Douglas Emmett, Inc. (DEI) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session. 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; Kevin Crummy, our CIO; and Mona Gisler, 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. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. Thank you. I will now turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. I am pleased with our financial results for the fourth quarter and for 2015. Both FFO and AFFO were up significantly. Our office rents continue to rise at double digit rates. And as a result, the straight line rents on office leases signed during the quarter were 28.6% above the expiring leases for the same space, our highest level since 2008. Our multifamily portfolio is essentially fully leased and those rents also continue to rise. Overall, our same property cash NOI for the quarter increased by 4.9% year-over-year. I am also pleased to announce that we have agreed to acquire portfolio of four office buildings in Westwood totaling just over 1.7 million square feet for $1.34 billion. These buildings are a perfect fit for our portfolio. They give us a commanding market share in Westwood, one of our core West LA markets. As has been our plan these assets will be purchased by an institutional joint venture that we will manage. We had originally expected that the seller will list all of their West Los Angeles assets in a single multi-billion dollar transaction. In that scenario, we expected to limit our equity contribution to around 20%. While their decision to sell the overall portfolio in multiple transactions has some benefits for us, it creates more uncertainty at this point in the process. Depending on how we feel about other opportunities to deploy our capital in the near term, we may chose to retain a larger percentage of Westwood in order to achieve our equity investment goals. Overall, I’m excited as we move into 2016. Given our expanding economy and high occupancy rates, we expect to see meaningful rental rate growth. We also expect there to be additional investment opportunities. Finally, in December we announced that Ted Guth has retired as our CFO and that Mona Gisler, our Chief Accounting Officer has taken over as our new CFO. I want to welcome Mona to her first earnings call. I also want to thank Ted for his many years of wonderful service. I am pleased that Ted is still part of our team, so we will continue to benefit from his tremendous experience and sage advice. With that, I will turn the call over to Kevin.

Thanks, Jordan, and good morning everyone. As Jordan mentioned, we’ve had a busy and successful fourth quarter. Like Jordan, I am also happy about our pending Westwood portfolio acquisition. As we have said in the past, we target Class A multi tenant buildings in our supply constraint markets and prefer properties with vacancy where our management and leasing platform can add value. This portfolio meets all those criteria and will make us a dominant landlord in Westwood. Subject to usual closing conditions, we expect to complete the purchase in the first quarter with the seven year $580 million non-recourse mortgage loan. Our purchase price equates to $779 per foot which compares very favorably with other recent sales in West LA. We expect this acquisition to be accretive to FFO and to AFFO during 2016. Turning to our other dead activities, we closed two term loans in the fourth quarter totaling $515 million at an average effective annual rate of 2.66%, fixed for the next five years. We have also rolled over two small floating rate loans totaling about $35 million. That completed our goal of refinancing our major 2015, 2016 and 2017 maturities. We are now focused on our 2018 maturities. Looking forward, we expect to see significant property sales in our markets in 2016 and remain hopeful that we can continue to make acquisitions that meet our target criteria. With that, I will now turn the call over to Stuart.

Thanks Kevin, good morning everyone. In the fourth quarter we signed a 167 office leases covering 634,000 square feet including 232,000 square feet of new office leases. The lease [trade] [ph] in our office portfolio increased to 92.9% with our core LA markets of West Los Angeles and Sherman Oaks/Encino still essentially fully leased at 96%. As Jordan mentioned, rental rates are rising across our entire portfolio. Our cash rent roll up this quarter was a positive 12.8%, and we continue to push annual rent bumps in our new leases, with most of our new leases in Los Angeles now at 3.5% or 4%. Our lease rate exceeds the relevant submarkets by an average of 330 basis points. On a mark to market basis, our office asking rents at year end exceeded our in place rents by 14.2%, up another 220 basis points from the last quarter. On the multifamily side, our 3,300 units were fully leased at quarter end. During the last 12 months, we raised our same property residential asking rents by an average of 3.5%. At quarter end, the annualized asking rents for our multifamily portfolio exceeded our in place rents by $18.3 million per year, about half of which related to our 233 remaining pre-1999 units in Santa Monica. I’ll now turn the call over to Mona to discuss our results.

Thanks, Stuart. Good morning everyone. It’s a pleasure to be here and I look forward to working with all of you. I will begin with our results and then discuss our 2016 guidance. As Jordan mentioned we are pleased with our Q4 results. Compared to a year ago in the fourth quarter of 2015, revenues increased by 6% about half from our acquisitions during the year and half from better performance at our same properties. FFO increased 6.5% to $72.5 million, or $0.41 per share. AFFO increased 10.2% to $59.1 million, or $0.33 per share. Comparing our same property cash results in the fourth quarter of 2015 to the fourth quarter of 2014, revenue increased by 3.4%, primarily driven by higher office rental revenue. Expenses increased slightly by 0.4%, and as a result, our same property cash NOI increased by 4.9%. After eliminating the impact of prior-year CAM reconciliations and lease termination fees from both periods, core same property cash NOI rose by 4.7%. G&A for the fourth quarter was $8.8 million. 2015 G&A was about 5% with annual revenue well below that of our benchmark group. Finally, turning to guidance. For 2016, we expect FFO to be between $1.70 per share and $1.78 per share and AFFO to be between $1.33 and $1.41 per share. We have not yet determined how much equity we will retain in the Westwood portfolio. Accordingly, we have widened our guidance this year to reflect a range of contributions from this acquisition. I should note that like last year we expect our growth to be higher in the second half of the year, both because of the Westwood acquisition and our estimates for continuing properties, our guidance does not assume any acquisitions beyond the Westwood portfolio. For more information on some of our assumptions underlying guidance, please refer to the schedule in the earnings package. With that, I will now turn the call over to the operator so we can take your questions.

[Operator Instructions] The first question comes from Manny Cordesman at Citi. Please go ahead.

Hey, it’s Michael Bilerman here with Manny.

Hi, Michael.

Hey. Jordan, I was wondering if you can maybe spend a little time sort of on your joint venture for the Westwood portfolio. And I ask because there is a couple of cross currents that are going on that I guess at least I am having hard time sort of understanding. I think the market was well thought that Blackstone was going to split this up into multiple pieces and you are the winner of the Westwood piece and the market pretty much took it as you’ll do 20% and so you’d have $150 million equity check for that portfolio and that would be sort of it until maybe the next thing comes and then the market would evaluate how that would be funded. It sounded like from your perspective you want to deploy much more capital overall, and so I’m curious what that capital is, and maybe talk a little bit about the structure here in terms of your partner how much your partner is willing to put up because I think there’s just a little bit of confusion going on.

Okay, so the deal that we’ve done so far and I’ll back up and give you a little bit of background. A lot of guys know the background on this deal, but what we’ve purchased is four great office building right in the middle of Westwood, perfect Douglas Emmett down the centerline exactly what we want. And to be very frank, not only do I love the deal but if we had if the stock in a different place et cetera I’d buy 100% of these buildings. So you would want to own all of them. Now in the midst of all that, this being the core of the Blackstone portfolio we had originally thought that the deal was going to come out as a much larger deal which has pros and cons. We kind of said in the prepared remarks, but the pros are that the buildings are coming out in a way where we aren’t going to have to buy everything and we will be able to be a little more choosey about getting exactly what we wanted. Now these four buildings we actually wanted all of them no matter what would have occurred in terms of the packaging of the building, so that’s great. These are great. The con is that we’re not sure how much we’ll end up owning if the other ones come out separately, we may not get them or they may not come out. We don’t know those answers. So we sort of looked at the situation and said to ourselves, look, in one sense you want to be greedy, it’s a bird in the hand. So, we have these deals, you want to own as much of them as you can because you know if that’s done and you like that price and you know you can make on those buildings. And in other sense, we said, well, these other deals are coming out, they are coming out individually and some of them are very good buildings for us to own. So we want to have the money to do that. I saw that there has been some noise in the market and I like to just start out by saying it is highly likely that we’re going to essentially be at 20% to 30% of this deal. Would we go to 50%? If we really felt like nothing else was coming out and we did need the extra money, we don’t have the money to own 100% and I’m not sure we have the money own 50%, but we probably do, but it would mean we don’t have the money to do anything else. So, we’ve looked at that. Now, I’m also not – we have -- I know there is some nervousness and we have the partners to do the deals. We have the partners to own a smaller percentage of the deal, the whole thing. But of course I don’t want to end up a year from now saying, wow, we did all the work and we only ended up with a small investment, I mean that would be a drag too if nothing else came out. So we’re sort of walking that line right now and trying to – in a mix with what our rights are trying to make decision as to where we want to end up. So that’s kind of by way of explaining that part of it at least. In terms of putting the money into the deal and we saw questions about consolidation et cetera, it is not for at least for this initial deal unless we really didn’t think anything else was going on. It is not in my mind a substantial capital investment for the company. Did I answer whatever you were asking?

Right, because you’re thinking about this is a 20 to 30 potential, so in that 150 million to 200 million of an equity check. And I guess if other things will come down the pike because of where your stock is you don’t want to issue it, you would fund that through asset sales or some other means?

Well, we have – what we’ve said and the way I still feel is that we’re without issuing equity with the other kind of leverage that we have, I will be comfortable and we would be comfortable $300 million, $400 million of equity going into to something. If the opportunities are right, and we like the pricing et cetera. We love this deal and frankly I had put a lot of money in this deal, if I wasn’t worried that I was using up my fire power for other deals. We have about $175 million in cash and we have good cash flow, so we generate cash and even more than that we have assets, we can as you’ve already heard we can pulse the JV, right, we can reduce the level of the JV and we also have assets that are very good fit with what we’re buying that we can contribute.

As your equity.

There is no cash, right. None of those is issuing equity, but we do have a good mix of JV contribution opportunities that could get us to higher numbers. All-in-all just to get cut right to it is I don’t feel any of this would stretch our balance sheet, I mean I’m sorry, we don’t have room to do more, but all of the things we’re looking at doing I still feel are relatively conservative and in line with the way we managed our balance sheet for the whole career of the company.

Great. Thanks, Jordon.

Your next question is from Brendan Maiorana of Wells Fargo.

Thanks. Could you guys provide maybe just a spread or the difference between sort of the GAAP and the cash cap rate on the Westwood portfolio and then are the fees for managing the JV meaningful to your bottom line FFO?

So, well, I will take them a little bit in reverse. So none of the deals we are doing or that we even imagine doing are driven by fees and they are not meaningful enough to cause you to go buy a building. All right. So most of what you see is in terms of our decision-making is the decision to buy building that we think is going to make money for us. And as I said, we would buy 100% of them if we had the capital. We are not big cap rate guys, as I told you in the past. I do think it’s reasonable to say that we are comfortable with this acquisition. We will at least add $0.03 to FFO. If you want some sort of grading in terms of its impact but we gave a little wider range because depending on where we end up, it could be better.

Okay. All right. That’s helpful. I was kind of around the number that we got to. And then I guess I’m not sure if this is, maybe Kevin or Mona. So you guys have three tranches or three swaps that roll off, two in April, one in August. Some of that debt comes due in ’18 and the other is ’19. Your plans would be to refinance that debt and if so, kind of how the rate flows versus what you’re in place effective rates are on a swapped basis?

Relative to the swaps we have in place, the rates would go down with the caveat at today’s rates. So, I don’t know where they are going to be in April. I don’t know where they are going to be in August but we would anticipate based on where we are in the market today that those interest rates should go down.

And your plan, Kevin, is to kind of refinance those maturities?

Yes.

Okay. In April and August?

Yes. Just to add, I mean, obviously if rates are very low and as those swaps come up and we have an opportunity to lock in a new set of longer term lower rates and swap in, we are going to take it. That’s the reason why we leave ourselves big tails on loans to give us the flexibility to take advantage of the market when rates are good.

Sure. Okay. Thank you.

Thanks.

The next question is from Jamie Feldman at Bank America, Merrill Lynch.

Thank you. I guess for Mona, can you just talk about for the transaction what the assumption are at the both ends of the range in terms of I guess the yields on a transaction and the ownership stake?

Hi, Jamie and thank you for my inaugural question here on the call.

I wanted to ask you.

I think what we’ve said with regard to the range is that we are comfortable that we will add $0.03 to FFO.

I think you are trying to ask for some more details than we are prepared to give out right now. And as you guys know, we historically and when I say historically like every single transaction, we don’t like to announce until they are closed. There has been so much in the market about this and some that I thought was incorrect and plus we had to give you guys guidance with the way the call rolled out. We got in a situation where we felt like it was going to give out some of this basic information on the deal and make clear to people what’s going on before closing. But we are not -- the deal’s not even closed yet. So where we are today and the information we’ve given is basically what I think we are comfortable with.

Okay. And then when do you have to decide how much of this you will take? Is this at the time of close or this could stretch out for longer?

We have a little bit of time, not a lot. And I don’t want to get into too much detail on our agreement and our structure. But we have a little bit of time but we have to make a decision. We don’t have a lot of time. And as I said, I don’t know that at this point, even 50% is one the table anymore. But we have a little bit of time.

Is there a chance you will use any kind of bridge funding?

No.

Okay. And then can you just talk about JV partner, is it multiple partners or a single partner and tell us more about who it is?

I mean, I can just no, but I want to put like nicer words, but we’re not going to talk about it, we’re not going to talk about our partners and the deal.

Okay. All right. Thanks.

Next question is from Craig Mailman at KeyBanc Capital.

Hey, guys, maybe just a follow-up to that question, is there a possibility in the structure to take more at the outset and have some type of provision in there, if you guys saw that you want to go after another portion of portfolio?

That’s a reason or assumption, but I really don’t want to talk about the deal that much that structure but I would call that a fairly reasonable assumption.

Okay. Thanks. But then maybe just going back to an earlier question about asset sales, is a possible form of capital, I guess I have to imagine that there is some assets in your portfolio you think would be lower growth than some other assets you could buy from Blackstone, just thoughts on whether you guys have list that kind of you can go to market with or you guys comfortable with the whole portfolio or rather just lever?

Comfortable with our leverage and definitely comfortable with our leverage and I think it’s worth mentioning again which I know lot of guys know. But there’s no debt, no obligations of it’s a level of a public company or the master partnership. So it’s0 all non recourse state secured by buildings, that’s all we’ve got. So it’s a very low risk profile in terms of our debt in general and where obviously comfortable with our debt and all the other stuff around our debt that is very, it’s very low risk. They’re very low risk obligations. Where I would say -- so I wouldn’t just start selling buildings other than if I wanted to still have capital to buy additional buildings and I think our options there, maybe there be something to sell, but more can be generated. When I look at our partners and the deals we’re doing more can be generated by taking buildings that will be good fit with that and putting them into those deals and all the JVs or other JV opportunities that just create, do a much better job of creating I would call available and like price equity, four deals for us to give us more control over a larger portfolio. So that would be the more likely thing that we would do.

This is Jordon Sadler [ph] just a follow-up there, I mean, we know you don’t like cap rates, but you do like making money and you do like growth and we realized and recognize you don’t love all your children equally and so the question really comes down to isn’t there something that you would be willing to part within or can’t because the longer term prospects of making money versus those on – the prospects of those that are in front of you vis-à-vis the Blackstone portfolio or otherwise they are just lesser than what in front of you?

I don’t want to put it that way, I mean, there may be buildings that are worse for our portfolio as our portfolio shift in another direction and there’s buildings that our better fit. And we might make those adjustments. I don’t think – I mean, I think that’s a fair statement. But I’m still going to say, I think we have a pretty good portfolio and specially as you look along the west side and as we’re expanding in the west side there’s more opportunity to create flows that have obvious synergies and get like price equity out of buildings then to just decide I’m going to sell this, pay the taxes, buy that, that’s not that great of a tray, right. So, if you believe in the market you believe what have going on at time, you’re better off looking for transaction that allow first of all obviously we fully price in terms of when you’re creating more equity in the past yourself and secondly we’ll do it in the most tax efficient manner.

Thank you.

Okay.

The next question is from John Kim of BMO Capital Markets

Good morning. I was wondering if you could maybe discuss you decision to consolidate acquisition to find earnings perhaps as low as 20% of the portfolio. And then also…

We not thought you’re asking that and because I saw some questions about consolidation. So, let’s start up with, it fore sure not our decision, okay. It’s a very complicated set of rules and if you would have asked me before I watch discuss it all this I wouldn’t got more that 50 dear you don’t. Okay. It’s really is very little relationship to what percentage you earn anymore with the way the world have been written. I can tell for sure that you could earn over 50 and not be consolidated and you can own 20 and we’ve said that you have to consolidate. Both of those to always new people on the phone might sound like strange answers, but that’s the way it comes out. It has to do with control and a number of other factors. I can tell you that the work we’re have done 50, 40, 30, 20 really in a way this thing is structured, its look highly likely we will be – I don’t want to use the word required till I guess we make the decision at the end of the day, but we’ll be somewhat required to consolidate.

And since same stores kind of touchy subject right now, have you given any thought as to how you’re going to include the performance in your same store pools as far as the timing and whether or not that your proportion of share?

Why is it touchy subject?

I don’t know.

So, I think our same store performance has been pretty good. You said same store NOI performance has been very good. Obviously, we’ve given you guidance; we think it’s pretty good. These buildings won’t be included in it for a while, right, you got some time before you have to decide how deal with that, but I guess once we get to the point whenever the profit is include that will be included. But you got a lot of time in that program.

Yep. And then, I know you won’t disclose your partner but maybe can you provide some characteristics of your partner whether or not pension funds, maybe geographic base. And also if you could comment on institution of demand for best selling products at this time from some of the major geographies, Canada, Middle East and Asia?

So, I don’t want to talk about our partner, partners or, that’s now what we do. I’m happy to tell you that we have found good demand for at least when we’ve gone out with our platform and the properties that we think we’re going to buy. We found that there is good demand for us to have partners in the structure that we’ve proposed and there really haven’t been any problems there. So there is still capacity, at least I can tell you, put this deal, I mean I don’t know if the world changes in six months, for then excellent, I have no idea. But this one as we sit here today, all good.

Okay. Thank you.

Next question is from Alexander Goldfarb of Sandler O'Neill

Good morning out there. So, hey, I’m appreciated with getting a little nervous if you guys didn’t disclose the ERPD [ph] on the release. So, just some quick questions here. One, you mention that they’re potential for other parts of the portfolio that ELP portfolio, would any of that bring you to some new submarkets or everything that you’re looking at is within markets where you already operate?

Everything within markets where we already operate.

Okay. So even something right, adjacent to an existing submarket, it wouldn’t be there, it would be literally adjacent to buildings that you already owned.

Well, I know adjacent next door but I mean there are what I considered to be in the markets that we’re already here.

Okay. And then as far as you guys in the presentation note a number of properties where you bought and you’ve improved the occupancy pretty quickly. Is that something that we should think about like in less than the year that you’d have made a lot of progress on these assets or there particulars about the leases in place that mean bringing it from 89 to like a 95 for me take longer than some of your other acquisitions.

Well, I mean we’re not making predictions about when the thing will be released full occupancy. We see have obviously a very good track record and we hopefully kind of outperform our expectations but there isn’t any reason that I know of why the building would stop us from leasing it up, that’s your question?

Yes.

Which we lease it up. I mean, you have our track record. You have a lot of information about the market. The fundamentals in the markets have been very good. The buildings are in great shape. They are well -- they show well. There is good space available to them. But at the same time we have to deal with the roll of the buildings and we have some real leasing to do there too.

Okay.

I was going to say, I think it’s fair to add that our Westside portfolio is 96% leased and I think that our leasing team is excited to add too a little bit of an inventory to lease up in this market because the fundamentals have been pretty good.

Okay. That’s helpful. And just finally, in the presentation, the investor presentation on page 16 where you guys talk about the apartment rent growth. It looks like this year it sort of plateaued but year-over-year it’s been growing. So is the plateauing, is there anything going on there or maybe it’s just how the leases are rolling this year that it just looks like it’s flattened out?

Yes. It’s Stuart. We are still seeing good rent growth on the apartment side. It did slow a little bit but asking rents are kind of volatile quarter-to-quarter with timing but we still had 6% same-store NOI growth in the apartments and we are still seeing good growth there.

Okay. Thanks, Stuart. Thank you.

The next question is from Rich Anderson at Mizuho Securities.

Hey. Good morning. How you doing? So, Jordan, you said that you are not really stretching your balance sheet and you mentioned kind of three options available to you. But could you comment at all, if you were to say let’s just assume 25% equity in the four assets about how your leverage metrics might change even if it’s minor or maybe your debt to EBITDA number comes down. I don’t know how the dynamics work. Could you comment on that at all?

I didn’t comment as minor.

Okay.

How do I give it? We gave the numbers but obviously the fact is that telling us consolidation means that all runs through it. So you got to deal with that, right. Because that’s got to be in there and then you take out the piece at the bottom. But if you kind of cut through all that and you save yourself -- as you know, we have $179 million [ph] in non-cash. So you just did this. What’s the little amount of debt and we have $3.5 billion of debt. All right. So what’s the little debt that we took, additional we took a little long, I don’t think you would even notice it.

Well. Except for the non-recourse debt that you will be taking that, right?

That’s what I’m saying. We consolidated on it. I mean we don’t have the choice of debt. So it’s going.

Optically, your debt might go up but in reality it won’t, is that kind of way to think about?

I would say you look at the company it’s around 40% leveraged. You look at the deal we are doing it’s around 40% leveraged. You look at how much cash you have and you say yourself, well, how a bigger piece does dealer take it? And what I’m saying is you look at the future take-ins and this little - maybe we take a little more debt, maybe stretch to every deal we bought, may we take a $100 million, $150 million of debt across $3.5 billion of debt, I don’t think you would find it to be that problematic. We don’t find the three problematic.

Okay. Okay. As far as modeling all this, I mean, you gave some numbers obviously in your guidance but is this kind of partial impact to ’16 in the way you are thinking about it and then full impact from there forward? Is that how we should be modeling?

Well, obviously, we are not even close, right.

Right. Right.

So it’s partial to ’16. So when we gave the $0.03 is that we are comfortable with at least $0.03 and look forward to talking about ’16.

Okay. And I’m sorry, just quickly. So the way to get to your number, I assume there will be some sort of minority interest, non-controlling interest line that you will provide that nets together interest expense, NOI and depreciation that will go to your partner. Is that how we should be thinking about it?

Yes. So there will be minority interest and the $0.03 is after minority interest.

Right. So do you have a range in that line for guidance?

No, we haven’t provided guidance on that.

Okay. Makes it easy to get to your number then I guess. All right. Thank you.

The next question is from Jed Reagan at Green Street Advisors.

Good morning, guys. You mentioned the Westwood assets at 89% leased. What are those on a percent occupancy basis and just little more color on if there is some sizeable move outs you are expecting in those buildings over the next year or two and then just what’s sort of a capital plan is how much redevelopment capital or reposition capital you expect to put into those buildings?

The occupancy is lower and honestly, I don’t know of it and I don’t think we are going to put pain on. I mean, frankly, on both the numbers leased although the lease is occupied, we can’t put a penalty. It’s actually close and really have a number. I don’t -- I’m not coming to mind of our larger rollouts coming out. I think it has a typical role going forward. The buildings are -- one of the reasons we are still exciting with the match of these buildings is they are similar tenants. I mean it is high rise. There is not a lot of very large tenants like a big tenant in this deal is a two floor tenant. So, it’s a super good fit for what we do right smack in the middle of our markets with our people being able to focus very well. This place is buzzing and people are very excited about it here because they are great buildings and let’s just kind of go to town on some large assets in a way we’ve only really been able to show you guys -- on the deals I know we showed you the examples of that four, five acquisitions we’ve made earlier. It gives us kind of more to chew up, I mean the fundamentals here. And you are seeing in the numbers where we are putting out are very good and they have buildings like this where we could take advantage of what’s going on with the fundamentals with leasing and our operating metrics of our spreads is everything that we could do to improve the cash flow come out of buildings that’s exciting for this group and people are coming.

So we shouldn’t expect...

To answer your question about capital, the buildings are in really good shape and so we are not anticipating the need to do any substantial renovation or anything. It’s more about lease-up capital.

Got it. Makes sense. And I realized this may be tough to offer specifics on but can you just generally maybe about the pricing power benefits you might be able to achieve going forward from moving to say a 10% market share in Westwood overall to call it 50% of the overall market there?

I would say that what’s happening is we -- it allows us to more rationally and directionally cause rents to do what we want them to do. So seeing that we are long-term owners and we know that we want to propel things up and we want to sort of slow them down when they are headed down, it gives us more ability to do that and we kind of to a good degree strip out any concessions. We create a very rational and let’s say comfortable market for people in leasing do where there is not a lot of angst around, are they getting the right or the best or whatever pricing because that always helps deals flow little better. And when you look at the tenant sizes that we work with, which is two to ten thousand. We typically, let’s call it. They are not anxious to feel the pressure that -- they should have gone pre-rent or they should have gone more TIs or they should have gone something else. We try and get people comfortable that it’s stable market. Yes, rents are going up. Everybody knows rents are going up but there is not huge volatility in the type of deal you can expect to get in terms of the economic going into one of these spaces. It allows us to create a more stable and clear market for everybody and therefore that’s how we keep all of our projects better leased. So, I would say we could -- when rents are going down, you can’t change the direction of rents. But when they are going down, you could slow that, slide down a little bit and when they are rising, you can push it a little bit, with all of the economics that go into the package of a lease, whether there be bumps in the lease, not giving concessions, holding down TI and turnover costs. We are able to be very rational and fair in terms of those numbers.

Okay. That’s helpful. And just last one. It looks like you had a nice pick-up in Warner Center last quarter and hoping you can talk a little bit about the activity you are seeing in that market these days and what you think could be a realistic occupancy goal for the end of this year?

I’m happy about the pick-up and I’m happy. Warner Center has definitely been kind of up and down. Am I still giving you answer? No. We had kind of broken up the question. This is Stuart. I don’t want to make predictions about where it’s going although I still feel great about the market. I feel we have a good pipeline still and when I talked to you last quarter, you are seeing it’s reflected in the activity that’s happened there. There is a lot of capital going into that market. I mean, I don’t know the next time you guys are out here. So you got out and take a tour, that whole mall is open and the apartments. There is even more construction. What was under construction has been completed. It’s filling very fast due to density of population, the amenities. People’s desire to be in that area is improving every day. And you are seeing it. We saw some in our pick-up and we feel good that over the haul, you are going to see even more of that.

Okay. Thanks a lot.

Thanks.

The next question is from Ross Nussbaum at UBS.

Hey. Good morning, guys.

Hi, Ross.

I just want to clarify something that was said earlier. The $0.03 of FFO accretion, did that number include straight line rent in the FAS 141 mark-to-market or is that more of sort of a peer cash NOI kind of this data?

It includes our ownership percentage after you back out the minority interest, right. So the assumption is that the straight line rents in the FAS 141 are consolidated in and then depending on what our ownership percentage is you back that component out of the minority interest to get to the $0.03.

Right. So the AFFO accretion after all the non-cash garbage in the CapEx obviously is less than $0.03. Okay. Second question. Your G&A expense was up 11.6% for all of 2015. You are now guiding to -- at the midpoint, you are guiding about a 10% increase in 2016. And I guess I’m struggling with why the G&A this company is going up double-digit percentages. What’s going on behind the scenes that’s causing that?

So with regards to 2015 and we had anticipated that there would be some announcement of an increase during Q4 and in fact that’s what we saw. But overall, our G&A was still in line with our expectation and still relatively low compared to our peer group. It was running around 5% of our annual revenue. If you look at our guidance for 2016, there is an increase although there really isn’t anything anyone material item that’s driving that increase and the expectation is it is still going to remain around 5% of our annual revenue. So, we still feel pretty good about it, still low compared to our peers and we are feeling good about our cost management internally.

But is it comp? That’s going up more than 10% a year at the company. I mean that’s -- in theory one would hope that your G&A as a percentage of revenues or NOI would go down over time as you get economies of scale. So, I guess I’m surprised that what would be driving your G&A up double digits at this point.

Yes. So there is no one factor or one of the things that is driving it for ’16 is that we restructured our Board compensation that used to be a longer term compensation plan and now we are going to see the impact in each individual year is about expense hitting in 2016 is driving it up little bit.

Yes. Appreciate it. Thank you.

The next question is from John Guinee at Stifel.

Great. Thank you. I get everything about this deal. It makes perfect sense to me. I get the $0.03. I get the leverage kick stuff just a little bit. We get the rental rate growth barriers to entry. If somebody is looking for value office space, contiguous to your markets or they are looking for newly build space, where, how far do they have to go? How far is drive time? Is it LAX, is it Culver City, is it Hollywood, is it Downtown LA, where is new product at a reasonable price?

Wow, now product at a reasonable price. There is some new -- you want to answer, Kevin?

It’s tough because when you go out and play, you are talking about larger floor plate, more campus style projects, which are expensive on an asking rent basis as we see and say east Santa Monica. The stuff over in Hollywood that’s going out is also in the $5 full service gross plus range, so I guess reasonable in the IDB whole there, but that’s what they’re getting in Beverly Hills for some rents. So, they’re not building really in markets like El Segundo and nobody in the right mind would drive south of the airport from our tenant base with a 4000 foot tenant would take a drive all the way down to El Segundo to save money. I don’t think there’s new reasonable price, they’re little bit new Kevin just mentioned, but I don’t know when you say reasonable price you say we go there and really bring down your cost of occupancy that would not been true.

Okay. Thanks a lot.

All right.

Next question is from Brendan Maiorana of Wells Fargo.

Thanks. Couple of follow-ups. So, Jordan I think you said although I may have miss heard, $175 million of cash on the balance sheet, I think there is little over 100 at -- there’s little over 100 I think listed as of 12/31, so what’s the difference?

The deposit for the lesser deal.

Okay. Got it. And your routine cash flow per year is I guess based on kind of your guidance, your retain cash flow above the dividend is probably 75 million a year or something like that?

We haven’t given that out although you guys have a lot of AFFO information on us and our dividend.

All right. Fair enough. And then, last one I had for your fund, your current fund, FFO was up a lot in the quarter, it look like maybe there was some adjustment that happen on operating expenses. What happened in the quarter and can we expect that to continue or is that a one time and it will go back to kind of that earnings power that has been over previous quarters?

Yes. I mean the one thing they just keep in mind is that because of the size of the funds that is a little more sensitive to fluctuation and in fact you’ve seen the swing and there are some factors that has factored the for this year. In first quarter in particular we had a concentration of property tax refunds that hit.

Okay. So that’s why it look OpEx went from me around $7 million a quarter down to $2.7 and that should resume to more normalized pattern going forward.

That’s right.

Okay. Thanks.

Next question is from John Kim of BMO Capital Markets.

Thanks. I just had a follow up on your guidance, what have you projected as far as acquisition related expense. This year I imagine it’s going to be pretty large number and you don’t deduced from your – sorry, you don’t added back to your FFO?

Well, actually we, I mean, last year we had acquisition related expenses and we just had an expense and they counting for that. I have a norm days of accounting for that you took them, put them with the deal. Now you expense the migrate when they’re happening, so they don’t necessarily line up much less in the quarter, they cannot even line-up in the year of with what the actual acquisition which I thought was kind of ought We have budgeted additional expenses for acquisitions, but we haven’t given that detail on our – in our guidance, but they are hard to budget for because they – in the olden days you I think you go -- I think is if blah, blah, blah and they have not put the expense with it and these they tend to like, we’re working on some that has some expenses and then I didn’t buy that quarter and then two quarters later you bought and those were like all in the rear view mirror those expense and they didn’t get even match to it.

So, the $1.8 million that you expense last year.

So the acquisitions like we have a big chunk of acquisition expenses that actually flow though in 2015. They’re already gone. You would think that with closing net and they would all go to gather, but it don’t work that way anymore.

And then do you get any reimbursement from your partner as far as acquisition fees or anything of the potent kind of transactional or leasing fees from your partner?

Well, yes we do get reimbursement costs, the cost that you would expect and we’ll be operating the properties.

But nothing related to that transaction related funds?

Well, yes, I mean if you have transactions fees then everybody pays their portion.

Okay.

Thank you.

Our next question comes from Jamie Feldman of Bank of America Merrill Lynch.

Thanks, just a quick follow up. Can you just talk about the pace of leasing in your portfolio as we start the year given stock market volatility and questions on the economy? Have you seen any meaningful change?

That’s a great question and believe me, we are watching for it. But the answer is no. I mean, it’s funny if you turned off, if you didn’t turned off the stock market; and you go these are great days around here. I mean, other than watching what’s gone off the stock market in all areas tenant demand, tenant attitude deal flow, we have movement in the economics of leases, rental rates etcetera up, up and up all good. So you kind of see what’s going off the stock market and you wonder whether the stock market is vibrating to some different type of thing that’s going on out there, it’s just hard to know, but no we are not. What we are seeing in the stock market, we are not seeing in any of our underlying fundamentals of operating our properties.

Okay. And have you seen, I mean has anyone delayed decision, any leasing decisions?

Jamie, we’re pretty fortunate in that one, we’ve got a very, very small tenant base and so if a 2000 foot guy delays this decision it doesn’t really trickle up through our numbers. And two, we’ve got a very, very diversified tenant base. And so, when you look at sectors that might be potentially backing up in the economy be it energy or banks or technology there is no overweight to anyone of those particular sectors within our market and thus far the media companies which is the tech has been fuelling our media companies the Hulu’s and Netflix etcetera that our production companies are very, very busy providing content and that flows through to the caterers and the accountants and the other people within our portfolio. So thus far, we are feeling pretty good about the demand that we are seeing.

But even with all that and saying it would trickle. We are not hearing about delays, matter of fact I’m getting calls every now and then people be taken -- saying hey I was mistreated, I thought I was getting the space, someone else got the space. I mean always trends out, we said to him, we have someone else for the space. And they don’t -- didn't move fast enough and someone else got the space. I mean, we are not seeing, I’m going to hang back at all.

Okay. All right. Great, thank you.

Okay, that looks like it was our last question. So I just like to thank everybody for being on the call with us and we look forward to speaking with you again in the quarter.

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