Stuart McElhinney – Investor Relation Jordan Kaplan – Chief Executive Officer Kevin Crummy – Chief Information Officer Ted Guth – Chief Financial Officer.

Jamie Feldman – Bank of America Merrill Lynch Gabriel Hilmoe – Evercore ISI Craig Mailman – KeyBanc Capital Markets John Kim – BMO Jed Reagan – Green Street Advisors Brendan Maiorana – Wells Fargo John Guinee – Stifel Ross Nussbaum – UBS Bill Crow – Raymond James Rich Anderson – Mizuho Securities Manny Cordesman – Citi Michael Bilerman – Citi.

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session.

I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett..

Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Ted Guth, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website.

During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.

Although, we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material.

For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. 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. The Los Angeles labor market continues to improve. During the last 12 months alone, LA added 85,000 jobs, reducing the unemployment rate from 8.1% to 6.2%. We had job gains across our diverse industry base, led by healthcare, leisure and hospitality, and construction.

Our premier submarkets continued to outpace Los Angeles as a whole, with West LA unemployment in September down to 5.2%. Against this strong economic backdrop, our office portfolio had another very good quarter.

Rents in our core Los Angeles markets are averaging double digit growth and the leases we signed this quarter bear that out, with our best metrics since 2008.

Starting cash rents on our leases this quarter were 10.2% higher than the ending cash rents on the expiring leases for the same space, and even more important, the straight-line comparison for those same leases was up 26.1%.

Our residential platform remains fully leased and continues to post impressive year-over-year asking rent growth, with Q3 up another 4.6%. Same property office cash NOI growth was up approximately 6%. As a result, our overall same property cash NOI increased by 5.6% year-over-year, our largest increase since 2008.

With that, I will turn the call over to Kevin..

Thanks Jordan, and morning, everyone. We've had a busy and successful quarter with our refinancing program. After paying off the last half of a $400 million loan in July, we have now completed refinancing almost all of our 2015, 2016 and 2017 debt maturities.

Only a few small loans representing an aggregate of about 4% of our debt are now scheduled to mature in those three years. We have begun to turn our attention to our 2018 maturities. For example, in October, we paid down $254 million of a $510 million loan that matures in April 2018.

We continue to enjoy historically low interest rates on our borrowings. In July, we closed a seven year, $180 million loan with interest effectively fixed at 3.06% per annum for the first five years. In October, we closed a seven year, $400 million loan with interest effectively fixed at 2.64% for the first five years.

In addition, we increased our available liquidity by upsizing our credit line in August from $300 million to $400 million, while extending its maturity by three years to August 2020. We are also busy underwriting acquisition opportunities in our markets. Most of them are office and a few multifamily. With that, I will now turn the call over to Ted..

Thanks Kevin. Good morning, everyone. I'll begin with our results, address our office and multifamily fundamentals and finish with an update on guidance. Compared to a year ago, in the third quarter of 2015, our revenues increased by 8.1%.

About half from our acquisitions during the last year and the other half from better performance at our continuing properties. Our FFO increased 12.3% to $70.4 million, or $.40 per share, and our AFFO increased 27.5% to $58.7 million, or $.33 per share, reflecting lower TIs this quarter compared to a year ago.

Comparing our same property cash results in the third quarter of 2015 to the third quarter of 2014, revenue increased by 3.5%, primarily driven by higher office rental revenue, as a result of both higher occupancy and higher in place rents. Expenses decreased slightly by 0.1%, and as a result, our same property cash NOI increased by 5.6%.

After eliminating the impact of prior-year CAM reconciliations and lease termination fees from both periods. our core same-store property cash NOI rose by 5.1%. Our G&A for the third quarter was $6.9 million, or only 4.3% of revenue. We are pleased that we maintained our G&A expenses essentially constant, even while increasing revenues.

This kept our G&A percentage well below that of our benchmark group, converting more of our NOI to cash flow. Now, turning to office fundamentals. In the third quarter, we signed 174 office leases, covering 641,000 square feet, including 255,000 square feet of new office leases.

The leased rate of our office portfolio remained at 92.8% with our core LA market still essentially fully leased at 96%. As Jordan mentioned, rental rates are rising across our entire portfolio.

Our cash rent roll up this quarter was a positive 10.2%, while more than 90% of the leases we executed for Los Angeles this quarter included rent bumps over 3%. Our portfolio continues to exceed the overall submarket lease rate by an average of 395 basis points.

On a mark to market basis, our office asking rents at September 30 exceeded our in place rents by 12%, up 210 basis points from the last quarter, and our best since 2008. On the multifamily side, our 3,300 units were fully leased at quarter end. During the last 12 months, we raised our same property residential asking rents by an average of 4.6%.

At quarter end, the current annualized asking rents for our multifamily portfolio exceeded our in place rents by $18.7 million per year, about half of which related to our 235 remaining pre-1999 units in Santa Monica. Now, turning to our balance sheet. At the end of September, our net leverage was 40% of enterprise value.

We had $10 million in cash on hand, no outstanding balance on our upsized credit line and as Kevin mentioned, only insignificant debt coming due in 2015, 2016 or 2017. Finally, turning to guidance. We have narrowed narrow the expected range for our 2015 FFO to between $1.62 and $1.64 per share.

We now expect our 2015 AFFO to be between $1.26 and $1.28 per share, raising the midpoint of our guidance by $0.01. For more information on some of the assumptions underlying our guidance, please refer to the schedule and earnings package. With that, I will now turn the call over to the operator so we can take your questions..

[Operator Instructions] The first question comes from Jamie Feldman of Bank of America Merrill Lynch. Please go ahead..

So Kevin, I think you had mentioned you're underwriting some office and apartment acquisitions.

Can you provide a little bit more color as to what you guys are working on and maybe give an update on the latest on the EOP assets?.

You know, Jamie, we've got a policy here, not to comment on potential acquisition. So, I don't think I'm in a position to add any color..

Okay.

I guess, if -- if we were in a market right now, talking to brokers, what would they say in terms of timing of the LA asset of the EOP sale?.

You know that deal's in the market. So, we're not going to talk about that deal right now. The other stuff, even if you put EOP to the side, there's office stuff out there and some residential stuff out there, which is what we're trying to tell you.

In the past, when you guys have asked us if there's other off stuff on the west side actually, and the residential is actually west side too..

All right.

So, EOP aside, how do you think of financing additional acquisitions?.

Well, I'm happy to in general say that, if it's single buildings or smaller deals, then you know we're not very interested in issuing equity. So those we would do on our balance sheet.

If it's a larger deal, then, as I've said before and I'm pretty committed to this, so I'll say it again, on a larger deal, we should be expected to do the same thing that -- we're trying to do on the Century City deal which is, we would put in maybe 15% to 20% of the money. We would not issue any equity.

Our plan would be not to issue any meaningful equity and probably zero equity, and then we would have joint venture partners in the deal, two or three and that would be the source of our equity..

And our -- you would expect our leverage to be modest..

Do you have a leverage level that, like a maximum leverage level you're comfortable with?.

Well, our history has been that we've run the Company at leverage levels that ranged -- broader range sort of between 40 and 50 and really tighter range closer to more of the 40 to 45, 46 and that [indiscernible] 46, I'm thinking, hmm, I'm getting a little tight, and down to 40, I'm real comfortable. If I'm in the 30s, I'm real, real comfortable.

If that answers your question..

It does. All right, thank you..

The next question is from Gabriel Hilmoe of Evercore ISI. Please go ahead..

Thanks. I guess, Ted, just given the third quarter results and guidance for this year for cash same store NOI and I realize you're not giving guidance for '16 yet, but just when you think about what's implied for Q4, I think, it implies something in the low to mid 4% range.

Do you think that's a good run rate going to the next year or do you think that number potentially accelerates, just given what you're seeing on the leasing front and potential for occupancy take-up?.

Well, so, I think that the implication for Q4 is of course, it's a broader range, because of the range that we gave on that. I think that cash NOI is a very volatile number from quarter to quarter. So, it's hard to really project out that exactly and as you said, we're not yet giving guidance for '16.

Long run, the trends continue to be good trends for us..

Okay.

I guess, then just on Warner Center, it looks like you've got 210,000 square feet rolling over the next four quarters, which is quite a bit lower relative to probably where you were a year ago, which I think was around 280, but I guess, when you look at what's rolling over the next 12 months, can you give us a sense of maybe what you think the mark to market is on that space? I think, in place rent's around 230, 240..

I think it depends a little bit -- so, Warner Center, the rents have actually been moving up a little bit over the last six months to a year, just being pulled up by the general rent in LA, particularly in Sherman Oaks. So, a lot of that's going to depend on how that rent pulls up over that x period of time.

It's not way off in terms of a mark to market. You've probably got a good sense of where the rates are in Warner Center and so, it's not way off, if it's 240. I, truthfully, I haven't looked at that number..

Warner Center itself is a 7% lease, so, there -- especially considering the pressure from the surrounding markets, it's not surprising that they're running up a little bit. I mean, the rental rates are clearly up from before, so that's not surprising considering what's going on there..

The next question is from Craig Mailman at KeyBank Capital. Please go ahead..

Hi guys.

Can we just touch on the 10.2% mark to market in the quarter? How does that kind of breakout between some your different submarkets? Were there any that kind of skewed that a lot higher?.

Well, clearly, we've had very nice rent growth in the last two or three years in the west side in Sherman Oaks Encino and less rent growth, although still some in Honolulu and Warner Center. As a result of that, you would expect that there's going to be better rent rollup in those areas.

On the other hand, that number from quarter to quarter, when you get down to the submarket level is so volatile because the effect of the rent bumps and which leases are coming up and when they're from. So, you really can't -- I couldn't give you the details by submarket in a meaningful way, even if I was inclined to do it.

So, but clearly, if you took a whole year's worth of things, you're going to see better rollup in the West LA, Sherman Oaks Encino than in Warner Center and Hawaii..

You know, as I've said in the call, I thought the straight-line rollup was even more impressive and meaningful, because those are the leases we went with going forward for longer than a quarter. I mean, and that's great in terms of future cash flow..

As you guys -- sorry, I was just going to say, absorption in the last two quarters has been kind of flat here.

I know you guys aren't giving guidance for next year, but I'm just trying to think through kind of the mark to market on the portfolio versus spreads could trend, versus the benefit of additional occupancy upside for same store for next year, is it -- should we be thinking about it that occupancy may be a little bit more muted till Warner Center and Honolulu pick up, and most of the growth is going to come from kind of the bumps and rent spreads or do you guys -- what you're seeing in the leasing pipeline kind of give you some sense in acceleration on occupancy into the early '16?.

I mean, most of the Company is 96%, 97%, it's very hard to get above that number. So, just from that alone, if we're going to get occupancy gains, it's going to have to be in Warner Center and to maybe a little lesser degree at Hawaii.

So, quite frankly, I'm not sure other than in Warner Center, and a little bit in Hawaii, I'm not sure occupancy is even a great goal for us anymore other than as it impacts up been able to move rents up, which is the -- which is now more the primary goal..

If you guys had to peg it, what do you think the mark to market on the portfolio is today?.

We gave that to you. It's 12%..

All right. Great. Thank you..

And just in case you missed that, then that's up another 210 basis points from last quarter. So, we're seeing that move up nicely now..

The next question is from John Kim of BMO. Please go ahead..

Thank you.

I think there was some commentary on rents you're signing now with rent bumps above 3%? Can you just repeat what this figure was and how this compares to --?.

Yeah, what we said was, at this point in the process, about 90%, this last quarter, 90% of the leases and lets in West LA that we signed had rent bumps above 3%..

And how would that compare to 12 months ago?.

Well, easy thing is if you go back 24 months ago, it was a really nominal number..

And then 10%..

And then what happened, as you recall, we told you guys, we were going to put that in -- start asking for 4s, and we did that probably, not quite two years ago and since that time every quarter you've been seeing it go up as sort of the market adjusted to that piece and at this point, at least in West LA, it's pretty much -- they pretty much know they're not going to get at 3%..

Okay, and I understand we're going to --.

[indiscernible] that means 3.5% or 4%, when it's above 3%..

I understand we're going to get a meaningful comp trading in the market, but can I ask what you think the appropriate cap rate is of your portfolio?.

You know, I've been asked that a lot of times on these calls and I always say the cap rate that I think of when I'm thinking of buying a building, the way it's calculated and done doesn't compare very easily to the cap rates that you guys quote when you're looking at the public companies' cash flows or AFFO or whatever the number you're looking at.

So, I've never felt like that was a good stat for me to go out and give because I was worried that it wasn't going to be used properly..

The next question is from Jed Reagan of Green Street Advisors. Please go ahead..

Hey, good morning, guys.

On the -- 12% mark to market rents, just I guess, sort of following on Craig's question, can you break that out by some market or market just generally? I mean, I think you've given a little color on that but not specifically on deals signed last quarter, but just in general where that might shake out between the various submarkets.

Are there any outliers on the high or low side?.

Well, clearly Warner Center and Hawaii, because they haven't had the rental increase, the double-digit rental increase recently, they're at the low end of that piece and the rest of the market are grouped at or above that number..

Yeah, I think they're actually, whether it be in Encino Sherman Oaks or all the west side, they're levelling out a little bit, kind of growing all together now, pretty strongly. You remember a while ago, like a huge outlier was Santa Monica or maybe the triangle on Beverly Hills. I'm not sure that's the case. They're all moving at a good clip now..

Would any of those be in 20% to 30% range on the kind of the positive side?.

Certainly, I mean, again, if you assume that Honolulu and Warner Center are flattish, then the implied average is pretty high for the rest of the things which does approach --.

Certain above flow..

Yeah, that's right..

How about Westwood? Does that one, stand out?.

We'll have to get back to you on that..

Fair enough, and then just on Warner Center, can you talk about just the leasing pipeline you're seeing out there in general and just, I guess, the mix of industries and tenant sizes that you're seeing the most activity from and most focus on?.

Well, let's start with the latter thing first because, I think that we sort of contribute to the confusion in terms of things. We talk about Warner Center and everybody says larger tenants. In Warner Center, our median tenant size is only 3,300 square feet and we only have six tenants over 50,000 square feet in the entire portfolio.

So, the bottom line is our focus continues to be to try and create small tenant buildings out there or to expand that level of things. Now, that being said, we have to look at all the tenants and you can only convert buildings at a certain rate to that level. So, we do look at larger tenants as well.

And your first question was the pipeline?.

Yeah, just the pipeline..

Yeah, I think again, we have really good feelings about the long term success at Warner Center and we did see the market move up, our building, our portfolio move up this quarter and we're hoping to keep doing that..

The next question comes from Brendan Maiorana of Wells Fargo. Please go ahead..

Thanks, good morning. So, this is probably for Ted or Jordan, I mean just looking at the spreads in the quarter, is this as simple as saying your mark to market across the portfolio is plus 12, you guys put up a plus 10 in the quarter. It feels like it's a pretty normal quarter versus kind of your overall for the portfolio..

It's hard that the statistics don't relate, as you probably know..

Yeah, I heard that the plus 10 and the 12 are sound, close together but they come from very different places..

Yeah, when you have very high rent bumps, the expiring rent is always going to be significantly better than --.

Yeah, they're playing a big role..

They have some additional rent bumps in there than the average portfolio. So, I think, it's more as Jordan said, it's more coincidental..

Okay, but the plus 12 is, that's cash to cash or that's a GAAP number?.

No, it's current cash to current cash --.

Current cash to market cash. They're starting rents. Not like some average rent or something. Starting rents in a market today to the rents in place right now..

Yup..

Okay, all right, fair enough, and this one's probably for Ted, so, looking back the past couple of years, you guys have -- your occupancy has moved up, although it's sort of flat lined a little bit this year, but your office operating margins have actually moved down a little bit, which seems a little counterintuitive when you've got higher occupancy.

Is there an opportunity for you guys to move margins back up to the sort of 67%, 68% where you were versus, 65% where it is now or is it just operating expenses that moved up across the board, so you're not likely to get back to that level?.

Well now, operating expenses actually, if we're looking on the office side and I haven't looked at that recently, because it's not one I keep track of, but the office expenses this quarter, actually were literally down from last year, as opposed to having grown. So, I think that there are opportunities and we worked really hard on them..

I'm actually surprised. I mean, that's a very small move but I didn't -- hadn't focused that there was any type of trend that they were moving down. We'd have to look harder at that to see what's going on..

I think that part of that may have to do, although I'm just speculating, I shouldn't do, but it may have to do with non-cash, some of it. We do have -- we have had our non-cash revenues going down, and it's why we wouldn't be thinking about it from an operational --.

Oh, as we bleed off --.

[indiscernible].

Yeah, I don't like the non-cash stuff. So, yeah that might be it, because that's been impactful..

But Brendan, if you want to talk to Stuart or me later, we can come up with some -- if we come up with something, we can talk to you about, we'll be happy to sort of do it, and have a look at that..

Okay, yeah, that would be helpful, just because thinking about it, your occupancy is higher, you guys have been moving rents up, you've been pretty good about keeping expenses in check, so I would think the margins would move up, but it looks like they've moved down, but yeah it's a good point, maybe it's --.

The non-cash might be where it is..

Yeah, okay, all right. Thanks guys..

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

Great. Hi there. Hey, couple of questions. First, and I can't remember if you have a policy on this or not, but it looks like you're about to start your expansion and re-skinning of the Hillside Apartments in Honolulu.

What's the start on that? Then is there a return on costs -- incremental return on cost that you're providing?.

Incremental return on cost. We've given you an idea to what kind of sort of cap rate we thought we were building it to, and I have the number in my head, but I can't remember --.

We've told them 7 to 8..

Oh, that's a very fair number..

Good..

So, we think we're building it in the 7 to 8 cap range. We're super comfortable with that number and in terms of starting, we have one last little permit thing to work through with the utility guys and we're started..

Then landmarks, Brentwood is still in the entitlement black hole?.

Yeah, it is, but you know what, it's moving along and I'm feeling as good as you can ever feel about that process. We haven't been tripped yet, not that we're not expecting to be tripped, but hasn't happened yet..

Okay, and then the last question is, it looks like your lease transaction costs are continuing to come down modestly. How much of that is leasing cost which there probably isn't a lot of room and how much of this is actual hard dollar spent inside the space? It looks like you were at $19 last quarter, $22 this quarter.

Is that 50-50 on leasing dollars versus tenant improvements?.

Yeah, it's mostly -- so, the decline and a lot of the variability is mostly in the TIs, because, if you think about the leasing commissions, you don't really -- there's not a lot of changes in that and as frankly as the value of leases go up, that number actually is going to rise up slightly, so that most of it's been in the TI piece..

[indiscernible] just based on larger or smaller tenants that we do in the quarter, because larger guys can be a little higher TIs, smaller guys get a little lower TIs..

No, it's a very low number. Thank you..

The next question comes from Nick Yulico of UBS. Please go ahead..

Hey guys, it's Ross Nussbaum for Nick. You guys had a good quarter of leasing, 640,000 gross square feet, but the net absorption was only about 1,300 and if I go back and look at 2Q, it's kind of similar dynamic, like 680,000 square feet of gross leasing, 22,000 square feet net absorption.

So, where I'm going is, when I put this all together, you guys have leased about 1.3 million square feet in the last six months, but 23,000 of net absorption. It suggests you guys have a ton of churn going on.

Where are the tenants who are leaving going and why are they going?.

Well, they're not necessarily leaving. That includes renewals.

So, frankly on the margin, that little bit of absorption is either a guy expanding or pulling somebody in from outside of our portfolio, but in general, just in general, we're going to round roll about 10% of the portfolio right, so -- every year, so you should be, kind of thinking hey, 1.5 million, 2 million feet a year of leasing is going to happen.

Now, we're pretty full, so we'll break down the new and renewal for you, but a ton of -- you know what those ratios usually look like and a lot of it is just guys coming up and renewing them and moving on, and that's the leasing, right? That's one of the great ways that we keep our cost down..

When a tenant's leaving you -- for the tenants who are leaving at expiration, where are they going? Is there a trend?.

Let me address that, because I think it's a different thing in our markets and a lot of other markets, with the smaller tenants, when they want to contract or expand, they have to move out of their space. If you've got a 2,500 median size space, we're not going to upsize you to 3,000 square feet, because it's just not really practical.

So, if you want to increase your thing by 20%, you're going to go to another space. We try and are often very successful in getting that other space to be in one of our buildings, but other times, frankly, we don't win that battle and they go someplace else because they want a smaller or larger space than they currently have.

That's the biggest factor in movement of --.

Fitting in their space. So, that's how we keep our TIs down. If someone's in 3,000 feet and they want 4,000 feet we don't go and just crush the neighbouring suite and leave ourselves a half suite and rebuild the space, we try and move them to another 4,000 foot space..

It all makes sense. Appreciate it. Thanks guys..

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

Good morning, guys. As you look at the landmark, it helps illustrate I guess, some of the inflation going on in construction and land costs, I mean, how well are you tracking that? You're not going to start until 2017, you really just -- talk about the inflation that you're seeing in the costs there..

Well, we're not overly focused on the inflation of costs right now, because it's a little ways off.

We sort of adjust that number actually for you guys when we do spend a little time with contractor when we're working on something, which we had to do last time we adjusted it when we were finishing getting our environmental impact report submitted, because we had to kind of go through a little bit of it with guys -- amount of garbage coming off the site and et cetera.

So, I would say, we're a little more sensitive to those changes, and why we're really in the process right now.

I'm not sure that I can say -- I mean, construction costs have obviously and certainly gone up, but I would say that there's probably other groups building in West LA or that have done some stuff in West LA that would have a better feel for that than we're going to have right at this moment..

The other thing I would say in terms of looking at our economic modelling is that at this point, you also have rents going up. So, I think that the net impact of that has actually not been significant to our bottom line..

Okay. I was thinking more in terms of kind of replacement cost based on construction..

Yeah, I know. I figured that's what you were thinking and I was thinking is there a number that I'd be comfortable giving for replacement cost for what we're trying to do on that building that you -- because I see that you're trying to triangulate to that.

I don't think with the information we have, I can give you a super -- current real time numbers on that, which I know is what you're asking for..

Next we have Rich Anderson from Mizuho Securities. Please go ahead..

So, as far as this quarterly result with the great numbers, the spreads and all that sort of stuff, how much was this kind of already factored into your guidance? You didn't really change the guidance at all for FFO or did the deleveraging efforts kind of offset whatever upside you saw this quarter that you didn't expect?.

I think this was consistent with our expectations. We're obviously very happy to have those fulfilled and I know a number of people who were sort of a little uncomfortable whether we could get from the first half of the year to the second half of the year.

We're happy to have actually accomplished that, but I think that we felt that these numbers were good numbers but not outside of our expectations..

Not outside of our range..

Okay, high end of the range?.

A range is a range..

Okay, all right.

Then, I probably ask some form of this question every quarter, because I remember back in 2006, '07 when you were doing rent rolls up 45% or greater, those were the heydays and you're kind of trending back, at least in that direction and I can't remember what your response has been to this question in the past Jordan, but you know, would you say that the market is setting up similar to, better, equal to, or lesser than that period of time in terms of just how the whole supply demand fundamentals are setting up?.

I don't know whether they'll kind of in a volatile fashion run up to a peak the way they did last time, but I would say that, what's driving -- what's going on here right now is a much stronger and wider base than what was driving the run up in '04, '05, '06 and '07.

It's way more comfortable, a way better percentage of kind of expenses for the tenants. The tenants are very -- we're seeing strong balance sheet and good credit. We're seeing a good diversity of industries.

You're not seeing like a heavy lean on, I remember before, it was the mortgage -- these mortgage guys were taking huge chunks of space, the resi mortgage tellers and so, I feel like it's -- on a bunch of fronts, it's healthier than it was before and by the way, it includes to a great extent this sort of conversion over to more the 200 feet per person, more efficient space.

The conversion over the flat screens and the smaller cubicles that don't take as much filing.

I mean, all that, being able to absorb that process through our portfolio at the same time as the strength in this market, all seems really healthy going to just literally more functional space for our tenants, as opposed to some of the tenants before that were literally just space grabbing and whether it be a big dotcom guy that didn't exist a year ago and all of a sudden now needs 50,000 feet, 100,000 feet.

What's going on now seems a lot more comfortable and it's backed by much stronger, more established tenants..

Do you -- not that you're looking in San Francisco at this point, but do you ever take a look at that market and just do your own comparative analysis about how the dynamics are playing out in Southern California versus Northern California and do you feel like there's a space grab going on there and that's not happening this time here?.

Well, obviously everyone knows, tech kind of expanded wildly out there and --.

Right, but a lot of people are saying it's kind of been a more thoughtful process this time around versus 2000..

This is Kevin. I think that, that's right but our tech dynamic is a little different than up north.

We've got a different ecosystem and it really, it floats around green tech, manufacturing tech, like the [indiscernible] which is going to be great for region and in our specific market it's the convergence of tech and media, so we've got Hulu and Netflix and Amazon driving production which is one of the main drivers of LA.

We don't have as much of the broader tech that San Francisco has and so I don't think that we've experienced the grabbing space because it's available and the growth that has happened up in the Valley or up in San Francisco..

Would you be nervous if you were up there right now?.

I think that's a better question for John Kilroy or somebody who's in that market rather than us..

Okay fair enough. Thanks very much..

The next question is from Manny Cordesman of Citi. Please go ahead..

Kevin, maybe a question for you. On past calls you talked about meeting with foreign capital and sort of the environment there.

Can you give us an update on anything that's changed or the way that they're approaching either partnering up or buying assets or whatever else they might be thinking about?.

Well, I think that I except that at the end of 2015 we're going to see a record level of foreign investment across the United States and so there's a high demand for quality opportunities of scale within the United States. So we're pretty positive about it..

And maybe on Santa Monica, there's a slight occupancy dip.

Was that structured and that you want to roll those spaces to high rents and current tenants weren't paying or was that just moveouts or a combination of the two?.

It's not structured, but from a 100, how do you not -- what did we --.

Any time a market is above 96%, there's a downward. If somebody moves out, you're just going to have that happen. So, I really encourage you not to get caught up in the noise in the 98%, 99% lease range. We're not deliberately holding space off the market..

So, right now, I think we're 98.9%?.

Right..

So, that's off of 100, I guess. Yeah, that's not -- that's only just friction..

Great. Michael has one for you guys as well..

Yeah, hey Ted, it's Bilerman, just -- and I can't remember if there was something particular in the fourth quarter, between AFFO and FFO. It just looks like the implied guidance for fourth quarter has an $0.11 delta. There's only $0.07 this quarter. It's been about $0.09 on average the first three quarters.

So, I didn't know, if there was anything wider from a cash perspective that would take down AFFO more than what it's been the rest of the year?.

Well there's obviously always some noise in there with respect to the straight line and so forth, particularly in that first half of the year, there was some real noise in that first quarter with the FAS 141 that we got from the land acquisition in Honolulu, and in addition we had some unusually high TIs in leases that we were signing last year as you'll recall.

That number popped up and we were spending a lot in those things that I think will come down and continue to come down as a result of the leases we've been signing with lower TIs in them..

Is there any sequentially that would cause it to go from a $0.07 drop to an $0.11drop, because this quarter, you reported $0.40 of FFO, $0.33 of AFFO. That's going to gap out in the fourth quarter to basically $0.41 down to $0.30..

Right, well remember that the leases we sign in a quarter impact the AFFO, in the next quarter or the quarter after and we've already talked about how the last two quarters have had relatively lower TIs and so forth in the leases we signed in those quarters.

You understand what I'm saying?.

Right..

If I sign a lease, this quarter, it actually doesn’t impact my AFFO this quarter. It's more likely to be next quarter when we actually build out the space..

Right, so the leasing commissions is going to ramp sequentially?.

Yes. So, it will be a quarter or two lag and if you look at the TIs and LP, they've been coming down mostly as I said earlier, TIs have been coming down in terms of what we've been granting and therefore you would expect there to be somewhat better things. In addition to that, there's just a lot of random noise that comes through those numbers..

There are no additional questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan for closing remarks..

I just want to thank everyone for joining us and 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..