Stuart McElhinney - VP of IR Jordan Kaplan - President and CEO Kevin Crummy - CIO Mona Gisler - CFO.

Blaine Heck - Wells Fargo Nick Yulico - UBS Manny Korchman - Citi James Feldman - Bank of America/Merrill Lynch Craig Mailman - KeyBanc Alex Goldfarb - Sandler O'Neill John Guinee - Stifel Jed Reagan - Green Street Advisors Rob Simone - Evercore ISI Mitch Germain - JMP Securities.

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

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. I am happy to report that 2017 is off to a good start. Thanks to strong fundamentals and supply constraints in our markets, office and residential rents continue to grow at a healthy pace.

Demand drivers in our sub markets remain strong, LA County added 75,000 jobs during the 12 months ended February, dropping the unemployment rate to 4.8% from 5.4% a year ago. West Los Angeles again led the county in job creation, with unemployment in February at only 4.1%, down from 4.7% a year ago.

The job gains were spread across our diverse industry base including education, health, leisure, hospitality and professional services. With the high barriers to entry in our sub markets, we don't face the threat of new supply that is impacting many other gateway markets.

As we have discussed, over the last few quarters, given the high occupancy and strong rental growth in most of our sub markets, our focus has shifted from growing occupancy to pushing rental rates. We are aggressively recapturing below market space and relocating tenants within our portfolio to realize our embedded rent spreads more rapidly.

While this strategy can initially result in slightly higher leasing costs and temporary occupancy loss, over the last 12 months those impacts have been more than offset by an impressive 5.5% increase in the average in place office rents across our entire portfolio.

Essentially all that increase is being reflected in our FFO and AFFO since we have kept our same-store expenses almost flat. On the development front, I'm excited that we received final approval from the City Council for the construction of our 376 unit high rise apartment building in Brentwood. We are targeting groundbreaking for later this year.

Finally I'm pleased that we acquired two more great assets in downtown Santa Monica. I'll turn it over to Kevin to discuss those deals in more detail.

Kevin?.

Thanks Jordan, and good morning everyone. In April, we acquired two multi-tenant office buildings which raised our market share in Downtown Santa Monica to 71%.

The properties are a perfect fit for our portfolio, 1299 Ocean is a 206,000 square foot Ocean Front office building with sweeping views of the coastline from Malibu to the Palos Verdes Peninsula. The building also features private balconies and an open part closet facing the beach. We paid just under $1,340 per square foot.

We also purchased 429 Santa Monica for just under $890 per square foot. This 87,000 square foot building is located only one block from the Third Street Promenade and three blocks from a new light rail station. Both building have significant occupancy upside.

Factoring in no moveouts, 429 Santa Monica is 70% leased and 1299 Ocean is 79% leased compared to our existing Santa Monica portfolio which is over 97% leased. These two buildings were purchased by the same consolidated joint venture that acquired two nearby buildings in 2016. We continue to manage that joint venture and owned 20% of its equity.

The joint venture borrowed $142 million for the purchase under its secured non-recourse interest only loan that matures in July 2019 and bears interest at LIBOR plus 1.55%. Our two residential developments are on schedule and progressing nicely.

Jordan already told you about the approval for Brentwood, which will be the first high rise residential tower west of the 405 in decades. And in Moanalua Hillside project, the first phase of 238 units is almost topped out, with deliveries scheduled in the fourth quarter. Look to the future, we expect more acquisition opportunities in our markets.

Our liquidity remains strong with no debt maturities until August 2018. With that I will now turn the call over to Stuart..

Thanks Kevin, good morning everyone. In the first quarter we executed 188 leases for a total of 844,000 square feet, which is the third highest quarter in our history. That total included a robust 292,000 square feet of new leases. Our leasing spreads for Q1 were 29% for straight line rent roll up and 12.9% for cash roll up.

We are now achieving annual rent bumps averaging 3.5% in our new leases in Los Angeles. On a mark-to-market basis, our office asking rends exceeded our in place rents by 13%. The lease rate for our total portfolio decreased 50 basis points to 91.7% reflecting typical seasonal year-end move outs and our focus on capturing embedded rent spreads.

In Westwood, we made meaningful progress leasing up the vacancy in our recent acquisition. Our other West LA sub markets remained fully leased at an average of just over 95%. Warner Center continued to show good net absorption while Honolulu gave up part of the increases it made in the prior two quarters.

On the multifamily side, our 3,300 units were again fully leased at quarter end. Our multifamily asking rents rose more than 5% year over year. The annualized asking rents for our multifamily portfolio exceeded our in place rents by $20 dollars per year. I'll now turn the call over to Mona to discuss our results..

Thanks Stuart, good morning everyone. We are pleased with our Q1 results. Compared to a year ago, in the first quarter of 2017, revenues increased by 15.4%. FFO increased 9.9% to $83.7 million or $0.47 per share. AFFO increased 11.6% to $59.7 million or $0.39 per share.

Comparing our same property cash results in the first quarter of 2017 to the first quarter of 2016, revenues increased by 4.2% reflecting the increases in our average in place office rents that Jordan discussed. Operating expenses increased by only 0.2%, reflecting our focus on controlling expenses.

Overall, same property cash NOI increased by 6.1% and core same property cash NOI rose by 5.4%. As we mentioned last quarter, non-cash FAS 141 revenues for our residential portfolio were $840,000 less than in Q1 ’16 and will be about $3 million less for 2017 versus 2016.

G&A for the first quarter included one-time payroll taxes from the option exercises we previously disclosed. As we did last year, we issued approximately 1.1 million shares in April under our ATM, which offset the decline in fully diluted outstanding shares resulting from the option exercise.

Including the onetime payroll tax impact, G&A was still only 5.2% of revenues, well below our benchmark group. Finally, turning to guidance, we have raised our guidance for FFO to be between $1.89 per share and $1.95 per share. And for AFFO to be between $1.54 per share and $1.60 per share.

We have reduced our occupancy guidance by 50 basis points reflecting the significant vacancy in our recent acquisitions and our efforts to capture embedded rent spreads. As usual our guidance does not assume the impact of possible future acquisitions, dispositions or financing.

For more information on the assumptions underlying our guidance, please refer to the schedule in earnings package. I will now turn the call over to the operator so we can take your questions..

[Operator Instructions] The first question is from Blaine Heck at Wells Fargo..

Jordan, I just wanted to get your updated view on the stock price, you guys were up 17% last year, another 3% to 4% this year. You’ve commented before on how you think the stock trades at a wide discount to private market values.

I guess just how are you seeing it today and have the increases in the share price made do it all more comfortable when it's possibly issuing equity or is it still kind of out of the question..

It’s a big question. Well for starters, I still think there's a good spread although less now than it was if you're going back a year or so between where the stock trades and the private market values.

In terms of issuing equity, if we you know there's a lot of things that we could need equity for and we have a lot of options in terms of what we could do to do that issuing equity on the public markets is only one of those. We can JV or sell buildings and we also have a lot of good cash flow.

But that's all going to be more driven by our needs or what we have coming up, that this small issue that you saw before that we did was to - was in parallel to what we did last year when we exercised those options.

And there aren’t a lot of options left, so I don't expect that to happen again where we have some bouncing off like that that we have to do because by exercising options we actually reduce the outstanding shares..

Yeah that helps, I guess as a follow up and I know we get into this and recall, but can you just give us an update on what you think your investment capacity is I guess before getting to leverage levels that you're uncomfortable with..

I understand why you can keep asking that question, I get it, it's a worthwhile question and we have to keep looking at what our leverage is and where we're comfortable and what we have coming up and what we want to spend money on. Our leverage of those right now obviously don't make us uncomfortable.

And I hope that we have a lot more acquisition opportunities coming up, as we said, we also have sources of equity to match that. Right now, I think we're leveraged around 37%.

Which is certainly not an uncomfortable territory for us, but also we need to look at what other opportunities we have in the future and where we want to have cash available to do..

Your next question is from Nick Yulico, UBS..

On the Santa Monica acquisitions, can you just talk about what the initial yield is and what you think the stabilized yield will be once you lease up the vacancy?.

Well, the initial yield is very low, because they're not very well occupied, right.

I think, I mean 179 and what’s the other?.

170..

And 170. But I think they're going to stabilize in the mid fives, I mean and that stabilization doesn't even take much in the way of rent growth, I mean those are stabilizing the mid-5s just as we lease them up. I'm very pleased with those acquisitions.

Santa Monica and the triangle in Beverly Hills have been, especially this downtown market in Santa Monica have been two of our best markets and have been two of the best markets literally going back almost to my whole career in this business.

And at this point in Downtown Santa Monica, with these acquisitions, which were key acquisitions, particularly 1299. We're up to 71% of that downtown market. That's spectacular, I mean that’s a core great investment for us that will carry us and support this company in a super strong way for the very long term.

They're great long-term investments and great building..

And then I guess on your same-store expense growth continues to be very low and I’m hop you can talk about further opportunities there for additional expense savings, I mean, does that continue to remain draw a very positive driver of your same-store NOI growth as you get into the rest of this year and next year..

Well, every year we start out thinking expenses should grow up 3% and every year we seem to find a way to get them below 2% and lately less than 1%. That's being driven by just continually driving our focus in all areas of expenses and also continuing to take advantage of our size.

And there's a lot of opportunities to take advantage of our size, but each opportunity has to be focused on and done right and kind of rolled out through our system before you start seeing the savings just like the stuff you guys heard about last year that had to do with utilities. But each step in the system can always be improved on.

And the way you see that - our investors see that is in that same store expense growth, where we whether it be changing the way some things process to making things more efficient, making things will more quickly, lowering the cost of turnover, I mean there's just a lot of areas you’re going to be focused on, but to do it right each one takes time and as they roll out, you've been seeing that happen over literally over years as each area gets addressed.

And by the way after we address an area and then as we grow and as technology improves we come back, we can address it again and again. We've done that whether it be with utilities or the way our parking works or even areas like insurance, I mean all those areas get relooked at constantly.

And one sense, I always have the feeling like at some point we can't continue kind of outperforming in terms of controlling our expenses, but each year and you got to give a lot of credit to our operating group on this, they find a way to do it and the expenses are extremely well controlled.

And so I certainly hope that will continue, but I’d hate to do a plan on that or rely on that continuing..

I guess just a follow-up quickly on that, I mean you talk about trying to churn the portfolio a little bit more to capture embedded some more rent growth opportunity, mark-to- market opportunity, does that affect your expense growth at all?.

Well, I’ll tell you that's been when we came in and looked at our numbers and we saw how much we were kind of growing on the revenue side and then we saw the occupancy, we looked very deeply into that. And it was interesting to discover that while our history as a company has been to focus aggressively on occupancy.

We've always been very focused on occupancy and why is that pretty simple, because turnover costs tend to be large enough so that it's very hard to find a trade where turnover makes sense in exchange for rate because turnover means whether BTIs, commissions and certainly some down time.

We've gotten to the point particularly on the west side where occupancy is so high and the rent spreads are large enough and we can roll somebody in quickly enough and we've got such good control over the costs that we're now able to do these deals and if it just left forever I'll be shocked, where formally if someone came to us and there were a little weak or they needed a little help or they wanted to do contract, we'd say well all is for that space and we'll see if we can find a tenant, but you’re also.

Okay.

Now we’re much more inclined to say, no we’re not making a deal, you're going to default, default, we’ll deal with it, we’ll get whatever you get or we're saying all right you want to move out, you're in 10,000, you want to be in 4,000, go into this space here, sign a new lease, you're all set here, and we'll take this space back and you could do a buyout.

And then we take responsibility for the space. Well those deals are becoming pretty meaningful, it's not something you can do unless you're in a market as good as this one and they have - the return is tremendous.

I mean your negatives are, you're going to have some additional TIs and you're going to because it's on two spaces and you're going to have some short term occupancy loss, right, because as people are moving.

But you get terminations fees, you end up with two long-term tenants that are healthier, you have more long-term occupancy and you have much higher rent across the board. And that's why we were sort of trying to point out in my part of the script it might have really been in the supplemental about the 5% growth.

So that's a real strong driver of that number..

The next question is from Manny Korchman at Citi..

Jordan, just as you look at these acquisitions, especially given the opportunity to lease them up, how did you weigh doing them within your JV structure especially with a partner that you’ve already done deals with versus capturing or retaining the upside fully for Douglas Emmett and its shareholders and then perhaps even JVing or finding sort of the equity elsewhere in a more stabilized property within the portfolio..

So, when we originally went into focus on this, so let’s call it a larger big deal that Blackstone was bringing all these properties out. That deal was too large for us to do by ourselves and we went out and there's actually multiple partners in these deals, there's only one that we announced.

And we found some partners and said, could you do this with us because it's going to take a lot of equity. They came back and said, yes, and we are prepared to do it and then what happened was instead of you know whatever you plan that would be the one thing that doesn't happen, right.

So that what ended up happening was they sold the buildings one at a time. Now when that happened, I mean the QIA and the other partners have been very good partners. And they said, okay, it’s going one at a time, we’ll do it one at a time, we're ready to do the whole thing.

And I said I'll tell you what, we'll set this up and I’ll give you the best benefit, the best opportunity to buy these buildings even though they're going one at a time, I can't promise you anymore that we'll get them all because we can get them all at once. But you’ll have the best opportunity to get these buildings that can be given, okay.

And we made the same list of buildings which was a list of building which we thought we were going to buy originally. So as that list of buildings has been coming out, it's not a question of should we do it here or there that's our commitment to them that we will do this with them and they've wanted to do it.

Now in fact what you're pointing out has been you know it's no longer theory, right. So a lot of the deals that we've done have been spectacularly successful. I mean you guys can’t even track what's going leasing in Westwood and some of the other stuff we bought.

And so it's been very successful and everyone has been saying that's cool that we're getting our piece and we'd even like to have more. And on the other side of a coin, we've said no, no, in our original deal we weren’t going to go below 20% and we're not willing to go below 20%. We'd like to have more too.

So we sort of balanced that what everybody deserves expected, launched, they've been very good partners and we will continue that way for the remainder of the Blackstone deals..

And then maybe if we weigh that against the comments you made earlier in the call about training rent growth for occupancy growth. How does that been fit in with having two majorly or largely vacant buildings or buildings with large vacancy within Santa Monica.

So now you have a tenant that you're trying to push rents, you're saying take it or leave it essentially. But then you also have another building with a vacancy is that you're trying to lease up.

So how do you weigh all that together?.

So, the two buildings you’re talking we’ve owned for a grand total of two or three weeks, so we haven't been in that sort of contradictory position for very long. But considering the rest of our space in Santa Monica I think is 94% leased which is like 100% I mean there's no space, right.

It's more of a benefit to have this space certainly if there's a tenant in the portfolio that want to evaluate this space and then we'll look at that and will look at the economics of that deal.

We don't have not only do we not have a lot of a vacant space, I mean that doesn't mean we don't have any but we don't how vacant space across the portfolio, neither do others. So it's become a very, very tight market and controlling this vacant space is going to be very good for us.

I doubt that it will remain vacant for very long, but it's nice to control this space.

So, the fact that we're able to do these deals where we move people out and increase overall [indiscernible] before the end of their leases is one of the facts it gives us the confidence and gives our investor the confidence to take on largely vacant buildings because we have a very good feel for what's going on in the market and capacity out there to lease these up..

The next question is from James Feldman at Bank of America/Merrill Lynch..

Broker appointments this quarter pointed to negative net absorption across a bunch of the LA sub markets. Can you just help us think through, is that something to worry about or is that more temporary, and what gives you comfort that the cycle is going to continue on pretty strong here..

Jamie, it's Kevin. We've looked at this too because there's a lag between tenants taking space and it's showing up in the brokerage reports and same with a lag of tenants announcing that they're moving in and showing up.

And East Santa Monica is a great example where there was a ton of leasing activity in the fourth quarter and none of that really got reflected in many of the year-end numbers because they said well nobody's in occupancy yet even though the space is off the market.

So this quarter it just so happened that some of those tenants were moving but tenants haven’t moved in. And so we don't have a sense within our portfolio overall that things are decelerating, I think it's just one of those quarter blips where we've got a lot of noise in the numbers.

And then we've also got a lot of landlords that have re-measured their space and those Bowman [ph] numbers are circulating out into the reports as well and it's causing noise within when you look at sub markets from quarter to quarter there's changes in the overall inventory in the sub markets.

So the numbers aren't quite as precise right now as we'd like them to be..

But overall you don’t see any hiccup in any of the sub markets?.

It's funny because you're asking the same question that everybody said, it certainly got to be the question on people's mind, right. I mean [indiscernible] strong pace for a number of years, we're hearing about slowdowns and some of the other gateway markets. And so everyone is extremely sensitive to what's going on in our market, right.

And because our markets showed strength for so long, I have to say, we have no new supply, everything is moving along at a very strong clip right now. And we really don't see any threat to the industries driving our market to new supply coming into our market, sort of something happening with the national economy.

And if you look back at the history of these markets you have to go very far back to find an industry specific or market specific thing that would have happened that would have impacted us separate from the national economy. I mean you could argue aerospace in the early 80s something like that.

But it's been a long time that most of the downturns that we've suffered across these markets have been the result of national downturns not something happening specifically here. And as we sit here now, we don't see anything here that would get in the way of which we had met and everyone should have met has been a very long trend of rental growth.

But we don't see anything that we get in the way of that, sort of a change in the national economy..

I'll ask it one-time time, I was kidding. I mean just second, so what's the next hurdle here for the Brentwood development, if we can break ground..

Well, we have to now complete plans and go pull our permit which we're allowed to pull now because we have this approval. We're moving it full speed ahead at this point. I think we feel like we’ll break ground for a quarter of this year actually.

And I see these meetings going on in our big conference room with a million people in it, so they must be getting something done..

The next question is from Craig Mailman at KeyBanc..

Just curious would you guys more actively looking to take back some space, can you just kind of talk about which submarkets you may be more active and if this maybe the reason behind the sequential drop in Sherman Oaks?.

We're more active on the west side. Sherman Oaks/Encino is a very good market but because we felt a little bit of a downturn last few quarters, I don't think we're doing a lot of it there, maybe a little bit of it there where there's real, real opportunity. But I think we're doing more of it on the west side..

Was there anything in particular that drove the sequential decline out there then?.

Stuart, you might be able to answer this better..

I mean we saw some kind of medium and small tenant move outs nothing in particular. Obviously disappointing to see another down quarter there but everything we're hearing from leasing there is a lot of activity, a lot of requirements in the market.

So we're pretty optimistic of getting some deals done out there and we’re continuing to work through it..

And as Stuart said, the pipeline is very strong out there and we're still pushing rents out there too. So we're not - we still feel good about the market..

Maybe just for Mona, could you just give us your updated thoughts on kind of what the plan is with the swap that's maturing in November..

So we are in the process of looking at refinancing our outstanding debt right now, we haven’t finalized that and it’s not in our guidance for the year. But as we get closer to finalizing that new debt, we’ll make a decision on what to do with the swap..

Do you have any sense of kind of were priced stock is relative to the in place..

What happens is and as we've discussed before, when we have you know our debt goes out obviously substantially beyond where our swaps expire. And we do that on purpose because we start focusing on refinancing debt two years before it's due that way we never get caught with our backs against the wall or anything like that.

As that debt expires then that debt will say, it goes on the list and we start working on that refinancing. I mean in terms of the pricing there I mean we're working on some debt now and when we announced that deal, we’ll able to – you’ll have a very good feel for the pricing, but I don't want to announce the pricing on that right now.

But I think in terms of just spreads on that you can do your own calculations about where LIBOR is, because we swap over LIBOR. It’s down a tick, still very good. It's very good and probably spreads have tightened up a little bit, not a ton, but a little bit..

The next question is from Alex Goldfarb at Sandler O'Neill..

Hey. Good morning still out there. So two questions here. The first, Jordan, as you guys -- obviously you've really solidified your building holdings in Santa Monica.

Are you finding that as you increase your dominance in a market, there may be less competition from competitors looking to acquire, because they may not have the same leasing leverage as you guys have or everyone is seeing the same dream, so people -- it doesn't change the fact that it's, from a leasing perspective, maybe in a new entrant, doesn't have the same leverage, just everyone still wants to own a piece of it and therefore we should -- pricing continues to escalate..

I hope it's the first one where we're scared people out of the market. So far, I haven’t felt the wonderful feeling of having scared people out in the name of five buildings at a discount. So far everything we try and buy, the bid is intense and my hair goes a little greyer.

So hopefully people out there are good, no word that it's hard to compete with sort of the LA local group that already has their platforms in place and you have to have a real good and strong operating platform to be competitive here and to manage your buildings in a way where they're highly profitable.

But I got to tell you, everything that comes up just seems to just get from -- it's the regulars and then there's always some other people that it gets attention from different people each time that there doesn’t seem yet to be any kind of free ride. I wish what you're saying was true, but it isn't..

I didn't expect it to be true. So I was expecting to hear that price is continuing to go up, but 70% concentration, Santa Monica seems like pretty tough to compete if you're another landlord. So following up that as pricing --.

So, other landlords take a note on that and get out of our way..

But in all seriousness, Jordan, following up on that, just given where pricing is going, do you guys start to think instead of buying traditional office buildings, you have the folks who bought the Macy's box over at Westside zillion, maybe they’ll convert to office.

Do you guys start to think down the conversion route that instead of paying the prices that the assets are now commanding or existing assets that maybe it's worth buying assets that are conversion candidates?.

I don't know that there are a -- I know that Macy’s [indiscernible] I don't know how many really -- I mean that’s a conversion just sort of large, open, super high ceilings, maybe trying to attract sort of large tech tenants.

I don't know that there are for what we do where we try and get this -- go after the small tenants and prime -- bring down the cost of leasing and turnover, drive rental rates, I don't know that there are a lot of substantial conversion opportunities in our market, particularly in the Westside where we obviously could make a lot of economic sense.

What we are looking at because of the just the strength of the economy and you guys are seeing it of course is opportunities for us to get more out of our property, whether it be building a residential project like you see us doing at Brentwood or the way you see us doing over at Moanalua or adding amenities to an area where we have a very intense ownership where we think we can even classify the area even more and drive rents even harder.

So there are areas where we can spend capital, not buying buildings where we think we can get very high returns on that capital, rehabbing buildings, redoing communities, adding residential areas where we already own land or adding in other ways, other product types where we already own land and we're focusing more and more on that.

And as you guys know, we have four lobby projects and repositioning projects at buildings going on right now. We have two big residential construction projects going on. So there's a lot going on in that area and that capital I think is going to -- the returns on that capital are going to be reflected extremely well.

I mean better than buying a building, which is a great long term investment, but extremely well, but it will be reflected. Outside of the range of where you guys look, which is GI, I don't know one quarter, but it will be reflected over the next couple of years, because I think we'll get a lot of good returns out of it..

The next question is from John Guinee at Stifel..

Great. Wonderful quarter. Very impressive. Thanks. Thinking from page 22, it looks like you're talking about $250,000 a unit for the Honolulu incremental investment. What do you think full development costs would be on that, if you had to pay for the land and then the same question for the Landmark.

I'm sure these numbers are much more complicated than you presented on this summary, but your incremental cost is only about 358 units, what would be an appropriate valuation for the land, the density created?.

So, two different. One in Hawaii, we hit the benefit of, let's call it, the greater the facilities although we are upgrading the facilities. We have the whole project there, but we don't get the parking.

So we're building the parking and so in our project, we're building the parking and actually improving the parking across the board in that project and improving the rest of the project and adding some swimming pool and sports facilities and new leasing office, new entries and stuff like that.

So -- but that project is hugely benefited by the land essentially being free, right. We bought that project at a cap rate on the in place rents that were there at that time. We're going to now pick up 500 potentially even plus, at least around 500 units here where we had no real value attributed to the land or to those entitlements.

The reason you don't see apartments for rent apartments being built in Hawaii, one of the main reasons is just land super expensive.

And when someone lays out the money to get land, where he can build residential and then they layer in the cost of construction there and saying, well the only thing that works is these high end for sale condos and that's what you see happening out there. This project and the windup of project which is closer in the downtown are very well located.

I think they're well located for sort of, not in the classic sense, but people that work downtown to be housed there. And so I think that that move will be good for the community and would be good for what we own in downtown Honolulu. The cost at Orlando is hard to pay.

Kevin, do you have a feel on Hawaii?.

Yeah. It’s done a lot of trades..

It would make it that you didn’t build. And when you come to the deal in Brentwood that even more so because we don't even have to build parking. That whole site has four levels of parking going down and because there is a supermarket there, we actually have enough parking for the entire building, no new parking to be built. Okay. That's amazing.

So we're just building the tower straight down through that deck and up with those tremendous views. So what's the value of the first highrise in 40 years, west of the 405 with gigantic views of the ocean, where you don’t even have to buy the land, build the infrastructure on the side, build the below grade parking, it’s tremendously high.

I don't want to overly speculate on how high, but hundreds of thousands of dollars per unit..

Okay. Then on the same subject of development, I think in Greater LA and I've asked this a couple of years ago, there is a push for transit oriented development, both office and residential. Anything at all happening in that regard in any of your current submarkets..

Well, yeah. So is the transit up and running and I used -- my kids would go downtown to go to Staples and do stuff. It's running useful, beneficial, quick, predictable. It's good. Now, so all that good.

Mostly it’s being used from people downtown to get to the Westside, right, because that's one of the traffic pattern, the new transit to go where there's no traffic, to go opposite of that. And so the only real negative to that transit has been that it has brought a dense number of people into downtown Santa Monica.

So where we're behind all these buildings is so dense with humans that they've switched over all the intersections to having red light for cars, green light for cars and then red for everybody and only pedestrians crisscrossing every which way, because they're trying to get the pedestrians across because they're always trying to cross and they block traffic from making right turns and left turns and then hold up the whole thing.

Even that's not working particularly well. You can barely get your car into that kind of -- in that deep area where we own all these buildings, got sort of the apartment on the fringe almost. So it's like that old joke about restaurants where that restaurant is so busy, nobody goes there anymore, because they have to wait so long.

I mean, it's crazy down there. I know people, I know the city of Santa Monica has focused a bit on a project they're working on which happens to be right behind the project we just bought. 429, Santa Monica.

The whole block behind us is controlled by the city where they're building a big project for the museum and a hotel, super pedestrian friendly open terraces type of thing and it was one of the reasons we thought that buy was going be such a great buy because that block, which has been a little bit sleepy over there on fifth and fourth is going to be kind of dead center of what's going on down there when they finish this project.

I know that people are focused on a combination of those pedestrians and dealing with it. Going up, Olympic, obviously, there's that project where the Penn Factory, it’s been built, I think it's built and it's mostly leased at this point. There's some work that's being done kind of in West LA going along Olympic further.

I haven't seen a lot laying off it. It’s mostly been residential. But it's going on to take a while..

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

Congrats on getting the city council approvals for Landmark. Just a follow-up on that.

I guess just kind of back to Jamie's question, is there anything at this point that could derail that project from moving forward? I mean, a petition from local residents or secret challenge and then can you talk about expected yields on that project at this point?.

So, it was challenged by a group that challenges everything that's done in the area, not a group I think with much of an agenda beyond trying to hold us up for some fees.

At the core of their challenge, they feel that the equipment building the building, we didn't properly evaluate the amount of smog and refuse coming out of the tractors or something, which actually is not even a thing that’s supposed to be evaluated. We saw that there were going to do that the whole time.

So I don't know, you could have the insanity of that being successful although that would rank very low and on my list of what could go wrong. There's nothing stopping us from building right now as we sit here and we are moving forward and building. And as I've said, we plan to start fourth quarter.

I suspect that -- in terms of the homeowners, the homeowners’ group spoke -- the groups, there were six groups that I would -- particularly we impact and they spoke on our behalf at the City Council hearing in favor of our project.

So this is not coming from any of the established locals that have a real, this is coming from a complete outsider group. So I don't have concerns that at this point, there's much that could stop us..

And is that challenge still outstanding at this point?.

Well, it'll be outstanding for a long time. The way those challenges work is they try and disrupt either whether you need to raise equity to build a building or you need to get financing to build a building. They try and disrupt that process. That's not a problem for us. So it doesn't disrupt us and so we're just letting it sit out there..

Okay. That's helpful. And then I guess any comments about how the acquisition pipeline is looking in West LA and your other markets at this point.

Is there still opportunities out there from Blackstone or others or is the stuff kind of diminished at this point?.

Jed, there are definitely opportunities and we're very, very excited about the acquisition pipeline..

And your question is right, because I'm surprised that there are still a good number of opportunities that Kevin and the whole group is working on, including some Blackstone..

Okay. That’s helpful. And then just last one for me.

Can you talk about just the type of rent growth you're seeing across the west LA submarkets these days and I guess are you seeing any change in the tempo of demand since the beginning of the year?.

Well, our leasing department is clearly seeing very strong rent growth since we’re willing, essentially when a tenant shows a little bit of weakness, we go and find and get out and something else. So I think that they're exhibiting a lot of confidence in terms of what's going on there.

Rents are still moving and as I said earlier, I understand why you’re asking the question. But they're still moving at a good clip and demand is extreme -- is very strong.

I mean it's strong to the point where there's tension in the system from tenants, particularly larger tenants about just getting or holding onto their space or getting enough space to expand when they're already large..

The next question is from Rob Simone at Evercore ISI..

Just kind of circling back on development briefly. Could you guys touch on or update everyone on the conversion project in downtown Honolulu..

So. That's funny that you asked that, because before this call, Kevin said, dial down our expectations, you’re putting too much pressure on me. Kevin wears a Hawaiian shirt every Friday to keep everybody focused that I'm so anxious to do that.

He's worked, the guys there are working constantly and trying to make that happen and you've got to give him the time to make that happen. I am sure we will eventually succeed.

Did that answer though?.

It looks like he’s not in the question queue any longer?.

All right. That was that good of an answer. Done and done..

[Operator Instructions] We have a question from Mitch Germain at JMP Securities..

Just curious if Jordan and I missed a little and I apologize, but did you talk about the bidding process for the LA assets? I mean was it kind of the typical players? Was there a significant amount of foreign capital? I would just be curious about your thoughts there?.

Well in particular for the Santa Monica assets, it was the typical plus-plus. There's a lot of bidders on everything and there were more than a lot of bidders on those deals in particular.

I mean, 1299 is a high enough profile asset that has to have the attention of everybody, no matter where they are if they've ever considered owning anything in LA and it did. So it was a meticulous number of people working on..

We have a follow-up question from Jamie Feldman of Bank of America Merrill Lynch..

I'm sorry if I missed it. But did you guys comment on, I know, Kevin, you had mentioned there's still a lot of acquisition opportunities in the markets.

When you look at all those opportunities, are those most likely in the JV based on what you're seeing or not?.

It's going to kind of be case by case. As Jordan said, we identified a group of assets when we raised our capital for the EOP offerings and we have a moral obligation to those guys to follow through and offer them up a first look at that.

On other assets on a going forward basis by other owners, we'll have to evaluate whether we think that's the right opportunity for the REIT or whether we should do it in partnership with JV partners..

I have to say and I know people keep asking our obligations. These guys have been great partners. I mean there were some we were doing they wanted to do it and some of these deals are definitely high yield deals. They are very good deals. Just to protect a relationship, because it's so good and we want them to be happy, we would evaluate doing that.

It's not just a case by case. It makes a lot of money. We do it, if it doesn't do it in this and that, it’s nothing like that. We want their experience to be good and to be very successful because they've been great partners to us.

So if some came up and they said they want to do it, we'd have to very seriously say, consider, okay, we should do this with them because they've been good partners and they want to do it..

Okay. That makes sense.

If you were to do more through the JV, would you have to add more capital or you redistribute the equity you already have in there?.

Well don't even suggest that to them. We would want to add more -- you’re trying to squeeze us down to a smaller percentage of the thing. We're struggling to hold our 20 here and you want to do deals where they're the only ones that add capital. We would for sure at least have our 20%, at least have our 20%..

Okay. And then, do you plan to fix the debt on 1299 or on the deal you just did..

Yeah. Those are in sort of a group of buildings that have been bought by that entity and we're, there's a couple more things that are on that list. We'll see if we get them or don't get them and when that's done, we’ll turn that into a typical pool the way we go out and finance buildings and we'll finance it long term.

We're just waiting to get a -- kind of get into established portfolio, because you get much better financing on four buildings over two or whatever wherever we are now. And so now that's a four building portfolio and an outstanding one..

But in the near term, you’re not going to hedge it or anything?.

No. We’ll just roll right to do in the permanent financing..

The next question is from Manny Korchman at Citi..

Hey, it’s Michael Bilerman. So Jordan, just recognizing the rent growth potential and how good the operating fundamentals are in your sort of outlook for that and all the operating synergies you did from owning more and more assets, I just hear you talking about all the frenzy bidding and the number of parties coming out.

I find it hard to imagine that there's no asset or a larger scale asset that you'd want to be able to monetize and return some of that capital to your balance sheet for further opportunities..

So as you know, we sold the building five or six months ago I want to say.

Well, I mean, look we own 69 buildings and we all want to say they are small ones from that perspective, but as I've said and you're just -- as you're pointing out again, there are ways for us to get equity that can be very efficient and you're saying sell a building, it could debt the equivalent saying, you could just reduce our equity exposure to a building, you could reduce our equity exposure to a market and move it to another market.

You could bring a partner in and say okay, let's take a look at whatever the market may be. So take a look at Hawaii, okay, I’m totally making these numbers up, totally make them up. There was $1 billion in Hawaii. We have 500 million of Hawaii, but we like where we -- we like our plans, we like where it could go.

Okay, you can bring a partner in and you can pull some equity and you have equity to put into some other stuff to further grow the company and you're still managing these assets that you think are good, right. So it's not just selling entire building. There are a lot of other opportunities to get equity out of the portfolio.

And one of the reasons that those opportunities are so financially attractive is because we already have great relationships of people that are interested in doing that. So that's why we keep mentioning that that's one of the things on our list of opportunities for raising equity..

And I guess is there not an asset that where the bidding and the price that someone's willing to pay far exceeds what you view the, what it's worth though from a portfolio standpoint and then just price per pound, if people are so desperate to be in your market and pay out for future fundamentals would seem to me that that would be an opportune time to reduce the bottom quartile of your portfolio or bottom 10%, just keep on rotating so that what you're left with is even better..

I don't feel that way. No. And I understand about kind of recycling capital. I'm not sure recycling capital in that way especially for company that's as intensely focused on long-term holds in markets and gaining market share and markets as we are is a very efficient way to do things now.

If you started to get a move out of an entire market or you want to reduce your exposure to market, I've described that. If you want to leave an entire market, you could sell even an entire market.

But to sell one building in a market that we're focused on and in particular, we’re actually trying to grow in some of these markets, most of these markets, it wouldn't make sense, because I mean you're talking -- the guys just won the bid on the last two assets that came for sale.

So we obviously, yes, there's a lot of bidders out there, but we still think that where it’s frustrating is a good deal or we wouldn’t have bought it..

So arguably, you have more synergies than others and better market entail than others, so you probably have the ability to outbid someone else based on the value that you can create from your platform..

Yes. So if you have a large position in a market, part of the reason for that large position is our platform in that market. So dismantling that last one would be to give up that that edge that we would have in bidding for other buildings..

Why were those two buildings 30% vacant in such a hot market?.

Two different operating strategies, different companies running the buildings. I don't know. I can’t tell you why they -- they certainly could have leased those buildings to 100%. Not like there’s not tenants out there.

Why didn't they choose to? That would be their own reasons for knowing they're selling it or whatever the reasons are, maybe even could be great reasons.

If you ask the next question is, why aren’t you nervous that you're going to suffer the same fate of whatever, 30% vacant buildings, I’m extremely confident that we will not suffer the fate of 30% vacant buildings.

I think those buildings will total up to the line, the same way as the rest of Santa Monica and it gets up to their 97% at a nice efficient clip. And by the way, we told you guys the same thing about Westwood and you're already seeing that happen..

Do you feel like the market's going to see positive net absorption in terms of tennis pick at that space or is that just people shuffling around, potentially coming out of some of your existing buildings which are basically full I believe?.

I certainly don't feel what you're suggesting that it's a game of musical chairs.

I think if you ever wanted to compare to that, it would be the harsh version where there's not one fewer chairs, but two or three fewer chairs and you've got guys swirling around trying to figure out where they're going to sit, because that's what's actually going on down here. So I don't feel like you would be robbing from Peter to pay Paul at all.

I think you could lease those buildings up, you could split and you will not see any diminution in the odyssey of the other buildings..

Right. I'd love to see that in your conference room.

Maybe swing around a chair, pulling out and see who gets last standing?.

Well, you could come on to my kids' birthday parties and you don’t even have to do it at the conference room. We’ll play real estate version hard core musical chairs and we’ll pull three of the chairs and really see people fight..

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

I guess just quick follow-up guys on that last question. Is it going to take much in the way of repositioning capital to -- on those Santa Monica assets to sort of get the lease up you're looking for..

No. And remember those who are in the JV, so whatever capital we drew already that it's already in the fund and prepared to be spent. So it's, if you will, they didn’t already actually even contributed.

But I know on a broader scale, which is out there that now between 1299, 100 Wilshire, 233 Wilshire and 401 Wilshire, those are the four buildings that you could add your office in where you're not only just in an office building.

But there's a lot of the [indiscernible] beach from a number of those floors in those buildings and we've kind of sit that sort of a beach front group and we're actually doing work to the lobby of 100 Wilshire, 401 Wilshire, 233 was recently done and we do have schedules to do some work to 1299 to sort of sync it up and tie it in with those four buildings all together, kind of moving together, because you see that when -- the tenants that are looking to be in that sort of top class space tend to always be looking at those four buildings..

Okay. I appreciate that. And I guess you didn't comment earlier on the yield expectations at Landmark.

Anything to add there? Is it too early at this point?.

Well, I know we've told you guys that we thought we would be building it for over a seven cap and I haven't looked hard enough at those numbers to want to update it..

This concludes the question-and-answer session.

Would you like to make any closing remarks?.

Well, thank you for calling in and we look forward to speaking with you all again next quarter..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..