Douglas Emmett Inc

NYSE:DEI

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's quarterly earnings call. Today's call is being recorded. [Operator Instructions]

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

[Stuart McElhinney, executive]

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.

[Jordan Kaplan, executive]

Good afternoon, everyone. Thank you for joining us. Our $0.51 of FFO per share this quarter sets a new high for Douglas Emmett. Compared to last year, we grew revenue by 9.9%, FFO by 18.7% and same-property cash NOI by 5.3%.

With our best new leasing quarter ever, we pushed our office lease rate up a record 120 basis points and had very strong cash leasing spreads of 11.6%.

After working through some short-term vacancy in Honolulu, our residential team returned the portfolio to fully leased by quarter-end. The fundamentals in our markets remain strong with robust demand across a diverse set of industries. The severe supply constraints imposed by both Prop U and antidevelopment community pressures continue to prevent any meaningful new office development in our submarkets.

The entire office construction pipeline represents only 170,000 square feet, less than 0.003% of the existing 60 million feet. The modest office development in surrounding submarkets like Playa Vista remain a plus for us as those large tenants generate economic growth that supports the professional tenants in our portfolio.

With higher energy rates, saving energy is not just good corporate citizenship, it is also critical to controlling rising costs. This year, we have already saved 2.6% in electrical usage per square foot, bringing our total reduction over the last decade to a remarkable 21%.

We also focus on water conservation and recycling programs that are environmentally responsible and result in significant savings.

I will now turn the call over to Kevin for a capital markets update.

[Kevin Crummy, executive]

Thanks, Jordan, and good afternoon, everyone. Our 2 multifamily development projects remain on schedule and on budget. Construction is well underway at our 34-story, 376 unit residential tower in Brentwood. We are on pace to complete construction of an additional 475 apartment unit at our Moanalua community, plus a new fitness center and pool within 6 months.

Market acceptance of Moanalua has been excellent and we ended the quarter with 194 new units leased at average rents above our pro forma.

We are also actively repositioning some of our existing office properties where we think that we can increase rent significantly. This year and next, we expect to invest about $100 million at 7 buildings, about half of which has been prefunded in our joint ventures. We continue to evaluate additional repositioning opportunities where we can generate attractive returns.

Jordan mentioned that our sustainability programs are important to controlling rising costs. They also help us compete for new acquisitions where we can often generate outsized energy cost savings. For example, at a recently acquired property, we earned an ENERGY STAR certification by reducing electrical consumption by almost 30% within the first year.

While the volume of trades in our markets has normalized somewhat, we still have potential acquisitions in our pipeline and plenty of dry powder.

Our balance sheet remains strong, with leverage at only 31%. Except for the loan in our Moanalua development site, our next term loan maturity is 4 years away in 2022.

With that, I will now turn the call over to Stuart.

[Stuart McElhinney, executive]

Thanks, Kevin. Good afternoon, everyone. Last quarter, we signed 214 office leases for a total of 929,000 square feet, including an all-time high of 410,000 square feet of new leases.

As Jordan mentioned, the 120 basis points of positive absorption this quarter was also our best ever. Our leasing spreads for Q2 remained strong with 28.1% straight-line rent roll up and 11.6% cash roll up. Including the impact of our high annual rent bumps and the tenant relocations we've previously discussed, we have increased the average annualized rent per square foot in our office portfolio by 6.1% over the last 12 months.

We have increased our lease rate to 91.7% with increases in every one of our submarkets except Santa Monica, which remained above 97%, and Burbank, which remained 100% leased. Warner Center regained 200 basis points since Q1, benefiting from a large tech tenant backfill and a number of other smaller tenants.

On the multifamily side, we improved our overall leased rate to 99.7%, including moving our leased rate in Honolulu up 150 basis points to 99.5% at the end of the quarter.

Multifamily rents continue to rise, although that growth has moderated to more normal ranges after the frantic pace following the recession.

I'll now turn the call over to Mona to discuss our results.

[Mona Gisler, executive]

Thanks, Stuart. Good afternoon, everyone. We are pleased with our Q2 results.

Compared to a year ago, in the second quarter 2018, we increased revenues by 9.9%. We increased FFO by 18.7% to $100.8 million or $0.51 per share. We increased AFFO by 12% to $76 million.

Our same-property cash NOI increased by 5.3%, which brings the average for the first half of the year in line with our full year guidance range. Our residential expenses for the quarter rose just over 10% compared to last year, reflecting higher payroll and utility costs as well as some timing issues.

As we have discussed, we made a significant payroll adjustment towards the end of last year in response to upcoming minimum wage increases mandated by Los Angeles. Although that significant adjustment will continue to impact comparisons to last year, future payroll increases should track general wage inflation.

Looking forward, we remain comfortable with our full year guidance for same-property cash NOI.

Our G&A for the second quarter was only 4.3% of revenues, well below that of our benchmark group.

Finally, turning to guidance. We continue to expect good FFO growth this year, and accordingly, we are narrowing the range of our FFO guidance to between $1.99 and $2.03 per share.

For more information on the assumptions underlying our guidance, please refer to the schedule in the earnings package. As usual, our guidance does not assume the impact of future acquisitions, dispositions or financings.

I will now turn the call over to the operator so we can take your questions.

[Operator]

[Operator Instructions] The first question will come from Manny Korchman of Citi.

[Emmanuel Korchman, analyst]

Kevin, can you just talk about the acquisition environment, what else you may or may not be looking at out there? You guys were really busy in '17, it's been a slower '18, but where do you think we're heading right now?

[Kevin Crummy, executive]

It's Kevin. So yes, the pace has slowed down. I mean, we bought 10 properties over a 2-year period and grew our Westside portfolio by about 2.8 million square feet. And L.A. this year, the number of transactions has decreased. We still think that there are going to be a couple of interesting offerings to come out later this year that we're excited about. And as always, we will chase them in a disciplined but enthusiastic manner and hopefully, we'll come out on top.

[Emmanuel Korchman, analyst]

And you think that the structure of those will be similar to what you've done to date?

[Kevin Crummy, executive]

What do you mean by the structure?

[Emmanuel Korchman, analyst]

You funding them with a partner and taking sort of the small minority stake in those buildings.

[Kevin Crummy, executive]

I think that's likely, although it's kind of on an asset by asset. It depends on the size of the transaction. We did that deal at the end of last year where we did an OP Unit deal. So we're inclined to do things in a joint venture format, but that's not the only way that we do it.

[Operator]

The next question will come from Craig Mailman of KeyBanc Capital Markets.

[Craig Mailman, analyst]

So the leasing activity was strong this quarter and pretty broad-based. Just curious on 2 fronts. One, any discernible trends in tenants that may be more active today than they have been previously? And then also, on the rent side, any submarkets where you guys are kind of facing more resistance on pushing rents than others and alternatively, anywhere you're getting more traction than you have been?

[Stuart McElhinney, executive]

I think on the tenant side, it's pretty broad-based. We're still seeing good demand across a diverse set of industries. We have seen kind of tech embrace Warner Center a little bit more lately. We had, as I mentioned, a large backfill that came in from the move out, was a tech tenant. So that's been a little bit of a trend. Other than that, I think it's been very consistent with our pretty diverse set of industries across the submarkets. On the rent side, no, I don't think we've seen any submarkets showing resistance. It's been -- well, yes, other than kind of the broader trends, which is -- Hawaii has been flattish on rents, we need to move occupancy there and Warner Center has been a little slower to recover than the core markets, although Warner Center has shown some good signs lately and certainly has moved up significantly off the bottom, hasn't seen kind of the tremendous growth that we've seen across most of the Westside and core markets.

[Craig Mailman, analyst]

That's helpful. Then I know they're kind of a smaller magnitude than what you mentioned on the acquisition side, but can you just kind of give us some sense of where you think redevelopment yields or repositioning returns are on the $100 million relative to what you guys can do in the acquisition market?

[Jordan Kaplan, executive]

This is Jordan. The repositioning, redevelopment, all those activities are like more than double the yields, like substantially more than double the yields we get out of purchasing new buildings. Now that doesn't mean we don't like purchasing new buildings. But they're high-teens, 20s, they're very high numbers. Now unfortunately, they're very high numbers on very small number of, like investments, right? You could put -- a lot of these buildings you could put $5 million, $10 million, pretty dramatic change, $20 million is a lot that, you know, for reskinning and doing everything. So they're smaller numbers. There is a lot of opportunity in that area. We have a good -- very good pipeline of those. But -- that with very high yields, but it's hard to put a super large amount of capital out. We're also getting pretty good yields out of our ground-up construction. But that's not counting the cost of land, but of course, the land is included in the fact that when we originally bought some of those properties, which could be decades ago, when we didn't count -- we just counted the value of the property as being what it was worth with the existing structures.

[Craig Mailman, analyst]

That's helpful. I mean, beyond the 7 that you're doing now, I mean how much more in the portfolio could you kind of reposition or what are the candidates look like?

[Jordan Kaplan, executive]

So we're going through now with the 7 that we're doing and we're just very early, working through feedback on what kind of -- what are the really movements in rent because this is the super lowest hanging crazily obvious fruit. So as we go through, we could -- there could be in the 10s -- 10, 20 plus -- that we think we could impact. Maybe equivalent to these, maybe a little less, still very high returns, but we want to get some feedback on the results of these and see -- because we're finishing a lot of them this year. And we're -- already even the work and showing the picture is getting good feedback. So we'll make some more decisions about how deep that pool of assets can be, including opportunities on sites where we just -- and it's hard to say it this way -- but could have excess land. No land is really excess, it's tough to get stuff entitled, but land where we could have opportunities. So it's definitely become a big area of focus for the company. And as I know you've heard in the past, we're hiring around that area, hiring in our construction and development group. Ken and I are spending more time focused on that area and our yields are very high.

[Operator]

The next question will come from John Kim of BMO Capital Markets.

[John Kim, analyst]

If Proposition 10 passes in November and Costa-Hawkins is repealed, how does that change how you manage your multifamily portfolio going forward?

[Jordan Kaplan, executive]

Well, I don't know when you say manage it, because first of all, I don't know that's going to pass or not. So -- and you're proposing that let's assume it passes. But even if it passes, it creates kind of optionality for cities in terms of rent control, but you don't know what the cities will do with that optionality. So, for instance, Santa Monica actually discussed it in the City Council meeting where I think the management of the city said, "Look, I don't want to spend time on this because it would be so complicated for us to figure out what we even want to do with this that -- let's just wait and see what happens." And then if you turn in and look at somewhere like city of Los Angeles, and frankly, it applies to Santa Monica and Los Angeles, which are the 2 areas in California that you will be talking about. But Los Angeles and Santa Monica have sort of, we'll call, bought into a different version, which is if you want to build a new building, you're going to agree to build such and such low income housing, 10%, 20%, 5%, whatever the case may be. And as a result, now we're going to contractually just agree that that's what you're doing and now you can build what you want to build. So those programs have a lot of constituents and they have sort of a lot of people behind it and people that benefit from those programs. So it's hard to know how cities will reconcile those activities, which give them through consent that, and maybe other funding for other things that cities want to do with the opportunity to do some different things under Costa-Hawkins. It's just very hard to know what would happen. And then with all that said, I'm not so sure that it's going to pass.

[John Kim, analyst]

But as far as your Brentwood development, for instance, I mean, the economics probably will change significantly if Prop 10 is passed. So are you definitely moving forward with the...

[Jordan Kaplan, executive]

That's not correct. So that's a great example. The Brentwood development, we have an agreement for an amount of units that are low income. That's subject to a development agreement. It actually embraces this issue. So it's hard to know what decisions you do. Do they want to abandon that and go to something else? I don't know, but I don't think so because we have a written agreement. And there is a lot of product like that. So it's hard to know what they're going to do with it. It's highly unlikely, considering the gimmes we gave on that and the exchanges, that they go, "Oh, yes, forget all that, now we want to do something different."

[John Kim, analyst]

And that's specific to this project because of the affordable housing component?

[Jordan Kaplan, executive]

Well, it's probably applicable to most projects that are being built at this time because it's not very easy to get projects through other than making those sorts of deals. That's why I'm saying. If you're talking about the city of L.A., I would not expect much of a change. Santa Monica has historically been much more aggressive on this front, and so, they will be more interested in evaluating their options, but I'm not exactly even sure what they will do.

[John Kim, analyst]

I mean, right now vacancy decontrol would be eliminated so...

[Jordan Kaplan, executive]

No, they would have the opportunity to put in vacancy control. Would they? You don't know that answer. Where would they put it in on? I mean, there's just a lot there. But with that said, I'm telling you what I know. And beyond knowing all these things, it's very hard to make some assumptions about how it would impact us or how would you manage differently or any of those things because there is just no clear view of exactly what the results -- which would take quite a while to come out, even if this thing passed -- what would be the results of it passing? Like what would cities do? They have to sit down, they have to decide what they want to do, how it would impact programs and plans that they've going right now. And I'm not saying that it's good. I mean, I don't want it to pass. I'm just saying it's extremely hard to know what would be the results of it passing. Remember we've existed most of our careers with no Costa-Hawkins and the only cities, for the most part, in the entire state that took advantage of vacancy control were Santa Monica, West Hollywood and Berkeley. So everybody else -- repeal it, don't repeal it, they're still operating the way they were -- they're operating today the way they were when it was in place a decade ago or more, 15 years ago.

[Operator]

The next question will come from Jamie Feldman of Bank of America Merrill Lynch.

[James Feldman, analyst]

I'm hoping to get some more color on the guidance. I mean, I would imagine -- I know the leasing, the increase in leasing percentage this quarter was pretty impressive. I would think it has you kind of ahead of where you thought you'd be this time of year, which you'd think also moves you to the higher end of your guidance range, but can you maybe talk about the ins and outs that either keep you at the midpoint of your guidance or maybe there is more to the story than I'm thinking?

[Jordan Kaplan, executive]

Well, we raised guidance last quarter, right? And I mean, number one, I agree with you 100%. We're having a great year, and we're doing a great deal of leasing and we're doing a great deal of leasing at very good roll up. But we also are seeing really good results, and we guided to having very good results this year and we even raised that first quarter. So I think that even though first quarter might not have been all you wanted, this quarter is maybe more than you expected. All in all, the world is kind of moving in the way that we see kind of longer term throughout the entire year, which is it's a very strong -- we think it's going to be a very strong year for us. So if you back up and you look at the fundamentals, what's going on? Rents way up, tenants -- income we're getting out of tenants is rolling way up, and at the same time, we have some of the least roll over the next -- I mean, at that time, we said over the next couple of years, maybe now it's over the next 7 quarters or 6 quarters. So we said we have a lot of strength coming our way going forward. So good gains in occupancy, good gains from a lot of the programs we're working on rolling out. So we feel good about what's coming.

[Mona Gisler, executive]

Right. And then keep in mind, when we laid out the guidance, we did mention that we were anticipating our expenses to go up this year and so that's factored into our overall yearly guidance as well. That hasn't changed.

[James Feldman, analyst]

How are you trending on the personnel and operating costs?

[Mona Gisler, executive]

I think we're trending consistent with what we had anticipated and we'll continue to feel the impact of that through most of this year, get a little relief in the fourth quarter since that's when it started to take effect for us. But like I think we'll see much of the same for the better part of the year.

[Jordan Kaplan, executive]

She is saying by comparison. So the same-store comparison is very hard on comparing to the first few quarters of '17 because we sort of took our medicine at the end and said we're going to do a big roll up, get ahead of it a little bit. And that's not exactly the right way to say it because it's also a competitive environment, but we did what we thought was the right thing to do. So from the perspective of mandated changes, we're probably ahead of mandated changes. Now are we ahead of just wage inflation? There's not a way to get ahead of wage inflation. You're just going to follow it and you have to see what happens each year. But we've said now -- we've been saying now for 2 years, we feel wage inflation creeping into the system and we've been saying that even very early before any of this and we still feel it.

[James Feldman, analyst]

Okay. And then Jordan, I want to get your thoughts on media sector consolidation, and just what you think the longer term impact might be on L.A. and L.A. submarket specifically and I guess, even your portfolio, when you think about how this could all play out?

[Jordan Kaplan, executive]

So far, consolidation, I mean, what we know about hasn't been particularly as impactful other than there might have been just overall, as odd as it sounds, some ramp up in terms of competing to produce product. So there seems to be more pressure on that front, which that is what the type of thing that L.A. feels. I mean, as you know, I know 100% that you know, we went through the renewal with Time Warner, which was caught up in the AT&T thing. And during the 1.5 years, which you even asked me a question on this, during the 1.5 years leading up to it, you guys kept asking what's going on, we kept saying we don't really know what's going on. And they were all trapped up in that. And then they finally just decided when the thing got caught up even for too long and when the courts stalled it or the administration stalled it, they said we got to just get this done. And so we renewed them. So that was an area where potentially, I guess, it could have been an impact. In terms of the market in general, it doesn't seem to be having a negative impact, but I guess, there is going to be some time as the Fox and Disney, there could be some stuff there. It's in a very tight market. Studio space still trades at a kind of a premium. So I don't know, will they give up -- I mean, it's hard to know what they will do over the long haul because at the end of the day, who owns it or doesn't own it, what matters the most is, how much production needs to happen, even if it's only 1 person or 2 people or 3 people, how much production needs to happen to fill all these airwaves and that seems to be increasing, like more tech guys are getting into the business and competing with the established guys and the established guys feel like they need to produce more content to compete with the more tech guys that are getting into their business. And we aren't a direct recipient of that, but we're a very beneficial recipient of the fallout of that, like all the -- we have so many tenants that are in some way are the business side of that business.

[James Feldman, analyst]

I guess, would you worry about the more business services-type tenants and just having fewer customers to call on?

[Jordan Kaplan, executive]

Well, they are the same amount of customers to call on because you're talking about very, very high-level consolidations. So I don't know that we have tenants that felt like they had AT&T and Time Warner and now that they're one -- now they only have guy to call. I mean, all those groups that are making content, selling content, all the people involved with them, I mean, that whole huge mass of people are still running forward full tilt. So I don't -- I mean, I'm telling you what we're seeing at the moment, which what we're seeing at the moment is no impact and almost a positive with an up arrow. Beyond that, you know as much as we do.

[Operator]

The next question comes from John Guinee of Stifel.

[John Guinee, analyst]

A stunningly good lease economics again, congratulations. A question for you, trees don't grow to the sky and eventually these rents may push somebody out and/or cause new development to occur in the fringes. Any comment on that? And then also, any secondary, pioneering markets that might be on your radar screen?

[Jordan Kaplan, executive]

Well, I'll let Kevin talk about the pioneering markets because you guys never like that answer, but I will give you the answer towards trees growing to the sky or a monkey climbing a tree and figuring he's getting to the moon. I've said that the -- I will tell you this, when Playa Vista started being developed in earnest and I'm talking about beyond what they were doing on the residential, building out the office. I actually looked at it and said, "I don't know, what's this going to be, good, bad, ugly, what are we facing here." It turned out to be very, very good. I mean, it actually created the opening for a lot of these big tenants to come in here, have the size footprint that they want, because we don't have a lot of big spaces that these guys do. These guys rent space 200,000 - 500,000 feet at a crack. And Playa Vista allowed them to have a real footing here in our market. And as a result of that, they spin out a ton of economics that had been very good for us. So there is on the fringe activity, and that activity has been very good for us. The negative aspects of that activity mostly revolve around -- we're just unable to accommodate large tenants in this, like, in the core of West L.A. It's very hard to do even at times when sometimes large tenants will pay more than smaller tenants because there is such a scarcity, but it's just hard to accommodate them. In terms of the overall cost of occupancy being gating to our tenants and them saying well, we've got to leave the whole market, we are not seeing that at all anywhere on the Westside. And as a matter of fact, I think the cost of occupancy on the Westside still compares favorably to San Francisco, areas in New York, et cetera. I will say that some of the pressure on some of the larger tenants is putting them out to Warner Center, which is good for us and Stuart mentioned some of that. So that's had a positive impact on us. That's the general thoughts on that. Kevin, what are you thinking about other markets for us?

[Kevin Crummy, executive]

As far as other markets to go to?

[Jordan Kaplan, executive]

Yes. That was his question.

[Kevin Crummy, executive]

Well, we've got so many opportunities in our own market that getting the team to focus on -- unless it's a super compelling opportunity that really plugs right into the operating platform that we've got, it's difficult not to chase the things in the markets that we know and grow our presence and leverage off of the platform.

[Operator]

The next question will come from Alexander Goldfarb of Sandler O'Neill.

[Alexander Goldfarb, analyst]

Also thanks for changing your conference call time to avoid the overlap. So just a few questions. First, Mona, do you have an estimate of what the lease accounting impact is going to be for next year?

[Mona Gisler, executive]

That's a great question. Obviously, we're deep in the throes of working through the guidance. Its complex and nuanced and it takes a lot of thinking to get through that. We were waiting for the guidance to be finalized and some new information just came out a couple of days ago. So we are working through that. I'd say at this time, we are not prepared to throw out an impact, but we're just continue to work through how it we think it's going to affect us. Obviously, the big area that we're looking at are the internal leasing costs, but in terms of how we ultimately present and what the dollar impact is, we are still working through that.

[Alexander Goldfarb, analyst]

Okay. And then the second question is, just going out to Hawaii. You guys I think are contemplating converting an existing -- one of your existing office buildings, rather than buying a new one, to resi. So can you give us an update? And also just given the change in corporate users out there in Hawaii, is this a market -- I mean, it almost seems even if you do convert, resi works well out there for sure, but the office market just seems to be a lot tougher. So even if you convert a building, do you think that's enough to drive rent growth? Or is your view that there is -- the market is just -- it is what it is and it's basically a flat market and you're not really optimistic there will be growth?

[Jordan Kaplan, executive]

Well, I don't think any market is what it is. I mean, if you have a tight market, rents are going to go up. If you have a market with excess supply, rents are going to be flat. And by the way, you have to be real old like me to remember a time when the rents were moving up so fast in Hawaii that people were screaming for office buildings. Now they probably overshot the runway -- this is going back to the late '80s -- I think they built 4 buildings. They sort of went to town on 4 buildings all at once and they overshot it.

I'm not going to take credit for this. I'm going to give them credit. I'm sure you guys know Jay Shidler . We were having dinner with him one night. And Jay said, "When we all bought these buildings, we fully understood the lesson that these people have nowhere to go and therefore, they have to rent from us. We did not understand the lesson that there is nowhere for us to go to get tenants." And so, you can't -- when the buildings are full, there is nothing to stop you from raising rents. And when the buildings aren't full, you can lower rents all you want, you're not going to get more tenants. So that actual -- that dinner is what caused us to even come up with this idea is to say, "Wow, we just have too much supply." I don't know that taking one building out is going to be like the end all, save all to what's going on, but the hope is, it will reinvigorate downtown. It's housing that's needed downtown. And we think that we can actually now with some changes -- some things that we've learned and some changes that legislature has passed in terms of supporting new workforce housing, and obviously, we've seen the rents were getting on the project we have in Moanalua -- we feel like there might be an opportunity, and we're not sure of this yet, but there might be an opportunity to just do one of our projects and have it be a win-win, but we have to keep playing that out.

[Alexander Goldfarb, analyst]

But Jordan, how -- what's the timing do you think, is this like within the next 12 months? Or is this something that takes longer, either because of just what you have to work out with the municipality or the fact that the buildings are encumbered by leases?

[Jordan Kaplan, executive]

We're working on it all right now. I mean, you're asking when the impact is going to be. I could tell you -- first of all, I have to say we're -- we haven't fully even decided if we're going to do it, but we are working -- we're spending money on consultants and costs associated with the conversion and trying to have the good information to be able to make a good decision as to whether we should do it. Once we decide to do it -- and you're saying, how quickly does the impact roll out -- I don't know, if we just tell the world we're not leasing this building anymore, that the impact just happens. I don't know if it takes 1 year plus for us to start doing conversions and tenants slowly start moving for the other space in the market to start filling out and people that have fewer options. We have to see how that rolls out.

[Alexander Goldfarb, analyst]

Actually I wasn't -- I was just asking when you think the decision would -- yes, the go-no-go. Whether you would do it or not. It wasn't when the impact would be felt. It would just be how long until you make a decision on whether you would or wouldn't do it.

[Jordan Kaplan, executive]

Well, we hope to make the decision relatively soon, but I don't want to put any dates because every time I put a date, it’s been a mistake, to be honest. But we are working on it right now. So and usually, if you're working on something, you hope to come to a conclusion. So we're working on it.

[Operator]

The next question will come from Rich Anderson of Mizuho Securities.

[Richard Anderson, analyst]

So going back to the guidance question, if you average the first and second quarter, you're at 3.35% on same-store cash NOI and your range is 2.5% to 3.5%. Is there some view that you'll kind of -- you'll sort of whittle back down a little bit for the rest of this second half of the year, even though your comps get lighter or easier in the fourth quarter? Or there is some level of conservatism baked in? Or how do you work through that -- those optics on -- purely on the same-store guide?

[Mona Gisler, executive]

Well, we provide a range. And just then looking at the overall year, we're comfortable that will be within that range, and we're not trying to pinpoint it to any particular point in the range.

[Richard Anderson, analyst]

...imply that you would have to be well below where you landed this quarter. I'm just curious if that's a reasonable way to look at it right now?

[Mona Gisler, executive]

I don't know that that's reasonable or anything. We gave you 2.5 to 3.5 and we think we'll be within that.

[Jordan Kaplan, executive]

Well that number is in the range. We said 2.5 to 3.5. So that number works for us and all the other numbers in that range.

[Richard Anderson, analyst]

Right. Well I'm saying you did 5 plus this quarter. To make the math work, you have to be down 150 basis points sequentially from there. So that's --

[Mona Gisler, executive]

I think it's hard to look at any particular quarter as an indicator and there is volatility that can happen just because of the timing issues that hit quarter-over-quarter or year-over-year. And so, you could look at the first 6 months, but again, that's within the range, and then as we look at the full year, we still think the range is reasonable.

[Richard Anderson, analyst]

Okay. Bigger picture question on Warner Center, Jordan, I think, you've said it's the one area in your portfolio where you feel like you're perhaps not keeping up -- or you're not beating your neighbors in that market. How is that changing as you see some bulkier tenants kind of moving up that way? I know there is a lot of good infrastructure in retail and resi being built up there as well. Do you see yourself ultimately kind of crisscrossing with your competition and beating them just like you do pretty much everywhere else in your portfolio?

[Jordan Kaplan, executive]

First, the answer is, let's start yes, but then let me say this, as that task is lot tougher in Warner Center than in any other market. Now why is it that I think we'll do it and why is it tougher? It's tougher because at a time when these large single-tenant buildings, they're either 100% or 0. Now, by the way, if one of them goes to 0, we're going to beat them easily. But when they are at 100%, they are very hard to beat. If you were to average over the long haul -- because we roll a lot of small tenants, right -- over the long haul, if you give time for that tenant to roll, I'll bet we'll beat them if you just average over a long period of time. I suspect that if you were to look at our portfolio and only compare it to other multi-tenant buildings, we might already be beating them, I don't know. But I actually think that the overall market there is about 89%, is that right? It's about 89%. We've been close to that number. We lost a few of the last few. I think we are down to one large tenant, right? We're rebuilding from that. We picked up 200 basis points this quarter, yes. So we're actually shedding the anchors and moving in a very solid direction where we are no longer going to have to wear like a big guy moving up and then having to backfill with 20 guys. And that's going just make a huge difference to our system. And it's going to give us more secure buildings and it's going to allow our buildings, as rents move up, to react more quickly to it instead of having one giant 20-year lease that doesn't matter what rents are doing in the market. Because -- and that's the way we operate the best. And the great news is, the market is going that way.

[Operator]

The next question comes from Steve Sakwa of Evercore ISI.

[Steve Sakwa, analyst]

Most of my questions have been answered, but I guess, just looking at the leasing costs, Jordan, it was kind of $6.50 per term year, which is up about 15% when you kind of look back over the last 9 quarters. Is there anything we should sort of read into that? Is it just sort of timing? Is it construction costs going up and that's feeding through? Is it something different?

[Mona Gisler, executive]

Hi, Stephen, it's Mona. So we had a couple of renewals of tenants in higher-end markets and those were driving it up a little bit.

[Jordan Kaplan, executive]

Large tenants. Yes, large tenants.

[Mona Gisler, executive]

Did I say -- yes, large tenants. So if you back those out, we're actually running in a normal range for us. And then if you look at our new, our new -- also, new tenants are also in the normal range for us.

[Steve Sakwa, analyst]

Okay. And Jordan, I guess, just to go back to the question about Hawaii and the conversion. So is it -- just to be clear, are you sort of not pursuing an acquisition and a conversion opportunity, and now it's just a conversion of one of your old buildings? Or are sort of both are on the table?

[Jordan Kaplan, executive]

They're both on the table, but I really want to know the answer to the work we're doing right now on construction cost because we've gotten very good answers on a lot of parts of that question. But doing the work around the cost to convert and some of that, it's just like -- it's not rule of thumb stuff, right, because you have a pre-existing office building and it's specific office buildings and stuff like that. But as I said, we're doing that work and we want to -- if -- we need get those answers to be able to know whether we're -- the best way to pursue this strategy.

[Operator]

The next question is a follow-up from Manny Korchman of Citi.

[Michael Bilerman, analyst]

It is Michael Bilerman here with Manny, and thanks again for moving the call later. Just a question -- the inverse of the acquisition market. I got to assume one of the reasons why you haven't been that active this year is just to the prices that are being paid are outside of what you're willing to pay even though you have access to some pretty attractive capital sources from joint venture partners as well as your currency. If that is correct, then how much time are you spending thinking about maybe selling additional assets into this market to take advantage of what is pricing that you are not willing to buy at. So if you're not willing to buy it, you should be willing to sell it.

[Jordan Kaplan, executive]

Well, I don't agree with "If you're you're not willing to buy it, you should be willing to sell it." I think there is a huge middle ground. So if you believe that your building a company long-term that gets stronger every year with all the stuff we're doing, and if I believe in our markets over 30 years, that I think these markets are going to be good long-term. Not at the pace or the metabolism of the public markets, but the true metabolism of real estate, then you would say build what you can, when you can buy it and sometimes you can't buy, so you wait a little bit. Then stuff comes and you keep building and you build overall great value by doing that. And we've been doing that. We've believed in that. Ken, Dan, Chris and I have been doing that since the '80s.

So that has worked and I think we're going to continue doing that. We've been right about the markets. We've been right about the long-term impact of the supply constraints, the environment we have these properties in, the industries that are gravitating to this environment. So I believe in the thing long-term. Now that's not to say, and you're right, there's been some trades recently, which we miss, miss, I mean, from buildings that we would have wanted to buy, but they sold for more than what we were willing to pay and that happens. But that's what protects the company long-term. We reach for good properties, but we don't overreach and that protects us to be there to play the game another day. And we've been through that in our -- in my career, I've been through that 3 or 4 times. But that doesn't mean there still won't be opportunities, that doesn't mean there won't be any more opportunities in the future. The markets can change. There is a lot of things that can happen. So I still view us as buyers, not sellers. I don't necessarily look very hard at the cost of our capital when I'm deciding what we should do, particularly when you're saying like third-party capital. We say, is that a good deal, is that a good long-term deal? And if it is, we've always assumed we're willing to put all of our money into it. And if we think that it is just too risky for one person, we bring other people's money in, but that's because we think it's a good deal, not because this guy's capital is particularly cheap or the public market's pricing is very hard for the stock at the moment or whatever the case may be.

[Michael Bilerman, analyst]

Where do you think the difference is on the deals that went away from you? Was it a buyer sort of cost of capital that was just cheaper than what you were willing -- imputed effectively into your bid? Or do you think that their growth outlook was materially different and for them willing to pay a higher price?

[Jordan Kaplan, executive]

I don't think it's either one of those. I mean, number one, I doubt that anybody has -- in the way you guys look at it -- a cheaper cost of capital than we do. And what I've heard.

[Unknown Executive]

I'm certain nobody has better information.

[Jordan Kaplan, executive]

No one has better information on outlook. Maybe they have a more rosy outlook, but that's not what it is usually. I'll tell what it is: every deal you look at has some stuff you go, I know what's going to happen there, I'm going to nail it. And it has some stuff that you have a good idea of what's going to happen, and you some stuff that you go, there are some risks here.

I don't know how this is going to end up. Maybe there is a large tenant in the property. I'm not sure what's going to happen with them. Maybe there is other factors impacting the property. And you go yes, this is a risk, but I'm willing to sort of stomach that risk. So what happens is, it's not a question of cheaper capital, cheaper this or that. It's a question of what are all the collection of risks and the collection of sure things and all that of this particular deal, and then what return do we think we should get to take on that mix of risk. Its classically called the risk-return relationship. We spend time in our acquisition meetings going good, good good, risky, risky risky. How do we think through range things of how this could fall out? And we go, here is where we end up. This is where we end up. So, we could handle two of these things not going our way but we need one of them for sure to go our way, or, we can't handle any of them not going our way. Okay. All of those things change the way we view the pricing. And that's what I'm seeing on some of this stuff, not that I don't think if things go the way of the buyer, of everything goes right, they're going to make money. But there's risks and if some things go wrong, maybe they will make money. If everything goes wrong, they probably won't make money. And it's just all different peoples point of view of how much they need to be paid to take on that risk. That's where I think we start missing on some deals.

[Michael Bilerman, analyst]

You have this great slide in your investor deck, Slide 12, where it looks at the -- your occupancy relative to your submarkets, relative to L.A. as a whole. And of late, that spread has narrowed because you've bought a bunch of vacancy and your market share is well over 30% in many of the cases. So you're comparing in many cases yourself to yourself. And I guess, behind that, are you spending any time thinking about new markets, either new markets within L.A. or other markets on the West Coast in terms of growth opportunities now that you have this significant portfolio and market share in the places that you're at?

[Jordan Kaplan, executive]

So, number one I would like to say, because Peter quickly put the whole page right in front of me. But if you examine that real carefully, do you see how we're starting to pull away again from our markets? You see that little white space in there? Credit to where it goes to Ken and leasing team. They're back putting us back to where we usually hang out with that spread between the markets, even with those overwhelming market percentages that you are saying we have, which is accurate. So I mean, I -- if underlying in your question is, "Hey are you just so big that you can't outperform the market," I don't think that's right. Now there is probably a day when that is right, but I don't think that's right today.

[Michael Bilerman, analyst]

It was more so, would you look at other markets? Are you spending any time together with Ken and Dan and the rest of the management team saying, "You know what, we've certainly conquered a lot in the Westside of L.A., we have a great foothold position in Honolulu. Now is the time that we should look at other markets in L.A., now is the time we should look at Seattle or into San Francisco and other West Coast markets where we can bring our operating platform and our know-how to bear?" Is that at all part of the conversation today? Do you want to be ready?

[Jordan Kaplan, executive]

I would say that was much more of the conversation if you go all the way back to like 2009, 2010. And I've said before, which you've been on these calls -- I actually said it to you on a call -- that I probably -- I was so insane to think that I could get that Blackstone portfolio during those years that we did not go into San Francisco at a time when we all actually thought we should go into San Francisco, in that downtown when a lot of that stuff was trading. And everyone -- to be fair almost everybody was going go, go, go. And I was the only one going, "No, no, I have to have the money in case the Blackstone deal comes out." Those are the types of time when you see the group get more aggressive about evaluating those markets. I'm not sure that it's as easy for an outsider to enter a market today with the way the capital markets are, and actually the way the fundamentals are, in the markets that you would think that we would naturally gravitate towards, which are on the West Coast. It's not as easy today to move in and be as effective as we are here with all of our advantages that we have being local here. So this would be the least of a time when we would think of doing that. And the time when we have the most heated conversations about it were during the times like that when we were looking at deals in those markets going, this thing's got to be a great deal. You are looking at these beautiful new office buildings in downtown and they were selling for whatever it was, $300 a foot and stuff and you could look at history and know that's got to be a good deal. And in that case that was probably more of my fault than any -- of my obsession with getting these Blackstone deals..

[Operator]

The next question will come from Daniel Ismail of Green Street Advisors.

[Jed Reagan, analyst]

It's Jed Reagan here with Danny. Another kind of bigger picture strategic question, just curious about. Jordan, if you could assemble the company's portfolio from scratch and everything was for sale, would your portfolio look different than, you know, call it the 80-20 split of office and apartments that you have today? Maybe said differently, do you think one of those two property types is fundamentally a better business and offers better risk-adjusted returns than the other?

[Jordan Kaplan, executive]

Well, first of all, there are not a lot of buildings that we own that I wasn't here doing the buying. So when you say assemble from scratch, I mean -- you're saying -- are you just saying simply do we like apartments or office better?

[Jed Reagan, analyst]

I mean, that's, I guess, one way of asking it. Or if you could kind of wave a magic wand where we sit today and sort of reassemble the portfolio, would it look different than what you have assembled over 20, 30 years?

[Jordan Kaplan, executive]

Well, what we've assembled over those years has been a result of two things: our desires, that's the same four I mentioned earlier; and what's come available for sale. So what the wand waving is, is saying different stuff that comes available for sale. They come for sale at a price that we thought was reasonable to buy. So I will say this in terms of the mix. In terms of the mix, I've always thought that in the markets we're in, that the multi-family business was it's just a great a risk-return business. And any time you can get in at numbers you can stomach, that's just a great business. In terms of where there is more volatility in value and where you can get in and be more impactful, make more money and over shorter periods of time make higher returns, which we have done for many different groups of investors, that has been to a great extent the office market, because when it's off, we've made some very good deals and we've had some some tremendous returns. The residential market in the markets we're in, I'm not talking about anywhere but the markets we're in, even in down markets, it doesn't fall way off. I mean, it's off a little, but not way off. And then we were super aggressive about getting what we can, but at those times, there is not a lot of big institutional deals that come for sale. So as I said, it's a matter of what came for sale that we could buy.

[Jed Reagan, analyst]

Is it fair to say you'd maybe be more acquisitive on the residential side if there was stuff to buy?

[Jordan Kaplan, executive]

And we have been. Most of what's come for sale that's been institutional we've been pretty aggressive on. I mean, I still know the list of deals that I -- and its very short, and I go, "wow, we should've just sucked it up and done it."

[Operator]

The next question comes from Bill Crow of Raymond James.

[William Crow, analyst]

Who knows what'll happen, but if we pass forward a year and Prop 13 repeal starts gaining some traction -- I'm going to put this on a positive spin here -- do you think it would prompt some owners to put assets up for sale? Is it going to be a buying opportunity for Douglas Emmett?

[Jordan Kaplan, executive]

I don't know, good question. You have to go take noninstitutional kind of long-term hands, the buildings that are left, and historically what has pushed those buildings into the market has been kind of short-term and dramatic jump in price where their expectations are beat in terms of value of the property and therefore we go -- they say to themselves, "that's a great deal," and they go to sell it. And because we have such good kind of fundamentals market knowledge, we realize that, that still a good deal to buy even though there has been a jump in values and therefore, we get in and buy it. Now you are saying something negative happened to them, does that cause them to bring property into the market? And historically, recessions and whatnot that are a negative impact to your building, which is dropping rents, have not tended to flush out much property.

[Unknown Executive]

We haven't seen a rash of apartment buildings listed with Costa-Hawkins on the ballot. So it's probably your best case study.

[Operator]

The next question will come from Dave Rodgers of Baird.

[Dave Rodgers, analyst]

Jordan, I just wanted to look at your Westside submarket specifically. When you look at the leased percentage of Brentwood and Westwood, they are kind of somewhere 200 to 600 basis points below the rest of the Westside and realize that you've made some big purchases there in the last 1.5 years or so. But is there anything structurally that keeps those -- whether it's rent, whether it's just faster turnover tenants -- that keeps those below? Or do you really view that as an opportunity? What's your outlook for getting that back up to maybe an average Westside occupancy level?

[Jordan Kaplan, executive]

I think they'll just go back to the Westside average occupancy level. I mean, I think, what you see in Westwood with our purchase of those buildings and kind of organizing structure and management across all of that you just have some tenant shuffling going on. And also we tend to see a little more noise in general on -- than on the rest of our portfolio on newly purchased buildings, whether it be tenant default, tenant roll, tenant whatever. And obviously, in Westwood, that's the super majority of our Westwood portfolio. So I think we'll just keep playing that out. Those buildings are already shaping up quite well. We also got what arguably is if not the -- it's probably the best building in that Brentwood corridor, at least down by Bundy. Maybe Landmark is better. But we're doing the shuffling there and building those back up. It's certainly a great place to have your office. I mean it is super close to all the high-end Westside homes. Douglas Emmett's office used to be there before we moved down here to Lincoln. So I don't feel like there is anything that's holding back any of those markets from performing exactly like just Westside markets.

[Dave Rodgers, analyst]

And the timing in terms of kind of where you are in that turn process to get back there, any thoughts?

[Jordan Kaplan, executive]

Well, not really. I mean, the horrible version is if it's average 5-year leases, you got to roll those leases and get everybody settled on the same lease form and get all that worked out. But it happens faster than that, but I can't tell you, it just takes -- there is less of an impact as you get farther into it.

[Operator]

And this concludes our question and answer session. I would now like to turn the conference back over to Jordan Kaplan for any closing remarks.

[Jordan Kaplan, executive]

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

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.