time, now leasing up, as people are sort of pushed into binding more space some place.

Our next question comes from Joshua Attie with Citigroup.

I just want to follow-up on the occupancy question. At the high-end of the range, 2.5 percentage point is pretty strong occupancy growth. What sort of your visibility into the tenant pipeline particularly in Warner Center? And are there some larger tenants in the market or there are some deals kind of on the near-term horizon that kind of give you confidence in the interim?

Well, one thing to start off by realizing and remembering is when we had 1% growth in 2013, we told you at the beginning of 2013 that there was a lot of people who hand hung over, and so that was about 60 basis point. So the reality is that the growth in 2013 on normalized basis was 1.6%. I think we are seeing strong demand from tenants. We always have questions about what happens during the year or where that's going to flow out to, but we are seeing through the portfolio really good demands at this point. And that's what that number reflects.

Just talk a little bit about rents, you mentioned in the press release and in the prepared remarks that the mark-to-market on the portfolio is positive 1.6% today and I think that's the first time that you gave that number. Can you give us a sense of what that number might have been during 2013 and maybe when it inflected positive?

We actually have been giving you that number now for I think two or three quarters, because this is either the second or third quarter, in other words, and partly it was response to people asking us, we gave that number for a number of years. And then we took it off because people didn't seem to be focusing on it, then people told us they were focused on it and we put it back. I think it inflected about two quarters.

In turned positive one or two quarters ago, maybe that's why we added it back.

How should we think about that relative to the cash spreads and when those might improve? And I know that its specific to what space happens to be rolling in any given quarter, but if the whole portfolio is a little bit above market, how should we think about, when that could start translating into better spreads on leases executed?

Well, I think what you can say is we're getting a lot closer to that happening. But I think that that there are significantly enough different factors, and as we talked to you guys before, there is a lot of moving parts in that that makes not very good and unfortunately in helping us predict exactly when that change will happen.

And our next question comes from George Auerbach with ISI Group.

Ted, on the same-store NOI guidance, can you break that out between multifamily and office? And then within office, can you help us understand the components little bit better? Just trying to think about how the occupancy is sort of weighted throughout the year? And you just mentioned the rent rollovers or rent spreads, any thoughts on where those might be in 2014?

So let's start with the question about what the breakout is. The breakout is going to continue to be about what it's been in the past in terms of we were going to have probably comparable growth in the multifamily side and the office is supposed to be better this year, which is what accounts for the increase from where we were this year. Let's see, your second question was that the timing of it. I think that we are looking at a little bit of headwinds in the first quarter or two. We've told you before, we've got AIG leased that's moving out of about 40,000 square feet in the first quarter. And so in general, and we hate to do this, but it's been true the last two years, we see a lot of that occupancy growth happening in the last part of the year not in the early part of the year. So it will be backend weighted just as it was this year and it was in 2013 and 2012.

And then just last from me. The TIs were up a little bit in the fourth quarter. Is that sort of one-time related or any color on that?

It's actually, if you look at the TIs on renewal leases, which are pretty spread through the portfolio, those who are consistent with prior quarters maybe even on the lower side. What happened to the new leases is as we move into places like Warner Center and Honolulu, which are generally higher TI markets. And as we lease up old space in the portfolio that hasn't been refreshed in a while, because it's been sitting vacant, we saw a little bit a bounce up of that, but the underlying low TIs in our markets isn't changing.

And our next question comes from Jordan Sadler with KeyBanc Capital.

So I guess digging a little bit more on the fundamentals, looking at the occupancy uplift, even though you said its backend loaded. I mean, it shows continued good momentum in your sub markets, at least the expectation of that. So my question is has anything changed in terms of your posture on leasing rates, so you're not aggressive perhaps as you were before? Are you starting to hold-off on early renewals as opposed to trying to force them earlier? I know you have a bigger chunk of the portfolio rolling in the next couple of year. So I'm just trying to understand what your cadence is like, given sort of the tightening of occupancy in the portfolio and in your markets?

Well, we're always aggressive about leasing. I mean we would always prefer to lease than not lease. So we're not that strategic to say, rents are going up, so we'll hold space off the market or something like that. We are certainly not operating under fear, so a good example would be going into the recession as we saw things moving a little bit, we reached out very early to our largest tenants and worked to lock them in long-term, probably leading the market in that aspect a little bit. Now, certainly we're not doing anything like that. In terms of what we're doing with the leases is we're taking this opportunity as kind of the economics are just roundly improving to find the areas in the lease to improve for us. And you guys know, we've been saying it for a while, for me at least, one of the greatest indicators of things improving is the fact that we've moved off the 3% bumps in a huge amount of instances. So I want to say something like a third of our deals are now getting better than the 3%, let's call it, 4%. And for those of you who that were with us before we went public and as we were going into that zone, remember that we were kind of regularly saying to people, wow, these bumps are moving 3.5% forward and they actually moved up to 5% at one point. That's a better than a great sign. I mean that's the fantastic sign, beside from the fact that overall rates are just going up. It's stuff like that that we're able to just keep driving and improving on that gives you good kind of long-term cash flow and economic growth and that's where we're focusing our time and energy in terms of the market kind of coming our way now.

The other one, we haven't talked about investment opportunity at all, but couple of quarters back or so you had quantified or talked about handful, I think of $50 million to $100 million opportunities out there. What is it you're seeing today? Are those opportunities is still out there?

Well, we did a few. We bought a couple of buildings that were in that range and I am hopeful that this year we will be able to continue that. I mean, we are seeing buyers and sellers coming together a little more often now on price. I mean the visibility on rental growth and underlying economics is pretty good for anybody in this market. And frankly, it's pretty good a seller and a buyer. So deals are being made as you saw and we are making a lot, we are making them. I am hopeful that we'll buy stuff this year as we did last year or hopefully even do better than that.

Our next question comes from John Guinee with Stifel.

Help us understand the FAS 141 accounting here. It looks like 2012 was about $18.1 million associated with above and below market leases. 2013, $15.7 million, but you're going, and that would imply that 2014 would be about $13.5 million, but your guidance has $22 million to $23 million. To help people understand, how much of that is one-time, probably the best thing to do would be to provide FFO or FAS 141 guidance in for 2015 and '16 after this ground lease is acquired?

I think the problem is projecting out FAS 141 is not that straightforward, because it also is very impacted by acquisitions and is impacted by some other factors as we're finding out this year. What I can tell you that may help you do that is that the ground lease we're looking to acquire in Hawaii that we have model that has the option, that's actually a great thing for us in terms of being able to control that ground and being able to get rid of the ground lease payments. And it will somewhat slightly impact NOI. It's going to have depending on when we exercise it, and right now we would be telling you, we're probably going to exercise it in the third quarter, but it sort of depends. Depending on exactly, when we'll exercise it that will have impact this year between $8 million and $9 million and not much of a decrease in impact for FAS 141 for next year.

So $0.450 to $0.05 a share. And then the next, there seems to be some reoccurring or non-reoccurring one-time items. Can you walk through the other income of $2.2 million and the other expenses of $1.4 million? Was that a good run rate for both?

That is probably a good run rate for both. As you recall, what we told you all was that when we took over the club in, took it back from the bankrupt tenant in Honolulu, that the way the accounting works is that what used to up in rental income because it's now being operated by an affiliate of ours, that gets pulled down and so the revenue from the club is in other income and the expenses from the club is in other expenses. And that made those numbers much bigger. There is always a few other little things in there, but that's the bulk of what's in there and that will continue so long as we are operating the club through an affiliate.

Our next question comes from Alex Goldfarb, Sandler O'Neill.

It's Alex Goldfarb. Just going back to the guidance, and if I just doing quick math, it looks like, Ted, is each occupancy point basically $0.01 per quarter, is my math right?

That's probably not too far off. Although, remember that, again we've told you, it's backend loaded, so you got to not annualize it that way.

But if you say that its $0.01 a quarter for each 100 basis points of occupancy improvement, so that would sort of imply that there is a pretty good ramp up like probably a $0.04 or $0.05 type difference between the first quarter and the third and fourth quarter. Like if you did first quarter to fourth quarter, it's probably like $0.04 or $0.05 difference, is that right? And that's all driven by NOI and improved occupancy or is it G&A or something else that's driving that delta?

First of all, you round it up it's actually a little less than $0.01. So it's actually more like $0.03 to $0.04, and it's actually probably $0.03. And it also depends when in the quarter, when in the quarter it happened. So for example, in 2013, we had a huge increase in the fourth quarter, but it wasn't hitting at the first part of the fourth quarter.

But my point is that in order for you guys to do the ramp up, to get to your guidance from where you closed out the fourth quarter until the fourth quarter, it's a pretty big increase in per quarter FFO. So I'm just trying to figure out, if in your numbers this is all purely occupancy NOI driven versus its G&A or something else in the model that's driving that pretty big ramp up in quarterly FFO?

G&A, we already gave you guidance, so you know exactly what we think is happening with G&A. But maybe it would be easier to sort of go through, because what's happening is, as you're rounding numbers I think you're rounding them in ways and they make it hard, but it will be easier maybe if you and I talk about it offline.

Then the follow-up to that is of the 246 pre-1999 apartments units, how many more of those do you think you can get out? Like how many of these are people who show up in Santa Monica like once a year and claim their permanent resident versus people who actually genuinely live there?

Well, I think that we think we do a pretty good job, although not perfect of finding the people that don't live there. So as these things turn, there are somewhat refined people, somewhat people unfortunately die and somewhat they change their lifestyle and they decide they're going to go do something else. But it's not just that there are 50 of them sitting there for us to catch. There probably are a few who are doing at any given point in time and we try and find that.

There is further one way to get units back, that's only one way that we happen to push through that kind of the city and get them to agree to, but you get them back other ways too.

So it's not just through natural attrition, there are other ways to get these units.

Yes. That's correct. And also the natural attrition have to start picking up, unless you feel that the plan, it would be 120. I mean we're certainly planning to outlive them.

Our next question comes from Brendan Maiorana with Wells Fargo.

I wanted to ask a little bit more just about the rent spread question, not because I think it has that big of an impact on '14, but just kind of wanted to get your sense of where you think those numbers might trend, as we move throughout the year. Given that, it sounds like you are pushing rents up and you're expiring rents probably get a little bit more favorable, as we go throughout the year. So do you think that that's a number that can get close to flat, as you get later in the year and combined with the occupancy ramp, it could set up well for 2015.

The occupancy, by the way, doesn't help us much. But the answer is, you correctly stated that all the trends in that regard are good. There's a lot of quarterly fluctuations.

Well, he said the ramp up in occupancy helps even push further on rent.

And you're right. When the market's improving, everything's going your way, and when it's going down, it feels like everything's going against you. And there is a lot of numbers, and you just named a few of them that are going our way, and I mentioned another earlier, which was also the terms in the leases are getting better. So terms and leases are getting better. As occupancy rises, that puts pressure on rents. And obviously, the roll-off and the comparative roll-off has to be going our way eventually too. So that's all really good directionally. We don't want to stand overly optimistic, but I am feeling very good about the near-term quarters coming out.

Right. The only trend that's against, but it's really for us is that we are getting to rent up a lot of spaces that were harder to rent up in areas that are not. And so one of the reasons why the straight line was off this quarter, as we told you, is because we were renting in Honolulu and Warner Center and that's slightly bad news in one sense, but in the other sense for the overall health of the company and our long-term thing that's great news.

Yes, it's not bad. It's just an aberration of stats, when they show up as over-weighted.

So you guys feel like the rent spreads are still moving in the right direction, with we know with the caveat things bounce around quarter-to-quarter?

Exactly.

On the occupancy outlook, I think someone else asked this question earlier. I did feel like it was a nice move up, and Ted, I appreciate the comments that you guys had a lot of that short-term leases early last year, which kind of hurts you a little bit in '13. Would you say that your confidence level in hitting the midpoint of the occupancy target by the end of the year is about the same as what your occupancy guidance was for '13 or do you feel better or worse, just because it does seem like it's a pretty big ramp-up. So just kind of a little color there will be helpful?

When we set up our guidance, we try and have it be the same sort of confidence level every year when we do it. So I would say, we've given you what we think is our best estimate, just like we did last year.

And I think if you look at our history, we rarely have ever missed. So take it for what it's worth. Take our history for it's worth.

Our next question comes from Michael Knott with Green Street Advisors.

A question for you on your occupancy forecast for the end of '14. I think if you're close to, but not quite at 91 now in the same-store and if you add say 200 basis points to that, let's just call it 93, I think you'd still be 200 basis points below your 4Q '07 peak of 95. So just curious, if you can comment on your thoughts on getting back to that? And then, also if you can maybe contrast that gap that I just cited 93 versus 95 compared to your earlier comment about West L.A. jobs being above the prior peak?

When you do that comparison, that gap at the end of the year is likely not to be very much in West L.A. If you look at the market, we're still going to be working to have Warner Center recover. But I think we feel pretty good about ending the year at that point in the process on an average basis across the portfolio.

I will tell you, I mean it was actually even higher than 95s, like 95.7 or 95.8. And I feel like we can go back into those numbers. I mean I don't feel like we're artificial and off the cap now at 93 or any number down in that range, because things are certainly leasing up and recovering exactly the same way they did last time.

And then just to that point, somewhat related, I don't think we've talked much on these calls. But have you guys seen or you're continuing to see much impact at all from tenants restacking their floors or becoming more efficient? Has that not been as much of an issue in your markets with smaller tenants?

Not with smaller tenants, no. But it has been an issue and it's acted as a drag in general in larger buildings, like a market like Century City certainly, it's impactful there. Hasn't been as impactful in a bunch of our markets, impactful in Warner Center and its being worked through. I mean the great news is its being worked through and we're increasing occupancy and the markets are improving all at the same time. So certainly it was much more painful to work through that process in the depths of the recession, and with just one more thing going the wrong way, and now it's turning into being just a little bit of noise and we seem to be driving beyond it.

And then on the investment sale side, what's driving this decline in the bid ask spread that's be prevalent for a while. Is it the big Century City trade, is it some other trades that maybe are under the radar. What's your sense of that?

As I said earlier, I mean that this is the raw fundamentals, and kind of visibility of the raw fundamentals are good enough that people are more confident, in terms of, I would say, the buyers are kind of coming up and meeting the sellers, more than the sellers coming down, but where pricing is relative to people's expectations just much closer now. And if you think about it few years ago, you had to decide where rents were going to bottom-out and how long they were going to be end of the bottom, and then how they were going to rise. Today, you're just trying to decide on the rate of rise, that's kind of an easier project, it gives capital more confidence and investors more confidence and the people selling. If their building is leased up, they have more confidence about what the value of their building is and they're getting close to a number that makes them feel better about selling. So that's why the deals are coming together.

Any thoughts on what the takeaway from Century City trade might be for overall asset values in your market assuming that you may no longer be involved in that?

Well, it's accurate. They were no longer involved in it. The trade, I'm sad for us and happy for the people that made that deal. I think that it's a great project and rents are recovering strongly and I'm sure they will do well.

And our next question comes from Rich Anderson with BMO Capital Markets.

So first question. What do you think that you were be a betting man, multifamily is a bigger or small percentage of the portfolio couple of years from now?

Well, considering we have on the books, almost a 1,000 units that we're building I would expect it to be bigger. That's pretty easy, so do you want to take the other side of that.

Well, I was thinking more about what you got going on right now?

You're saying beyond that. Boy, I every year hope to find and buy and increase our multifamily portfolio, but it's been very hard to do. So it's hard to say, our proclivity, our inclination would be to really stretch find and buy multifamily. But I'll say the other side of the coin is there has been some multifamily trades that we felt, might we couldn't get that on prices they traded, so they want for us.

So maybe that's telling you that it should be getting smaller then, if you can't make it bigger? I don't know. Pretty good logic in there.

Considering the multifamily, it's not making me think that I want to sell multifamily. I mean that's only kind of theoretical trading stock world. It doesn't hold as true in the actual assets transfer world.

And then bigger picture, so you talked earlier about property values, trades showing up well in terms of valuations, and then you kind of look at your seven year public history peaked out at $28, trading close to that now. I imagine there's some fatigue factor having gotten through a recession. Is there any thought at all about, boy, if I get the bid, we could be a seller at this point or it's just like we've muscled through the recession at this point, so it's going to be very hard for someone to make the right offer at this stage for the company?

Well, what do you want me to tell you right now that we're offering the company for sale? Is that what you're asking? I will say this, let me say this.

If you did say that that would be a great answer from my perspective?

I'd say, the way you characterize it is nothing in the range. I mean I don't feel fatigue. That's like our third recession or fourth recession that we've gone through, so I don't feel like, wow, we suffered through it with our tongue hanging out, through the recession. And as you know, we felt pretty good about our assets and the long term prospects of the market. And we didn't issue stock and we did all the stuff right, and thankfully we were right on that and the market is now improving well. So I wouldn't use the fatigue or surviving through the recession or anything in what we're doing. We still feel like we want to build this company to be the absolute best and dominant player here. And we feel great about our prospects for doing that going forward. It's always tough to build a super Class A portfolio in a major port market and we've been doing that and staying at it and I expect just to continue staying at it.

Our next question comes from Jamie Feldman with Bank of America.

Just a quick follow-up. So I guess, Ted, did you say what you're assuming for leasing spreads next year in the guidance?

No.

Do you care to?

No. It's a problem with that number is that it just is so dependent on the data in the individual quarter. Earlier I was asked if I could predict, which markets the leasing would be in. And if I can't do that with any great degree of certainty, I certainly won't be able to predict what the spreads will be.

And then just I guess thinking through the capital plan. Well, first question or first on that topic can you talk a little bit more about the land acquisition under the ground lease acquisition and how you think about the yield? And then are there other opportunities like that in the portfolio and then along the same lines your capital plan for '14?

Well, the purchase land, which is an option we've had forever going back before the IPO, is that purchase price is $27.5 million and its been something that actually we've been disclosing in our K because it affects the accounting that we've been intending to exercise all along and now it's time to exercise it.

I think that there's some yield on that. It's in the mid fives.

The yield is just over five.

So do you have other opportunities like that across the portfolio?

Not really.

I don't know. Do you mean in the form of like ground leases that we can buy?

Places where you can generate a little more yield than we're thinking about.

Well, if you go beyond ground leases, I mean we're building units in two of our sites where we're going to generate a lot more yield out of existing properties. That's a good question and it's something we're working on all the time, but I feel like it is going on in a lot of places.

I guess, I mean like for other land buyouts, are you saying that's the only one at this point?

I'm trying to think what other ground leases were actually there.

Yes, we own the ground under a building in Warner Center and we tried very hard to buy the building, which would have been a great play, but we were unsuccessful. But you know, we had a bunch of ground lease deals that before we went public, because we just didn't feel like they were good long-term that we sold in 2005 and 2006, maybe even '04, '05 and '06.

Right, we kept the one in Hawaii, primarily because since we had the option on the ground that we knew we could buy it.

And then what are your thoughts on financing needs this year with the development ramps picking up on then this acquisition?

We don't have a lot of financing here this year. And the one spot, which you're right to ask it that way, where we're doing development, which is over in the Honolulu project. That loan comes up next year. And we're going to play through for a little while with cash and then we'll make some kind of decision about how we want to finance that if we want to do it kind of construction loan style or just put a new loan on it since it's a project that already generates a lot of cash flow and that probably would be an option too.

In addition, for those types of uses, we actually have good enough cash flow to cover most of those uses.

And our next question comes from Jordan Sadler with KeyBanc Capital Markets

I just wanted to run through the breakdown on the same-store. I might have missed this, but what's the revenue and expense breakout on the same-store NOI guidance? And if you could maybe give us what the full year revenue expense were for last year. I have sort of the individual quarterly numbers, but not the full year numbers for last year.

Well on that one, I got them. We'll call you and give you that. And I don't think that we've ever broken it down between operating expenses and revenues. I will say that what we told you guys in the past, which is that we generally expect in this part of the cycle. Although, we seem to keep doing better than that, that we would expect operating expenses to be up by 2% or 3% generally in a year in this part of the cycle.

So we can go through on that together, and going to give you a call and give it to you.

But for this coming year, you're embedding a bigger operating expense number, like you said, like a two or three or maybe even a four? I know you were thinking about that originally for '13, but I don't know if that ever materialized.

The answer is yes. That's good. If I were modeling it when we model it, we would model up 2% or 3%.

Our next question comes from Josh Attie from Citigroup.

Well, it is a mark. I mean, we already knew what our values were, but it's for the public, buying the stock, they look at that, and they go, we're getting a better feel for what underlying NAVs look like in your markets and I'm going to be happy if that happens. And hopefully it improves the stock price.

You talked about sort of the raw fundamentals and buyers and sellers coming closer together, more so the buyers getting more confident. What sort of rise in rents are you seeing buyers put in over the next, call it, five years into their models to make the math work?

Well, this Century Park here is not the only deal for what you're talking about, just to go back to that that you're saying people could take the Century Park deal and kind of deconstruct it, and say, wow, look at the spread between this value and where the stock is trading. There is other deals that have been happening like that. So I wouldn't sort of pop the champagne corks like that one deal going to cause everyone to realize, because I've seen other deals happening over the last 12 months, all of which you could have looked at and said the same thing. In terms of buyers, I mean I don't know, I don't get very much opportunity to see what other people are doing, but I suspect by looking at the way people are bidding that at least over the first next five years, they're putting some double-digit increases in and holding those for a few years going forward and then tapering it off like everybody always does that three or four years.

And then how much, obviously, every building is different right, depending on where it was leased up, you think about your portfolio today being 2% under market. Obviously that's going to play into what initial cap rates are, how should we think about whether if you're going to be active in the acquisition game, assuming that there's probably some opportunity that there's some mark-to-market initially that they're below market rents. And then two, this rent rise in the market, how should we think about current cap rate versus sort of an IRR in that instance?

Well, yeah. I think I know it's counterintuitive, but in a weird way when we're buying something, the lower the cap rate the better because when the cap rates lower, I'm not buying a bunch of above market other guys leases. I'd rather have a very low cap rate, a good IRR and we'll do the leasing and get in at a better dollars per foot on the project. And if you look today, more than probably ever, the spread between a low cap rate relating to a higher IRR is bigger today than it has been in quite a while, but the number moves very quickly in a position. I mean just for case studies of the last few buildings we've bought, we've been buying buildings at pretty low cap rates with pretty big going in vacancy. I want to say, like 50%, 60% occupied, and turning those within a quarter. I mean one of them we did, like while we were still in escrow back to the 90s. So if we could keep picking those off, keep getting those that are like 70% leased and using our platform, they move up very quickly as we're buying those in our market, and we're getting them for good dollars per foot at the same time, crazily low cap rates -- like ridiculously low cap rates, but they're great deals.

And how do you think, if raw fundamentals is playing a big part in transaction happening, how much of it is the financing market? And are you seeing lenders being more aggressive on the West Coast in terms of total leverage and sort of all-in rate?

I think lenders want to be more aggressive and are targeting L.A., but I really don't see anybody using debt to finance their way into making deals work. Now, there's an inner play of debt with real estate that cuts two ways. One, if you could finance cheaply, in theory, you can pay more and the other is debt's an alternative investment. Someone could invest in real estate they can invest in debt instruments. Obviously, debt being very cheap probably is causing capital to look a little more at real estate where I think the returns are better, but I do not see buyers, particularly of the types of assets that we're buying, really anything we would buy or most institutional buyers would buy, I do not see people leveraging their way into making those deals work. Frankly a lot of times, it's all cash. I mean we have been buying effectively all cash and you see a lot of other people, 50%, are the kind of numbers we're seeing and sometimes 40s. I mean that deal in Century City was I think 40%, and I'm not talking about Century Park, I'm talking about the 1888 deal. So frankly people are more anxious to put their equity to work at these returns.

And then just lastly on the Honolulu development, $100 million, how should we think about sort of what that initial yield is, because obviously some of it is infrastructure work, some of it is new units. So how do we sort of think about the going in yield eventually when it comes online effectively almost two years from now and then the increase in that yield over time as we start thinking about the value creation from that capital?

So there's two components there. One is if you just sort of separate the project and just say we're just building the 450 units, I think the direct yield on that, 7 to 8%. Now, we're also spending some money on the rest of the units, and I actually think that money has a real possibility of having even higher yield because we're making some great changes to the project to reposition it in a market that around us has already repositioned itself, just as a side. So there's a pretty nice stuff above us and right across the highway from us, and frankly below us. So as we position it up, the money we spent on other units, it's hard to say, the cap rate on that if you will. But I think the stuff we're doing and redoing the way the parking works, redoing kind of some of the roads in there, putting the new clubhouse there, moving the leasing office out, I think it's going to substantially improve things in that project. And we've organized what we're doing in a way that we play through these first 450-plus units and then we have the other pads that we can look at after we've done this kind of overall, let's say, redo of that, of the entire project because at that point we'll have over 1,000 units that will look a little newer vintage.

So it sounds like it's mostly all revenue enhancing, revenue generating rather than any sort of debt capital, so it actually should be a pretty good yield overall, of the $100 million spend?

I think it will be a good yield, yes.

And our next question comes from Brendan Maiorana with Wells Fargo.

Ted, just wanted to follow-up on the balance sheet. If I look at it now, I think your leverage is around 44%. You've got about $44 million or $45 million in cash, but $27.5 million of that's slated to take out the ground in NY, and you've got the development project that's there, so it seems like you've got. And then you've got about $70 million of AFFO cash flow above the dividend. So it seems like you're in good shape to do all the day-to-day things that you need to do, but we're talking about acquisitions that seem like they are maybe more available now than they had been over the past few years. So if more acquisition opportunities come up, how do you think about financing that, would that be taking leverage up a little bit, would you be comfortable issuing on the ATM or can you think you can satisfy it with the free cash flow?

I think you've correctly stated everything about that piece. I think that we have good cash flow. We have enough to be able to deal with what we've got on our plate, including the acquisition of the land and the development, and then some for some additional acquisitions under the credit line. We could increase debt, and by the way the 44% was at December 31. Fortunately we've recovered very nicely from that trough and it's actually down from there. So we probably have some room for debt. In the end, we are not big issuers of equity, because of the concern about buying at one price and selling effectively buildings at a lower price. But we'd have to play all that out if we are fortunate enough to have the ability to do acquisitions. We could certainly get the cash, and then we'll figure out the best balance of what we do, when we do it.

So I guess sort of implicit in that statement is even though your stock has had a nice rebound in the early part of the year, you still feel kind of like the value of your existing portfolio isn't fully reflected in the share price, relative to what the acquisitions that you may do, which is why you'd be reluctant to issue on the issue shares?

Yes. I mean, think about the question two questions ago, right. We're talking about kind of our people starting to zero-in on the underlying value of the properties from the Century Park deal. My feeling is they kind of zeroed-in on like the three deals prior to figure out what's going on. And I don't know, if they will or where that will end up, because you guys are buying and selling stock and not buying and selling real estate. But in terms for my perspective issuing stock it will be selling it to low price, now what we're out there trying to buy buildings at.

And our next question comes from Michael Knott with Green Street Advisors.

Jordan, a quick follow-up on the Honolulu development yield question. I think we had heard you perhaps preliminarily on prior calls say that you thought it might be five to six yield on that spend. Should we infer from your conversation with Michael a second ago that maybe that's a little better now as plan come along and evolve?

We were probably overly conservative on that prediction. Yes, you should infer that now I think it's going to be seven to eight. I think that. We're getting better visibility on this whole thing. The whole thing is tightening out and I feel very comfortable with that prediction.

And is that just because there is more of a redevelopment component than there was initially?

No, it's kind of the costs associated, the rents we think we can get. I am actually separating out the redevelopment component, and saying, I think we might get a better yield on that money. But if I was to just cut off the portion then I said that we were building the units, and I have tried to kind of do some kind of fair allocation. I think it's very reasonable to say we would be building those for seven day account.

Is there any quick comment worth making just on how the Flint building that you acquired as coming versus your projections?

Well, one of the examples that was in my mind. I don't know if I actually did mentioned it, but you're mentioning it, which is that, we bought that building thinking that we were going in it again. I want to say, it was in the 60s.

Before we got Larry renewed it was about 50. Then we took it to about 80.

And then we reached the toughest space that's been vacant, I want to say 20 years. I mean this ground floor, when it was originally the Great Western Bank space, while we were in Escrow, and it allowed us to kind of put forth a real good complete plan on to redo of that building that we had planned, knowing that tenant and the whole thing, and that building now is kind of, I don't know want to call it done, because it's not done from Ken's perspective or from my perspective, least, we have plan in place, work being done, I'm saying good to go, let's move on to the next one. That's pretty good. I mean usually you buy a building and even also I come wearing it for a while, and I already can't even remember the address, I mean it is good.

And then just last one and this is sort of a variation on Brandon's question a second ago. But with the reduced bid ask spread more activity you're more optimistic about your own activity. Just speaking hypothetically, if there was hypothetically a very large portfolio that came out to market that you hypothetically had always wanted to buy, how would you think about financing that in terms of going with a partner, given your fund business history or maybe OP units or I'm just curious how you would think about that?

Well, I'll tell you, I mean we have been saying to you for quite a while that we were working on good joint venture relationships and trying to get those kind of really nailed down for large deal, because you know we're not called through comfortable issuing very much stock. And where that came out just the best was on that Century Park deal. We went out, we made a deal with those partners, we had a fully-funded equity and debt and everything bid for that deal. I though that it was all the way around, other than believing it's a deal, it was a great process for us. And I would expect to follow exactly the same process on the next one and next one, on anything that was larger, as you know, we don't like issuing stock, but anything that was larger where I just felt like, hey, that I might think nine out of 10 times I want to be right. There might be too much money just for the company to risk on something, and we want our partners in it that was a perfect structure for us, for getting something done.

And our final question comes from Rich Anderson.

My question was answered. Thanks.

Thanks.

And there are no more questions.

Thank you everybody. It was a pleasure speaking with you. And we look forward to speaking with you again next quarter.

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