Douglas Emmett, Inc. (DEI) Q2 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Q2 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. [Operator Instructions] I will now turn the conference over to Mr. 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 Peter Seymour, our CFO. This call is being webcast live from our Web site 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 Web site. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. 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 Web site. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.

Good morning, everyone. Thank you for joining us. We had an excellent second quarter. Fundamentals in our markets remain strong due to continued healthy tenant demand from a wide range of industries and meaningful barriers to new supply. During the quarter, our total portfolio lease percentage moved above 92%, and our straight-line rent roll-up was 31%. These successes drove excellent operating results for the second quarter. Same property cash NOI up 7.7%, FFO up 7% and AFFO up 26%. Operating results like these, together with thoughtful management of our balance sheet, have been the foundation of our long-term success since we went public 13 years ago. We see current long-term rates and tight lending spreads as an opportunity to do some strategic balance sheet management. As a result, by the end of 2019, we expect to eliminate all of our debt maturities prior to 2023; add almost five years to the weighted average life of $1.5 billion to $2 billion of debt, pushing our average debt maturity for that debt to 2027. Fix the interest rate on all our outstanding floating rate debt, add almost five years to the fixed interest period and lower the interest rate on the debt we refinance. Increase our future financing flexibility by expanding our pool of unencumbered properties to almost 40% of our portfolio; and reduce our share of outstanding net debt by nearly $200 million before the impact of new acquisitions this year. Kevin will fill you in on our progress toward these goals. Over the long-term, this program will provide ample liquidity for attractive acquisition and development opportunities while reducing future interest rate exposure. Now, I would like to talk a minute about our guidance. The combination of excellent operating results, The Glendon purchase and the impacts from our balance sheet activities make guidance this quarter a little complicated. First, based on the strength of our operating results, we are increasing guidance for occupancy and same property cash NOI. Second, we expect those stronger operating results and the acquisition of The Glendon will positively impact our 2019 FFO by approximately $0.03 per share. And finally, we expect that one-time cash and non-cash refinancing costs and dilution from the equity issuance will negatively impact our 2019 FFO by $0.04 to $0.06 per share. The net impact of these items reduces our guidance for 2019 FFO to between $2.08 and $2.12 per share. With that, I will turn the call over to Kevin for more details.

Thanks, Jordan, and good morning, everyone. We had a busy quarter in the capital markets. During the last three months, we paid off $630 million of debt with an average interest rate of 3.5%, including $220 million just after quarter end. We closed $540 million of 10-year, secured, non-recourse loans with interest effectively fixed at an average of 3.25% through 2027. This total includes the acquisition loan for The Glendon. We reduced our overall leverage by $200 million by issuing common stock at $41 per share, and we extended the fixed interest rate on a $102 million loan for another three years. We are continuing to focus on extending our debt maturities and capitalize unfavorable interest rates and tight loan spreads with the goal of refinancing the total of $1.5 billion to $2 billion of debt by the end of 2019. During the second quarter, we acquired The Glendon, a luxury mixed-use apartment community. The Glendon sits on a 4.5 acre parcel in the heart of Westwood village, with an easy walking distance of 3 million square feet of Class A office building, UCLA's campus, the UCLA Medical Center and over 300 local shops and restaurants. We paid $365 million for the 350 units and 50,000 square feet of street retail, which works out to roughly $870,000 per apartment unit. The Glendon is midway through a unit renovation program that has been very successful in increasing rents. The going-in cap rate was just under 4% and we expect that to stabilize in the mid-5s as the renovation program is completed. The property is owned by one of our existing consolidated joint ventures in which we own a 20% capital interest. Growing our multifamily division has long been a goal of ours. Between our development program and the acquisition of The Glendon, I'm pleased that we've successfully grown our multifamily portfolio by over 15% during the last year to more than 4,000 total units. Our development projects will continue to fuel our residential portfolio growth moving forward. In Brentwood, the construction of our 376 unit high-rise apartment tower is progressing well. And in Hawaii, we still expect to deliver the first of about 500 new apartment units at 1132 Bishop in 2020. With that, I will now turn the call over to Stuart.

Thanks, Kevin. Good morning, everyone. In Q2, we signed 221 office leases covering 869,000 square feet, including 295,000 square feet of new leases. Leasing spreads for the quarter were 31% for straight-line rent roll-up and 12% for cash roll-up; the lease rate for our total office portfolio increased by 45 basis points to 92.2% with increases in our lease percentage in almost every one of our submarkets. Occupancy increased by 10 basis points to 90.4%. As we mentioned last quarter, Honolulu is seeing increased tenant demand as a result of our office to residential conversion strategy at 1132 Bishop. With our Honolulu office portfolio now 94% leased, we have less than 100,000 square feet of vacancy with more than 350,000 square feet of office tenants still needing to relocate out of 1132 Bishop. On the multifamily side, our portfolio remained essentially fully leased at quarter-end, including our new Westwood property where we acquired slightly more vacancy than our portfolio average. I'll now turn the call over to Peter to discuss our results.

Thanks, Stuart. Good morning, everyone. We are pleased with our Q2 results. Compared to a year ago, in the second quarter of 2019, we increased revenues by 5%. We increased FFO 7% to $107.8 million, or $0.54 per share. We increased AFFO 25.8% to $95.5 million. We increased our same-property cash NOI by 7.7% driven by 8.6% office growth. Our multifamily same-property growth was restrained by some one-time insurance items and without them growth would have been closer to 3%. Our G&A for the quarter remains around 4% of revenues, well below that of our benchmark group. Now turning to guidance, as Jordan mentioned, based on the strength of our operating results, we are increasing our guidance for same-property NOI growth to between 6% and 7%, and our guidance for average occupancy to between 90% and 91%. With respect to our FFO guidance, we expect a stronger operating results and the acquisition of The Glendon will positively impact our 2019 FFO by approximately $0.03 per share. We expect that one-time cash and non-cash refinancing costs and dilution from the equity issuance, partially offset by interest expense savings and interest income will negatively impact our 2019 FFO by $0.04 to $0.06 per share. These two offsetting factors net to about $0.02 per share. As a result, we expect 2019 FFO to be between $2.08 and $2.12 per share. Other than the planned financings we have discussed, our guidance does not assume the impact of future acquisitions, dispositions or additional financings. For more information on the assumptions underlying our guidance, please refer to the schedule in the earnings package. I will now turn the call over to the operator so we can take your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alexander Goldfarb of Sandler O'Neill. Please go ahead.

Hey, good morning out there.

Good morning.

Question on the balance sheet, historically, Jordan, you've been hesitant to issue equity, but you seem to be much more comfortable despite -- if we use consensus of 45, you issued below, and at the same time, on the debt side, you guys have always maintained a pretty flexible strategy and your debt cost over the next few years is pretty low, only 3%, and yet you're aggressively going after it. So maybe you could just speak from the equity side and from the debt side, why you feel more comfortable issuing especially below NAV and given that your debt position is pretty good, why you feel compelled to get aggressive ongoing after debt that matures over the next three to four years?

So, well, first of all, I'm never comfortable issuing equity. That's one of the most uncomfortable decisions that we ever have to make here, my most uncomfortable decisions. You know, Chris, I've known you for long time, that I want to own as much of the company as I can and every time we issue equity, it dilutes us, me, Ken, Dan, all the rest of us sitting here. But we also have commitments to other goals vis-à-vis the balance sheet and reducing leverage and reducing our exposure to leverage and interest rate risk. So we came upon a situation where we were doing the deal for the apartment in Westwood, The Glendon, and it fit properly there to do that. We did end up putting that into our JV, and so we went ahead and reduced our leverage and built up a little more firepower going forward in terms of all the development and things that we're doing. We generally have been trying to over the years slowly with excess cash reduce our leverage each year a little bit. So that's on that side. We have not been very aggressive equity issuers. We've only issued equity three times in 13 years. So -- and then now the dilution that equity's created has been very, very minimal compared to, at literally, when we went public. In terms of debt, we keep our leverage very flexible, just like you said, it's flexible because it's non-recourse loans that are on properties, on pools of property, and they're all LIBOR floaters that are swapped. So we watch for opportunities to improve that whether it's improving the index or improving the spread. We happen to be at a time right now when index -- the indexes are very low and spreads are very tight in our opinion. We did a deal at 90 over. We did a deal at 110 over. So, I mean, those are low. In history, I would say we would average 125 to 140, when the numbers get above 150, its spreads are getting very -- getting wide. When they're below 120, I could say spreads are tight. Certainly in terms of the index, indexes are quite low now, I'm not saying that's their lowest, but they are quite low, when we see that happen when those two come together. So a lot of times the index will go down but spreads will cap out. When we see them together come down with opportunities to do deals in the low 3s or even in the mid-2s, and put away debt, then we go -- we're going to do that and we stretch the horizon of our debt out each time. That way you don't -- you're not letting the -- you're not letting your last loan determine which market you refi and we determine which market we refi in. Now historically, we tend to refi a couple of years early, right? So on a seven year loan we'll refi two years early, year-and-a half early. So we're always going to be a little early on debt as it comes up. That's because we never want to have our back against the wall with debt that's coming due and face maybe a close debt market or interest rate market or whatever else may be going on. So when we see an opportunity like this come up, which I feel this is an opportunity, when we see something like this come up, we run to extend our maturities, lower our rate the best we can, and that's what we have literally everybody in the capital markets is working on at the moment, except Kevin is working on behind. So that's a program we're trying to pursue and because it's so impactful to everything we're doing. We haven't completed it, we're midway through it, but we wanted to make sure the information got out to everybody now that that's what we were doing.

Okay. And then the second question is, and I think this came up on the last call; the upcoming lease expiration in Honolulu, Sherman Oaks and Encino, may be you can just talk a little bit about that. Obviously, you spoke about your guidance, how it would be going up if not for the capital activities. So, does that mean that the lease expirations in these markets won't be a drag on your numbers, they'll be accretive or is there a little bit of headwind in the next few quarters?

No. Overall, it looks like pretty normal role for us. What you're seeing in Honolulu is probably some expirations at our conversion at 1132 Bishop. So, that's the conversion property. So that we're not worried about those, obviously [indiscernible] office tenants out of that building, and then Sherman Oaks/Encino has some medium-sized tenants rolling later this year, but we've seen really good activity there.

Thank you.

Thanks, Alex.

The next question comes from Alexander Pernokas of Bank of America Merrill Lynch. Please go ahead.

Hi, thanks for taking the question. I was wondering, just keeping in with the topic on leverage. Can you talk more about your plans for target leverage on a net debt-to-EBITDA basis and what that number looks like in the short-term versus the intermediate or longer-term?

Well, right now, I think we're a little under 7, right, yes, 6.5. I don't feel we're -- I mean, I don't feel we're in a position that I need to do anything about it like in that risk position or anything like that. I mean, there is two debt , debt generally, debt could be very good, right. I mean, leveraging your position with a fixed cost against the equity that gets all the remaining economics. I mean, that improves things for all of us. The only problems with debt are, number one, repayment risk, which can risk the mortality of the company; or number two, the cost of maintaining that debt can go up, if you have to refi at the time when interest rates are higher. We refi very early in the process to make sure we don't get caught at tough times. I don't think there's any question about mortality risk, I mean, our leverage is down around 30%. So that's -- for real estate, that's a very low number. And I don't think there's any question that we have a -- we have a level of debt that risks the mortality of the company. So the only question with debt is how exposed do we want to be to moving interest rates? And if I step back -- if we step back and look at the company and we look at the risk, just globally, at the risk facing the company, and I'm not making any predictions about risk here. But I would say this, we feel very comfortable about the direction of our tenants, tenant demand, the lack of new supply, the fundamentals in our markets and the fundamentals of growth in rental rates and our ability to continue and operating our properties, continue our development programs and there's not much you can get in that way. Save two things, one is a big move in the national economy, the national economy obviously impact us; and second, a big move in interest rates. So, we can't do anything about a big move in the national economy, but we can, when it -- when it's opportune, not all the time because it's expensive to do this. Reduce our exposure to interest rate risks, so as we continue reducing the amount of leverage we have vis-à-vis the size of the company, then big moves in interest rate the wrong way, which I'm sure will happen at some point in the future. I'm not predicting it anytime soon, we would be less subject to, and it would be less painful for the company. Not deadly painful, just less painful.

Okay. Cool. So it's…

Did I answer your question?

Yes. So it sounds like you're not targeting a specific level or anything like that you're just going to continue to be opportunistic with it. Cool. And then, I guess, my second question would be, could you talk a little bit about the Warner Center? It seems to be the laggard of the sub-markets. Can you maybe give us an update there on market conditions and what you're seeing for leasing prospects?

Yes, Alex, we continue to see good activity in Warner Center. Obviously, it's a laggard versus the rest of our markets where it sits right now, but we have made good progress there over the last year-and-a-half. I think we're up 250 basis points in lease rate over the last year-and-a-half. So generally pleased with the direction that's heading and we are seeing good tenant demand there. So we're optimistic going forward.

All right, thank you.

The next question comes from Blaine Heck of Wells Fargo. Please go ahead.

Thanks, good morning. So you guys had a great quarter from a same-store perspective, mostly driven by a 7% increase in same-store cash revenues, I think. So can you just talk about the drivers of that growth? I know you guys have got some occupancy growth year-over-year in there and rent growth has been strong, but was there anything else in the quarter you can point to that drove that large an increase?

No. It's just the fundamentals of the business, that's what you pointed to. Occupancy increases and steady growth in revenues. It's a strong quarter and we expect generally that to continue.

All right, great. And then second question, I was hoping you to give a little bit more detail on the timeline for 1132 Bishop, you've taken a 125,000 square feet offline already. Stuart, you just mentioned some more expirations coming up. Are you just going to be taking back all of the space that expires or is there any challenge with respect to making sure you repositioning this space in large blocks? And then the supplemental offices that in order for the first units to deliver timely approvals need to be obtained. Can you just talk about the nature of those approvals and your thoughts on getting those by the delivery date?

Sure. Hey, Blaine, it's Kevin. We do have a little bit of wood to chop with the city relative to some approvals, but it's nothing that we don't think we're going to work through. And we've announced that our timing is to deliver the first phase of the units next year and we still feel comfortable with that. And regarding the timing of the overall project, I mean, it's going to take a couple of years to bleed everybody out of this building and migrate them out into the marketplace. And so -- and the timing of this, I think, that the more construction we do, the more rapidly some people want to get out of their leases. And so I can't really give you a defined timeline for the actual conversion, but it's going to be somewhere over the next couple of years before we have that built in a 100% residential.

But we're able to convert -- when we get an entire floor back, we're able to convert floor by floor. Obviously, you can't covert half of the floor.

Right, right. That's helpful. Thanks guys.

The next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.

Hey guys, just to clarify on the debt side. So it seems like pro forma the $220 million you guys paid off subsequent to quarter-end. You still have about $700 million of kind of 2022s that are less that you guys would want to pay off this year, is that kind of correct? And you guys don't have anymore refinances and guidance. Is that because of minimal impact of where you could refinance versus kind of in-place rates or is it just going to be sort of end of year timing?

I don't have that what you're looking at in front of you -- of me, but I could say this, I believe when we end this year, we are trying to get a $1.5 billion to $2 billion of debt refinanced. That debt, once it's done, we will have eliminated all maturities through 2024. Is that right?

I mean it's '23.

'23? '23. So, I mean, you could -- I don't know where on the schedule you're looking at, but there is that amount of debt that we can shift out.

Okay. So it's more than $1 billion.

Yes. And I mean, just to clarify on our schedule the three loans that mature in 2022, it's $920 million of principal.

Right. Then you guys paid off $220 million subsequent to the quarter end, right? Is that any of the…

That was a '23 maturity.

That was a '23…

That was a 2023 maturity.

Got you. Okay, so you guys still in the north of $1 billion to refinance roughly?

Yes.

Okay, that's helpful. And then just on the investment side, you guys have talked about kind of $200 million a year spending between redev and developments. Could you kind of talk about maybe where you are in the next one or two to go on ground-up for the resi program and maybe timing on when we should expect to hear more about those?

We're -- we have to -- we effectively finished the one at MHA. We have a big one launching in at Hawaii, right, the conversion. We have the one we're building on Wilshire, right? So there is -- those are taking a lot of cash to do those. And then we're working actively at two additional sites both from -- actually three additional sites, one in Hawaii and two in LA to get them geared up for entitlements, so that they kind of are entitled online, as those are completing. And then those will sort of slide into it and hopefully we'll be able to properly move crews over to it.

Awesome, thank you.

The next question comes from John Guinee of Stifel. Please go ahead.

Great. Thank you. I'm looking over the last 3.5 years of your lease economics and it's been stunningly consistent about 27% to 30% growth in GAAP rents, 11% to 13% growth in cash rents. Holding, releasing costs between about $5.75 and $6 per square foot per lease year, is this sustainable and for how long?

Well, we hope it's sustainable. I think that it's sustainable as long as the national economy keeps up, holds its own. In terms of a gateway market that's performing that way, I think we have stronger, more solid underpinning to be able to continue performing than some of the other markets that are single industry dependent. And I also think that we are priced -- we continue as we sit here now to be priced below whether it would be New York or certain areas in Boston, certainly, San Francisco or areas in Washington. So I -- without a national trip, I think that we have a very good running path ahead of us. But change in the national economy, it could be -- obviously, it could be hard on us and whatever some type of trade war that was particularly impactful to the rest. I don't know what it is, but it's nothing happening here local.

And then a follow-up, most of your peers have a big 100,000, 500,000, 150,000 square foot lease expirations, which always seem to go vacant. Do you have any of those on the horizon?

No, not that I can think of because we really don't barely have any of those. So even when you look at our kind of largest tenant list, those tenants tend to be many, many tenancies at different locations that make that single person seeing it out whether it'd be Bank of America and their various locations, UCLA and their 20 locations, or whatever it is. So we don't happen to have that sort of chunky, severe depression followed by elation of having leased that's -- signed gigantic lease. We are much more of a flow business.

Yes. And I think in the entire portfolio, there are only four that over 100,000 square feet, and those that are expiring comes in.

Great. Thank you.

Thanks.

The next question comes from Manny Korchman of Citi. Please go ahead.

Hi, everyone. Thank you for the equity discussion earlier in the call. I guess, as you thought about doing the common equity, how did you weigh that against contributing more assets to either the existing JV or other JVs?

Well, it's much more complicated to contribute assets that I didn't just buy to contribute assets that we've owned for a while than it is to contribute an asset that we just purchased. When you contribute an asset that you just purchased, you don't have to have a price discussion with your partners because it's the price you purchased it for. When you contribute one that you've owned for a while, it's more complicated because they don't feel like you're exactly on the same page with them in terms of the price it should go in. Now that's not to say that those aren't also discussions that we have, but we weren't prepared to have that discussion then.

Thanks, Jordan. And just can you give us updated thoughts on what's going on in Downtown L.A. and how interested you are to get involved in that market right now?

Well, I'm happy that things are -- and there is development in construction and things going on in Downtown L.A. and all the great activity around USC and things that are happening. But it's not putting in a negative, not positive, nothing. It's not a typical Douglas Emmett market when you look at how focus we are on smaller tenants, the mix of industry, amenity base, being able to control what's going on, lack of real limitation on new supply, it wouldn't be a typical market for us, so you shouldn't expect to see us headed down there soon.

Thanks, Jordan.

Thanks.

The next question comes from John Kim of BMO Capital Markets. Please go ahead.

Thank you. On your multifamily same-store growth, I know it's impacted a little bit by insurance this quarter. But overall, it seemed a little bit weaker than some of your multifamily peers. Can you just discuss the occupancy dip that you had in Santa Monica and Brentwood? And also on Santa Monica, it looks like the rents were flat sequentially. I just wanted to see if you could elaborate on this?

Well, let's start with what you -- I felt that same-store on our resi was a little weaker than we expected it to come out as. Obviously, part of that has to do with a bad expense comparison in the previous quarter. I think, in Peter's remarks, he said that it was -- it would have been more like 3% had we not had the insurance income come in, in the previous quarter. But our resi, you're right, when you look backwards, we've been running more of four to six program, which has been extremely strong. And now even taking out the insurance gain that we had before, you're looking more of a three. I don't know if anything going on that is limiting on that front. We've had tremendous growth. I don't know what would cause a pause. Certainly there is noise quarter-to-quarter. Certainly, we aren't taking it as an indication that it slowed down, I mean, I know because I'm reading reports all the time that there is a tremendous shortage of for-rent housing in the markets that we're in. And certainly, everyone from the City Council to the Governor to everybody else is trying to figure out a way to increase the for-rent housing in these areas along transit corridors, really, a lot of areas where we own apartments now because they are just running at 100% full always. And rents continue moving. So I don't know if any issues, but I also agree with you. I thought this quarter was a little lighter than I would have otherwise expected.

Okay. And then on the office front, I think by recollection, you had seven office assets that were repositioned: five were back in the same-store pool this year, two are still under renovation. Can you just clarify those numbers? But also what was the impact of the renovated office assets to your same-store growth this period?

Well, we're getting the renovated buildings as they roll in are definitely improving our same-store, because as we've said to you, the renovations are impactful. I mean, we're seeing shifts. We -- even when the renovation isn't completed, we're seeing shifts. So obviously, we're anxious. First of all, we're anxious to have the same-store pool as large as possible because when it's too small, it gets too much very -- too much kind of random noise quarter-to-quarter. And as it gets larger, it's a little easier to predict. And so we're trying to push as much into it as we can. But if you're saying the renovated buildings are carrying their load at Maury, I'm sure they are because they -- when you're doing same-store and comparing back, we're seeing -- we're seeing same-store accelerated improvement from those renovations, which is, by the way what we predicted.

I'm just wondering because some of your peers will keep the renovated assets in the same-store pool through the renovation process, some do not. And I'm just wondering if you had considered, I guess, the more conservative approach.

Well, I will say this, I would reverse what just said because what we actually -- I would say, a year or two ago, we went around and met with people. And they're like, "You're out of your mind. You have so little same store. You have all these buildings out that you're doing. You need to include more buildings and same-store." And we said, all right, we'll put them out, we'll put them in, which more conservative is to include as much in same-store as you can and not pull buildings out, which can be accused of cherry picking or whatever the case may be. So we said, all right, we'll put everything in, it's going to make things better, not worse, which at the time, people were thinking that we were keeping that because they made things worse. So we put them all in. Okay. So I would say that if you were to talk to your peers, they go, "Okay. Thank you. You took the conservative approach. When those are drawing, you put most of your buildings in unless they're extremely impacted." So that's what we did. You're calling that to be not conservative approach. That's not what we were told.

The part of the change also was including the -- other buildings and the -- most of the buildings in the JVs, because we had previously excluded all the buildings in our JVs from same-store. So that includes the buildings that are not going to repositioning.

Got it, thank you.

All right.

The next question comes from Dave Rodgers of Baird. Please go ahead.

Dave?

Just one moment please. Mr. Rogers, please go ahead, sir.

Yes. Can you hear me?

Yes, yes.

Okay. Sorry, not sure what happened. But I guess on the acquisition pipeline, just curious, Kevin, can give us some additional detail on the change in interest rates and spreads if that kind of shaking more things loose, increasing the appetite and maybe how the pipeline looks today between multifamily and office?

The interest rate movement is all kind of so recent that most real estate are slow business, and it takes a while to sell something. And so most of the people who have made decisions to gear up and sell, made those decisions early in the year. The pipeline has been pretty good. I don't think that we're seeing a lot more flowing out due to the movement in interest rates. But the number of offerings in the market has been pretty solid. And I think the balance is kind of the same between multi and office that we typically see. Things like the Glendon don't come up very often because that was 350 units, which is a larger property for our markets, but there is a steady flow of a multifamily throughout the market as well.

And then maybe, Jordan, just going back to your comments earlier with regard to leverage on the portfolio, obviously, if the goal is to kind of continue to push leverage down, not necessarily to a specific number, you've got a lot of developments. Would you contemplate kind of contributing those developments or redevelopment to completion? Or is it really just going to be the acquisitions? And I guess I'm thinking where the equity component is going to come in and to continue to de-lever the portfolio with the bigger and bigger development and redevelopment pipeline.

We are willing to do deals where we contribute assets into a pool and there is a JV style pool. But it's just much more complicated. We have a group of JV partners and documents that are organized extremely well to just buy something and put it on the structure and fees and otherwise that's pre-negotiated and ready to go. But, of course, in that situation, there is no issue about what the cost it's contributing on. It's much more complicated to contribute whether it'd be development assets or a section of -- or group of assets or whatever, because you have to agree on pricing and other things. That is definitely on our -- that is something that we do think about doing. We just haven't happened or done it here.

Thank you.

The next question comes from Rich Anderson of SMBC. Please go ahead.

Thanks. Good afternoon, or I guess good morning still. So, Jordan, when I think about your office portfolio and how it's so different than many of your peers in terms of its size, tenant -- typical tenant size and whatnot. And then I think about your history running multifamily assets over the past many years and still do today. Does it feel like your business having experienced it for a wide range of different types of office buildings flows more like a multifamily portfolio than an office portfolio just in terms of capex, and some of the other sort of things that tend to bite other office REITs in the neck because there's so much capital involved. Does it feel a little bit like multifamily to you or is that just as kind of a silly observation on my part?

That's a 100% the way we feel. That's the exact on the nose exactly how it feel. Thank you for saying it. And it's funny to have someone say it back to us, because I've been saying for a while. We are moving, we are trying to move, I'm saying it internally. I haven't been saying to the outside world. We're trying to move the feel, the look and feel of leasing office space over to the same look and feel that you get when you rent an apartment. So if you got to rent an apartment, you don't walk in and say, "Hey, got the place, and I'm going to send in my planner." You don't say, "Let me introduce you to my lawyer." You don't say, "Let me introduce you to my construction company that we're going to have to do all this." Well, you know what you say? "Hmm, can you -- can I get paint and carpet?" And then you hand in the lease. Okay. That's what happens. That is what we're going for, and I'm telling you, we're achieving it. I mean, when you look at the stats in terms of speed to move in, TI costs, our signature suites program, which is the prepared suites and moving people into them, the form leases, and quickness of negotiating these leases and getting them done because we only have certain clauses that are allowed to be changed. You would see that we've actually taken giant steps in that direction. And the reason for all of that is, it seems like in the office business, one of the most -- when you look at the office business, the most discussed item is rental rate, but the most important item is turnover costs. And that's TI, commissions and downtime. TI commissions and downtime represents so much more year-in and year-out money than whether you got another [indiscernible] $0.10 or whatever the case may have been in the rental rate. And so the whole platform is shifted to focusing on those things. And as it has, what we've recognized is we need to operate more like the residential business, where they're looking for very little downtime between units and then move the tenants in. So that's exactly -- and that's the mantra around here.

Say that again?

You're exactly right and that is the mantra around here.

Okay, thanks. And then secondly, again, along the line of the typical size of your tenants, how do you feel about a company like we work and just what they are attempting to do. Is that a good tenant for you? Or do you feel that that's competition? I don't know to what degree that they're in your markets, but I'm just curious what -- where you stand on that issue.

I don't know that they're plus or minus vis-a-vis our markets for us. I know they're very anxious to get some space in our markets; our markets are fairly well leased, so it's hard for them to get in. My guess is the question of whether they're a plus or minus has more to do with the end game of WeWorks. Do they end up with the strategy that works long-term and, therefore, they don't create like during recession a giant vacancy across every place markets. At the moment, their -- they haven't been very impactful plus or minus in our markets, but we don't have markets of a lot of vacancy. I think there is markets with vacancy where they've come in and taking huge amounts of space and improve the economics of those markets because they supply it.

Great. Okay. That's all I have. Thanks.

The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.

Thanks and good morning. Jordan, you've been pretty vocal about your thoughts on Prop 13. I'm curious to hear your thoughts on the failure of measured EE and if that provides any sort of litmus test for 2020's Prop 13 ballot measure.

I thought it did provide a litmus test as. It -- as obviously you know that needed to pass by -- need to pass two-thirds.

Two-thirds, yes.

And it didn't even get 45%. And it only had -- the only advertising that was out there was the advertising in favor of it that was essentially seem to be sponsored by the city. So I feel that there will not be for the people that haven't heard about this already. There's been -- it's been proposed by some groups that Prop 13 should run at a split role. So you should Prop 13 protection on residential, but not on all commercial space. But commercial space is very broad and impacts all small businesses, all -- everybody. I mean it's just a dramatic change and there's even been the county assessors for the various counties have already come out and said, they don't know that that's even something that they could do would be to reappraise every single commercial property in the state. And one even said you'd have to -- whatever revenue the split role would generate, it'd be more than that to hire the people to do it. But anyway, I did not feel that this state have voters that are at all sympathetic to a split role or frankly any modification to Prop 13 and, in fact, they have shown that they are not very sympathetic to almost any further taxes going forward. We are operating at very high tax rate as it sits today and you're just not hearing a lot of that, whether it'd be from politicians or others, you have individual groups that would like to get their hands on more money that are pushing things, but you're not seeing that institutionally across the state. And certainly a change to Prop 13 would be a particular shot at the residents of California, right, because if you're going to say, if you do -- if you're willing to have your business and do business in California, we're going to tax you. But if you're willing to have your business in any other state and only sell products in California, you can get out of the tax, that's a strange way to go. Right? You would think that would be the opposite of what a state would want to do. And in fact, when we talk to politicians, I think they feel that way too.

Great. And maybe just shifting over to the office markets just for a moment, can you give us an update on year-over-year net effective rent growth in your various west L.A. submarkets?

Well, we're seeing very good growth. It depends on the market. We're seeing very -- obviously, we're starting to see some reasonable growth in Hawaii. We're seeing very good growth on the Westside and we can see it on Sherman Oaks. And we're seeing, what I would call, very modest growth in Warner Center market. And even that one, as I think Stuart mentioned, has finally got to clear up arrow, which is nice.

Relative to '18 is that -- would you frame it as a deceleration stable or an acceleration in terms of year-over-year growth?

I'd say '18 had an up arrow, and '19 has an up arrow, but I wouldn't say the arrows any bigger or smaller for either year. Are you just talking about Warner Center? Is that what you're asking me?

No, no, for West L.A. office.

All of it is just -- our up arrow, as was asked earlier on the call, the same-store, our up arrow is getting a little cloudy, when you say up arrow on market and up arrow from the gains we are making from doing our buildings. So we're -- we might be seeing a little more action than the average of the market from those activities. The activities are saying good gains, but of course spread across the whole portfolio there still having some impact, as it was brought up earlier.

Okay, great. Thanks everyone.

The next question comes from Bill Crow of Raymond James. Please go ahead.

Good afternoon. Jordan, what is the possibility that they could try and solve the housing issue by speeding up the permitting process?

Oh, please. I would tell you this, it's not even lost even lost on politicians at this point that Sequoia has turned into a drag on promoting housing and housing is a big goal across the board. I mean, if you go to -- from city councils to mayors to governors to county board assessors, it's housing, housing, housing. Okay. And what they're hearing back is, first of all, you got to find a way to deal with it. [Indiscernible] or bananas not in my backyard. Everybody goes we need housing, just not my backyard. Put in, in that guys and that guys for sure, not mine, OK. That's number one. And number two is, we got to figure out a way to modify Sequoia, because Sequoia is used not to protect, it so rarely used to protect and so often used to -- as a sword and to attack. I mean, you can see Sequoia claims being generated out a law firms that are out of state they find one person here. And I mean we had -- we had one against us where the person left in then the guy's secretary became the Sequoia claimant. I mean it's just turned insane. And it's being used to just drag these out. You know what. they are not as effective against the company like ours, but it's the way a claim becomes effective is, if you need to go out and raise your equity and you got to go out and raise the debt, because you want to build, let's say, an apartment somewhere and you get a Sequoia claim, a lot of times the debt won't fund till its claim clears or the equity won't funds till the claim clears, and that gives them leverage. Even the worst claims in the world, that's certainly a win if you can get into court, can stall a deal to the point where now that developer has to go and now argue with those Sequoia claimants. And this is not lost on this offerings, I mean they're in the business of doing this. So that is -- that is in the discussion, but obviously there is points on both sides, the original reason for Sequoia was probably a good reason. It's just big horrifically misuse now. And so we need to look for ways to fix that. And you've seen there is precedent for that because when the state wants something big to happen, a stadium downtown or whatever, something big to happen, they will literally pass the bill and exempt them from Sequoia to get them free of those nuance lawsuits so that they can move through and get done. So I'm hopeful for something like that. I don't know how quickly it will occur, but people -- it is certainly recognized that, that is one of the things that's in the way.

Yes, I always like to hear your perspective on the politics out there. The follow-up question was on the signature suites, which you referenced a few questions ago. How important is that becoming to your business? And what is the rent differential between a signature suite and traditional office space?

Well, it's very important in our business. In fact, I just something that said we're trying to do -- we're trying to build out 30 a month. Is that right? Was that the number? 30 a month. I mean, we are so focused on those suites and they are doing so well for us. I would say to be most accurate in the question, is not that this -- the rent in the suite would be higher or lower, I would say the net cost of renting this suite and the downtime is much better package that when someone comes in and no matter how fast we are when we have to modify that suite to fit them, that's a completely different deal. Somebody could come in and look at one of those suites, we can have them next week. I mean, these numbers are crazy. They're so good in terms of the speed, the cost of the TI. But there is no TI, right. And having a suite also that is reusable at very little TI cost. Remember, we're using all space planners to build the suites to the most standard feel that we know will be appreciated by the widest class of people. And so when we do that, we get something that's very reusable and cost effective. And then you would say "That by itself would be a fantastic win". And then you say, "Oh, by the way and we lease them faster, and by the way, those build-outs are cheaper than the build-outs that we have to do and the person's expecting something that they particularly want. And by the way, they're in the space almost immediately and paying. Okay, everything good about that program".

It sounds like -- it sounds like that's one of the kickers to the same-store growth as well, right? Just above and beyond what the market might be giving you.

Yes, it is.

All right. That's it from me. Thank you.

Okay. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan, Chief Executive Officer for any closing remarks.

Thank you for joining us. We look forward to speaking with your next quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.