Q2 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to Douglas Emmett 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. If you require operator assistance. Please press Star then zero.
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 CMR 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.
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 website.
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 was up 7.7% at that FFO up 7% and NAV FFO up 26%.
Operating results like these together with thoughtful management of our balance sheet had 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.
Fixed 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 that debt we refinance.
Increase our future financing flexibility by expanding our pool of unencumbered properties to almost 40% of our portfolio.
And reduced our share of outstanding net debt by nearly $200 million for the impact of new acquisitions. This year.
Kevin will fill you in on our progress towards 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 Glenda and purchase and the impacts from our balance sheet activities may 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 Glandon will positively impact our 2019 that FFO by approximately three cents per share.
And finally, we expect that one time cash and noncash refinancing costs and dilution from the equity issuance will negatively impact our 2019 FFO by four to six cents 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 years secured nonrecourse loans with interest effectively fixed at an average of 3.25% through 2027.
This total includes the acquisition loan for the Grendon.
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 alone for another three years.
We are continuing to focus on extending our debt maturities and capitalized on favorable interest rates and tight loan spreads.
With the goal of refinancing a total of $1.5 billion to $2 billion of debt by the end of 2019.
During the second quarter, we acquired the Grendon a luxury mixed use apartment community.
The glendening sits in a 4.5 acre parcel in the heart of Westwood village within easy walking distance of 3 million square feet of class a office buildings.
Do you see as campus the assailant medical center and over 300, local shops and restaurants.
We paid $365 million for the 350 units and 50000 square feet of Street retail, which works out to roughly $870000 per apartment unit.
The Glen as Midway through 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 fives 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.
Drilling our multifamily division has long been a goal of ours between our development program and the acquisition of the Glandon I'm pleased that we've successfully grown our multifamily portfolio by over 15% during the last year to more than 4000 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 11, 32, Bishop and 2020.
With that I will now turn the call over to Stewart.
Thanks, Kevin Good morning, everyone. In Q2, we signed 221 office leases covering 869000 square feet, including 295000 square feet of new leases.
Leasing spreads for the quarter were 31% for straight line rent roll up and 12% for cash flow.
The lease rate for our total office portfolio increased by 45 basis points to 92.2%.
With increases in our lease percentage and 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 11 32 Bisha.
With our Honolulu office portfolio now 94% leased.
We have less than 100000 square feet of vacancy with more than 350000 square feet of office tenants still needing to relocate out of 11 32 vishal 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.
Ill 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 of 7% to $107.8 million or 54 cents 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 onetime insurance items and without them growth would have been closer to 3%.
Our DNA 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 six and 7%.
And our guidance for average occupancy to between 90 and 91%.
With respect to our AFFO guidance.
We expect that stronger operating results and the acquisition of the Glenda will positively impact our 2019 FFO by approximately three cents per share.
We expect that onetime cash and noncash refinancing costs and dilution from the equity issuance, partially offset by interest expense savings and interest income will negatively impact our 2019 fell by four to six cents per share.
These two offsetting factors net to about two cents per share as a result, we expect 2019 FFO to be between $2.08 in $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.
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We will pause momentarily to assemble our roster.
The first question comes from Alexander Goldfarb of Sandler O'neill. Please go ahead.
Hey, good morning out there.
My question on the back on the balance sheet.
Yes, historically, Jordan, you've been hesitant to issue equity, but you seem to be much more comfortable. Despite yes. 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 and Avi and given that your debt position is pretty good why you feel.
Compelled to get aggressive on going after debt that matures over the next three to four years.
So well first of all I'm never comfortable issuing equity Thats one of the most uncomfortable decisions that we never have to Medicare My most uncomfortable decisions you know Chris.
No need for a long time that.
I want to own as much of the company as I can and every time, we issue equity it dilutes.
Ask me, Ken Dan and all the rest of us at the sitting here.
But we also have commitments to the goal. So we are going to be 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.
For the apartment in Westwood glam then and.
It fit properly there to do that we did end up putting that into a JV and so we went ahead and reduced our leverage and felt that for a little more fire power 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 thats on that side, we have not been very aggressive acuity issuers, we've only issued equity three times in 13 years, so and and the amount of dilution that equities 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 its non recourse loans sick, so that our office 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 by 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 a 110 over so I mean, those are low and history I would say, we would average 125 to 140 when the numbers get above 150. It spreads are getting very getting wide when they get when they are below 120, I'd say spreads are tight certainly in terms of the index.
Indexes are quite low now that I'm, not saying, that's our lowest but they are quite low when we see that happen when those to come together. So a lot of times the index will go down but spreads gap out.
When we see them together calm down with opportunities to do deals in the low threes or even in the mid twos and put away debt. Then we go we're going to do that and we stretched the horizon of our debt out each time.
That way you don't youre not letting the market maybe not letting your last loan determine which market you refine we determine which market we refinance.
Now historically, we tend to refile a couple of years earlier I just want a seven year loan will re Fi two years early year and a half early so we're always going to be a little early on debt as it comes out that's because we never want out of our back against the wall with debt, that's coming due and face maybe a closed death market or a poor 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. So Kevin is working on buying.
So.
That's a program were trying to pursue and because it's so impactful to everything we're doing we haven't completed Ed we're midway through it but we wanted to make sure the information got out to everybody now, but 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 expirations Honolulu Sherman Oaks Encino on maybe you could just talk a little bit about that obviously you spoke about your guidance how would be going up if not for the capital activities. So does that mean that the lease explorations in these markets won't be a drag on your numbers they will be accretive or is there a little bit of headwind in the next few quarters.
Alex overall, it looks like pretty normal role for us what you are seeing in Honolulu is probably some expirations at our conversion.
Eleventhirty to Bisha, so thats the conversion property.
So that we're not worried about those obviously, we're actively office tenants out of that building and then terminals in CNO has some some medium sized tenants rolling later this year, but we've been really good activity there.
Thank you.
Thanks, Alex.
The next question comes from Alexander.
Promote because of bank of America Merrill Lynch. Please go ahead.
Hi, Thanks for taking the question.
I was wondering just keeping in with the top you'll leverage can you talk more about your plans for target leverage on a net debt to EBITDA basis, and with that number look like the short term versus the book.
Intermediate or longer term.
Well right now I think we're a little under seven right.
Yes, six and a half.
I don't feel where.
I mean.
I don't feel we're in a position that I need to do anything about it like an at risk position or anything like that I mean, just to debt debt generally.
That can be very good right I mean, leveraging your position with a fixed cost against.
Equity that gets all the remaining economics, I mean that improves things for all of us the only problems with that our number one repayment risk which.
Can can can miss the mortality of a company or number two the cost of maintaining that that can go up if you have to refine a time when interest rates are higher we fight very early in the process to make sure. We don't get caught it tough times I don't think there is any question about mortality risk I mean, our leverage is down around 30%. So that's for real estate. That's 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 risk, but the mortality of the company. So the only question with that is.
How exposed to 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 RIS just globally at the risk facing the company and Im not make any predictions about rates here, but I would say this we're so we feel very comfortable about.
The direction of where our tenants tenant demand the lack of new supply the fundamentals in our markets and the and the fundamentals of growth in rental rates and our ability to continuing operating our our properties continue our development programs.
And that there's not much you can get in that way save two things one is.
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 its opportune not all the time because it's expensive to do this reduce our exposure to interest rate risk. So as we continue reducing the amount of leverage we have these a view that the.
Size of the company then big moves in interest rates, the wrong way, which I'm sure will happen at some point in the future I am not predicting it anytime soon we would be less subject to and that would be less painful for the company not deadly painful just less painful.
Okay cool so it sounds like to answer your question, yes, so it sounds like you're not targeting a specific level or maybe value just going to continue to be opportunistic with it.
Cool.
And then I guess my second question would be could you could you talk a little bit about the Warner Center seems to be the laggard of the sub markets can you maybe give us an update there.
On market conditions, and what Youre seeing for.
Leasing prospects.
Yes, Alex we continue to see good activity in Warner Center, obviously, it gets 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 were up 250 basis points.
Lease rate over the last year and a half so generally pleased with the direction that setting.
And we are seeing good tenant demand there so.
We're we're up optimistic going forward.
Okay. 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 increase.
No. It's just the fundamentals of the business is what you pointed to occupancy increases and.
Steady growth in revenues.
It's a it's a it's a strong quarter and we expect.
Generally that to continue.
All right Great and then.
Second question I was hoping you could give a little bit more detail on the timeline for 11 32 Bisha.
You have taken 125000 square feet off line 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 your repairs and repositioning the space in large blocks and then the supplemental also says that in order for the first team is to deliver timely approvals need to be obtained can you just talk about the nature of those approvals and your thoughts on getting those behind the delivery date.
Sure Hey, Blaine its Kevin.
We do have a little bit of wood to chop led 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 will.
When I get out of their leases and so.
You know I can't really give you a defined timeline for the actual conversion, but its going to be somewhere over the next couple of years.
Before we have that building a 100% residential.
But just.
We're able to convert when we get an entire floor back were able to convert floor by floor.
Obviously, you can't for half a floor.
Right right. That's helpful. Thanks, guys.
And.
The next question comes from Craig Mailman of Keybanc capital markets. Please go ahead.
Hey, guys.
Just to clarify on the.
On the debt side. So it seems like pro forma 220, you guys paid off subsequent to quarter end you still about 700 million of of kind of a 2020 twos that are that are left that you guys would want to pay off this year is that kind of correct and you guys don't have any more refinances in guidance is that because of the minimal impact of where you could refinance versus kind of in place rates or is it just going to be sort of in the year timing.
I don't have that within but at your but can add a funny on me, but I could say this.
I believe when we end this year, we're up we're trying to get a billion and a half to $2 billion of debt refinanced that debt. Once it's done well have eliminated all maturities through 2024 is that right.
24.
23.
All the maturities before 2003.
So.
I mean, you can I don't know what was 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 a $1 billion.
No no just to clarify on our schedule the three loans that mature in 2022, it's $920 million of principal.
Right and you guys paid off to 20 subsequent to the quarter end right.
Is that any of the other just 23 maturity.
That was that was your 2023 maturity gotcha. Okay. So you guys still north of $1 billion to refinance.
Roughly.
Yeah.
Okay.
That's helpful and then.
Just on the investment side I know you guys have talked about kind of $200 million a year spending between redev and and developments could you kind of talk about maybe where youre 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.
Well, we're we're.
We have.
Two we effectively finished the one and may Che, we have a big one launching in at.
In Hawaii right. The conversion we have the one we're building on well sure right. So there is those are taking a lot of cash should do those.
And then we're working.
Actively add two additional sites both from.
Actually three additional sites one in Hawaii into an outlay to get them geared up for entitlements. So that they kind of are entitled online. As those are are completing and then those will serve slot into it and hopefully we'll be able to properly move crews over to it.
Awesome. Thank you.
Next the next question comes from John Guinee of Stifel. Please go ahead.
Great. Thank you.
Im looking over the last.
Three and a half 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 you know, it's sustainable as long as the national economy keeps up.
And you know holds its own in terms of you know 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 should take we continue as we sit here now to be price below whether it 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 you know it change in the national economy.
Could be.
Obviously, it could be hard on us and.
Whatever some type of.
Trade war that was particularly impactful to the west I don't know it is but it's nothing happening here local.
And then a follow up most of your peers have.
Big Hundred 5100, 150000 square foot lease explorations, which always seem to go vacant.
Do you have any of those on the horizon.
No not not that I can think of because we really don't barely have any of those [laughter]. So even when you look at our kind of largest tenant list those tenants tend to be.
Many many tendencies at different locations that make that single personal or whether it be.
Bank of America in their various locations.
So they are in their 20 locations or whatever it is so we don't happen to have that sort of chunky you know.
Severe depression, followed by a relation of having leases signed a gigantic lease we are much more of a flow business and I think in the entire portfolio. There are only four that are over 100000 square feet doesn't expire in terms and so.
Great. Thank you.
Thanks.
The next question comes from Manny Korchman of Citi. Please go ahead.
Hey, everyone.
And 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 then 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 base. It's a price you purchased it for when you contribute one that you've owned for a while to 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 arent 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 La and how interested you ought to get involved in that market right now.
Well I'm happy that things are are and Theres development, and construction and things going on in downtown La and all the great activity around U.S.C. and things that are happening, but it's not not putting in a negative not positive nothing its not a typical Douglas Emmett market. When you look at how focused we are on smaller tenants and mix of industry amenity base.
Enable to control, what's going on lack of news you know.
Real limitation on new supply it wouldn't be a typical market for us. So you shouldnt expect to see us headed down there soon.
Thanks Jordan.
And the next question comes from John Kim of BMO Capital markets. Please go ahead.
Thank you.
On your multifamily same store growth and it was impact 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.
Occupancy dip that you had in Santa Monica Brentwood.
And now it's on Santa Monica looks like the rents were flat sequentially I just wanted to.
If someone is did you see if you could elaborate on this.
And Oh, well, let's start with what you.
I felt that the 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 about expense comparison to the previous quarter.
I think.
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 Reggie you're right. When you look backwards, we've been running more of a 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 of 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's noise quarter to quarter.
Certainly we aren't taking it as an indication that.
Residues slowed down to I mean, I know because I am reading reports all the time that there's a tremendous shortage of four around housing and the markets that we're in.
And certainly.
Everyone from the city Council to the Governor to everybody else just trying to figure out a way to increase the four rent housing in these areas are on France corridors really lot of areas, where we own apartments now because you're just running at 100% full always and rents continue moving.
So I don't know of 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 my recollection, you had seven office assets that we repositioned.
Five were back in the same store pool. This year two we're still under renovation.
Can you just.
Correct.
You know clarified those numbers, but also what was the impact of the renovated office assets to your same store growth.
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 did here even when the renovation has been completed we are seeing shifts.
So obviously were anxious first of all were instead, the same store pool, the largest possible because when it's too small it gives too much vary too much kind of random noise quarter to quarter and as it gets larger it's a little 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 loan and Marty I'm sure they are because they.
When you're doing same store in comparing back we're seeing we're seeing same store accelerated improvement from those renovations, which by the way what we predicted.
I'm just wondering because some some of your peers, we'll 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 you just said.
Because.
What we 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 in same store you have all these buildings out that you're doing you need to include more buildings in same store and we said all right. We'll put them out we'll put a man which more conservative as to include as much in same store as you can and not pull buildings out which can't be clean could you know.
Accused of Cherry picking or whatever the case may be set. So we said all right, we'll put everything in it or it's going to make things better not worse, which at the time people were thinking that we would keep from that because it made things worse. So we put them all in.
Okay. So I would say that if you were to talk to your peers Jayco. Okay. Thank you took a conservative approach when those are drawn you put.
Most of your buildings in unless they are extremely impacted so thats. What we did you are calling that the not conservative approach. That's not what we were told hurt and part of that change also was including the all the buildings and the most of the buildings and the images is because we had previously excluded.
All the buildings in our in our Jvs from same store.
So that includes the buildings that are not going to repositionings.
Got it thank you.
All right.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Okay.
Just one moment please.
Mr. Rogers. Please go ahead Sir.
Yeah can you hear me.
Yes, yes, okay, sorry, sorry, I'm not sure what happened, but I guess on the acquisition pipeline, just curious or Kevin can give us some additional detail on the change in interest rates and spreads if that's kind of shaking more things loose increasing the appetite is and maybe how the pipeline looks today between multifamily and office.
The.
The interest rate movement is occurring.
So recent that.
Most real estate to slow business and it takes a while to sell something and so.
Most of the people who have made decisions to gear up and 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 an office that we typically see.
Things like the glendening, they'll come up very often because that was 350 units which is a.
Larger property for our markets, but there is a steady flow of.
Of.
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 when would you contemplate kind of contributing those developments or redevelopment at completion.
Or is it really just gonna be the acquisitions and I guess I'm thinking where the equity component is going to come in to continue to delever the portfolio with the bigger and bigger development and redevelopment pipeline.
We are willing to do deals, where we contribute assets into a pool windows JV style pool, but it's just much more complicated we have a group of of JV partners.
And documents that are organized extremely well to just buy something and put it in structure and fees and otherwise get through Prenegotiated and ready to go.
Yes.
Of course in that situation. There is no issue about what the cost is contributing now it's much more complicated to contribute whether it be development asset to our section of.
Our 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 to have done it here.
All right. Thank you.
The next question comes from Rich Anderson of.
SMBC. Please go ahead.
Thanks, Good afternoon.
All right I guess good morning still.
So Jordan on the way to think about your office portfolio and how it's so different than many of your peers in terms of its size tenet tenet 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 experience across a wide range of different types of our office buildings flows more like a multifamily portfolio that an office.
Portfolio just in terms of Capex and then some of the other sort of things that tend to bite other office Reits and you know in the neck. Because there is so much capital involved it does it feel a little bit like multifamily too or is that just as kind of a silly observation on my part.
Yes.
That's 100% the way we trio.
That's the exact on it knows exactly how it feels that you were saying it and it's funny to have someone say impacts us because I've been saying for a while.
We are moving we're trying to move sand internally that I'm, saying to the outside.
We're trying to move that feel the look and feel of leasing office space over to the same look and feel that you get when you ran apartment.
So if you Gotta ran apartment you don't walk in and say Hey, got the place and I'm going to send in my plan or you don't say, let me introduce you to my lawyer, you don't say, let me introduce you to mine.
Construction company that we're going to have to all this you will you don't you say no can you kind of get paint and carpet and then you had on the lease okay. That's what happens.
That is what we're going for and I'm, telling you we're achieving it.
Yeah, I mean, when you look at the stats in terms of speed to move in you know CCI cost you know our our signature suites program, which is the prepared suites and moving people and doing them.
The form leases the quickness of negotiating these leases and getting them done because we only have certain clauses. They are allowed to be change 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.
His rental rate, but the most important item is turnover costs and naps tea ice commissions and downtime.
Hi, guys commissions and downtime represents so much more yearning here out money, then whether you've got an amount of nickel or dime or whatever the case may have been on a rental rate.
And so the whole platform has shifted to focusing on those things and as it has what we recognized is we need to operate more like the residential business, where they are looking for very little downtime between units and some of the tenants.
So thats exactly right thats tied up on her around here.
So that again.
You are exactly right and that is fairly apparent okay. Thanks.
And then secondly, again, along the lines of the typical size of your tenants how do you feel about.
A company like we work and just what they're attempting to do is that is that a good tenant for you or do you feel that that's competition I don't know to what degree that there in your in your markets, but I'm, just curious where you stand on that issue.
I don't I don't know that there are plus or minus vis-a-vis our markets for us.
I know, they're very anxious to get some space in our markets are markets are fairly well leased so it's hard for them to get in.
My guess is the question of whether Theyre, a plus or minus has more to do with the end game of Wee works do they end up.
You know with a strategy that works long term and therefore, they don't create Mike during recession, a giant vacancy across everybody's.
Market at the moment there.
They haven't been very impactful plus or minus in our markets.
But we don't have markets with a lot of vacancy I think theres markets, a vacancy where they've come in and taking youve taken huge amounts of space and and improve the economics of those markets because they so.
Supplier.
Great. Okay, Thats, 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 measure he and his staff provides any sort of litmus test for 2020, 2020 prop 13, a ballot measure.
I thought it did.
Provide a litmus test.
I.
As you know.
Good day.
Passed by also two thirds, two thirds is and it didnt, even get 45% and it only had the only advertising that was out there with the advertising in favor of it that was essentially seemed to be sponsored by the city so that.
I I I feel.
That there they will not be for the people that haven't heard about this already this banner.
It's been proposed by some groups that prop 13 should run as a split role. So you should have 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 its cystic.
Dramatic change and Theres 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 can do.
We would be to reappraise every single commercial property in the state and and one even said you'd have to whatever revenue. The split regenerate you need more than that to hire the people to do it but anyway.
I I do not feel that the state has 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're we're operating at a very high tax rate as it sits today and you're just you're just not hearing a lot of that whether it be from politicians or others you have.
You have individual groups that would like to get their hands on more money that are pushing things, but but you're not seeing that institutionally across the state and certainly a change to prop 13.
I would be a particular show shot at the residents of California, right, because if youre going to say if you do if you are willing to have your business and do business in California were going to taxing, 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 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 guys give us an update on year over year net effective rent growth in your various westway 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 west side I haven't seen 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 pretty fragmented deceleration stable or an acceleration in terms of year over year growth.
I'd say 18 had an up arrow and 19 has an apparel, but I wouldn't say, there's any bigger or smaller for either either year.
Are you just talking about Warner Center is that what you're asking for west La office.
Oh all of that is just.
Our our upper Arrow as was asked earlier on the call of the same store our apparel is getting a little.
Low cloudy when you say apparel on market and apparel from the gains were making for me doing our buildings.
So where we might be seeing.
A little more.
Action than the average of the market from those activities. The activities are seeing good gains but of course spread across the whole portfolio, they're still having some impact as 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.
[laughter].
I will tell you this.
It's not it's not.
Even lost on politicians at this point.
That sequel has turned into a drag on providing housing and housing is a big goal across the board I mean, if you go to from Citi.
Councils 10 mayors to governors to County Board of sensors, It's all housing housing housing, okay, and what they're hearing back is.
First of all you got to find a way to deal with it Nimbys. Your banana as you know not my back everybody does we need housing just not in my backyard put in that guys in that guides for sure not mine. Okay. That's number one and number two is.
We got to figure out a way to modify C Corp. Because sequel is used not to protect.
It's so rarely used to protect and so often used to as a store and to attack.
I mean, you said you can see seek what claims being generate out of law firms that are out of state. They find one person here and.
I mean, we had we had won against elsewhere.
The person left and then the Guy Secretary became the sequel claim it I mean, it's just turned insane and add it's being used to just drag. These out in that you know what they're not as effective against a company like ours, but it's the way a sequel claim becomes effective is if you need to go out and raise your equity and you got to go out and raise the dead because you want to build let's say an apartment somewhere and you get a secret claim a lot of times the debt won't frontals, Graeme clears or the equity won't fund to the claim clears and that gives them leverage even the worst claimed in the world. That's certainly a win if you can get into court can stall a deal to the point, where now that develop or have to go and now argue with us equal claimants and this is not lost on this law firms and they are in the business of doing this.
So that is that is in the in the discussion, but obviously theres points on both sides of the original reason for sequel was probably a good reason, it's just being terrifically 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, you know stadium downtown or whatever if something doesn't happen. They will literally passed a bill any exempt from sequel.
To get them three of those nuisance lawsuit should that it can take and 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 recognize that that is one of the things that's underway.
No I just wanted to hear your perspective on the politics.
Hi, there. This is 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 does the rent differential between a signature suite.
Traditional office space.
Well, it's it's it's it's very important to our business in fact I just saw on.
Someone said, we're trying to do we're trying to build out third 30, a month is that right and that's 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 Dan to be most accurate in the question is.
Not that this the rent in the sweet would be higher or lower I would say the net cost of renting the 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 deals some it could come in and look at one of those suites. We can have a minute next week I mean these numbers are crazy there. So good in terms of the speed the cost of the T.I. Theres no ti right that and having a suite also that is re usable very little T. high cost. It's a number we're using all space planners are build to suites to double standard feel that we know will be.
Appreciated by the widest class of people and so when we do that we get something is very reasonable 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 in the person specking something that they particularly want.
And by the way they are in the space almost immediately and paying okay everything good about that program.
Sounds like it it sounds like that's one of the Kickers to 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 for 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 you next quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.