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Douglas Emmett Inc
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Ladies and gentlemen, thank you for standing by. And 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 would now like turn the conference over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett. Please go ahead with your presentation.
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'm very pleased to report another strong quarter for Douglas Emmett. Compared to last year, we grew revenue by 7%, FFO by 10%, and same-property cash NOI by 4.2%. Our leasing success in the first half of the year drove a 60 basis point increase in our office occupancy this quarter.
Overall, we continue to benefit from robust economic trends in Los Angeles. During the last 12 months, LA County added 62,000 jobs and we still did not see any meaningful new supply in our submarkets. As a result, we have a healthy leasing pipeline and with demand coming from a wide range of industries.
Our cash and straight-line rent roll up remain very strong. Our unique operating platform has kept our G&A, recurring TIs, leasing commissions, and CapEx very low. In fact, our lease turnover costs represent only 15% of our NOI versus an average of 24% for our benchmark group. Considering our better than expected fundamentals, we are raising our 2018 guidance for same-property cash NOI and FFO.
Looking ahead, I am excited about our long-term growth prospects. LAs dynamic fundamentals are driving very healthy rent roll-up. We are uniquely positioned for more successful acquisitions in our markets. We are midway through delivery of 851 new residential units in Los Angeles and Hawaii.
Our repositioning program is in full swing and over the next few months, we expect to complete a number of the projects in our current $100 million pipeline. Of equal importance, we have additional opportunities for future repositioning and development within our existing portfolio.
I'll now turn the call over to Kevin.
Thanks, Jordan, and good morning, everyone. We continue to make good progress with our two multifamily development projects. In Brentwood, we are building a 34-story, 376 unit residential tower. The first residential tower is west of the four or five freeway in more than 40 years. We remain on budget and on scheduled for 2021 completion. As part of that development, we are also creating the first privately owned public park in Brentwood, which will benefit all of our nearby office and residential properties as well as the local community.
In Honolulu, we are more than halfway through the delivery of 475 new residential units. We ended the quarter with 221 of these new units leased at average rents above our pro forma. We expect to complete the remaining units as well as the new fitness center and pool by year-end.
As we've mentioned in recent quarters, we are making investments in a number of our existing properties where we believe that targeting capital will allow us to significantly increase rent. We expect to complete the first of these repositioning projects next quarter. We continue to evaluate additional investment opportunities within our portfolio where we can generate attractive returns.
Our balance sheet remains strong and our leverage is low with the exception of the loan on our development project in Moanalua, our next term loan maturity is approximately 3.5 years away in 2022. We also have a large number of unencumbered properties that provide flexibility for future financings.
With that, I will now turn the call over to Stuart.
Thanks, Kevin. Good morning, everyone. Last quarter, we signed 196 office leases for a total of 740,000 square feet, including 294,000 square feet of new leases. Over the last 12 months, we have increased the average annualized rent per square foot and our office portfolio by about 6%. That trend continued in Q3 as we achieved 23.6% straight-line rent roll up and 11.1% cash roll up.
Our lease rate ended the quarter at 91.4% with nice increases in Sherman Oaks/Encino and Westwood. Our remaining lease expirations over the next four quarters totaled less than 10% of our portfolio, well below our recent historical averages. At quarter-end, our residential portfolio was again fully leased. Over the past year, we have increased our total annualized rent for the multifamily portfolio by 8.6%, reflecting the appeal of our newly developed units at Moanalua and continued rent growth from the rest of the portfolio.
During the quarter, we continue to lease new units at the Moanalua development, where we expect to deliver another 246 units over the next few months.
I'll now turn the call over to Mona to discuss our results.
Thanks, Stuart. Good morning, everyone. Compared to a year-ago, in the third quarter 2018, we increased revenues by 7%. We increased FFO by 10.3% to $100.1 million or $0.51 per share. We increased AFFO by 10.3% to $82.5 million.
Our same-property cash NOI increased by 4.2% based on strong revenue growth from both our office and multifamily portfolios. With respect to our GAAP NOI, our non-cash revenue declined by about $2 million compared to the second quarter of 2018. Excluding the impact of future acquisitions, we expect non-cash revenue to decline at an accelerated pace.
Our G&A for the third quarter was only 4.2% of revenues, well below that of our benchmark group. Most of you are aware of the accounting change that will require REITs to expense certain internal leasing cost, but not external leasing cost starting in 2019. Has this rule been in place in 2018, it would have reduced FFO, but not our cash metrics by about $0.04.
Our internal leasing platform provides a significant benefits. Regardless of this accounting change, we will continue to have lower leasing costs and our peers.
Finally, turning to guidance. As Jordan mentioned, we are increasing our guidance range for same-property cash NOI growth to between 3% and 4% and for FFO to between $2.01 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.
Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first questioner today will be John Guinee with Stifel. Please go ahead.
Great. Thank you. Very, very strong quarter. Can you give a little more guidance as to what you think the full development budget is on the 475 units out in Hawaii and then Brentwood and what sort of yield on cost you might have assuming a fair market value for the land?
Yes. So for Moanalua, the total cost about $120 million and Brentwood, between $180 million and $200 million.
That zero for the land. What do you think…
Yes, that zero for the land. So remember we brought these projects more than a decade ago and we bought them and they support themselves and have been very good investment just with the property – what was built on the property. So, as we sit today, you can make some estimates, but we never sort of trying to parse off because this is just excess land that we have on those sites.
But certainly what you're alluding to, which is correct, which is that, we've said to everybody, we'll build it for way above a seven cap rate and of course that does not include the cost of land. And so that maybe that's an easier statement to make than usual. It still turned out to be a very successful project and if you added land in, it would – that would change those cap rate metrics. But I will say that these projects have been very, very successful. And as we've told you, it's well above a seven cap rate that we expect to finish them for.
Second question, over the last two or three years, you've averaged about 11% cash spread on a releasing and GAAP spread of around 27% and your cost per square foot per lease year, a shade under $6. Can you maintain that or is that going to inevitably slow?
Well, it's impressive of the amount of years we've had this cash roll up and we're still continuing to have it and I don't see any reason. I mean it seems higher than it should be just because it's just so high. But if you look at what's going on in terms of the market fundamentals here and the lack of supply and amount of tenants that are growing and the relative cost of occupancy for our tenants compared to other submarkets – other markets that they're in, whether it be in San Francisco, New York, et cetera, it seems like the numbers have a lot of running room. They're just driven by rents moving up for the most part. I mean, the angle of that line and that angle of that line is just still seems to be pretty strong.
Great, all right. Thank you.
Thanks.
And the next questioner today will be Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
Great, thank you. So you had some meaningful moves in some of the percent lease and some of the submarkets. Can you just talk about, some of the changes and then your prospects that backfill some of the spaces that, that did go dark or did had some are lower on the percent lease basis?
Sure. Jamie, I think we referring to Center City and Santa Monica, we had a couple of full core tenants in those markets move out. Thankfully those are some of our strongest markets. They're both still very highly least and we're feeling really good about our prospects to backfill a few of those spaces very quickly.
And how large are the leases?
Full force for us typically about 20,000 feet. We have two full force in the ground Center City, another larger than average tenant move out in Santa Monica.
Okay. And how do those rents compared to market?
I think we're in a good position to see nice roll up on those spaces.
Okay, and then just generally, just thoughts on kind of net effective rent growth across the markets and maybe in outlook if you can do that?
Well, net effective rent growth across the markets has been obviously very strong in the west side in Sherman Oaks. It's been a little slower, but happily growing in a Woodland Hills and in Hawaii we’re really outperforming the market and as you know, we have – we're trying to make some, we're working through a process there that we hope will end up with us redeveloping one of the buildings were not 100% there yet. We're still looking into what needs to be done to make it happen, but that would be impactful there. But I would say Hawaii slowest, real happy with growth getting going in the Woodland Hills area and very strong in the other markets.
Including Brentwood and Westwood?
Definitely.
Okay, all right. Thank you.
And our next questioner today will be Nicky Yulico with Scotiabank. Please go ahead.
Okay, thanks. First question is, what drove the same-store NOI guidance increase? And then also how you're thinking about expenses, it's been kind of drag on your growth this year, maybe we get a preview for how expenses might trend next year?
Hi, Nick. So the same-store cash NOI, I mean we're three quarters in. So looking at our run rate so far this year and then looking ahead through Q4 and we felt comfortable that an increase in that range to 3% to 4% make sense. Like we've said earlier, we don't want to look at any single quarter, but look at the year as a whole, the guidance that we provided for the year and we’re feeling good about the 3% to 4% for the full-year guidance. And as far as expenses go, the two major expense areas that we've continued to talk about have been payroll and utilities.
On the payroll side, we made some moves last year to try to get ahead of the mandated minimum wage increases in Los Angeles. So we think that we've addressed that and that going forward you should see a better kind of comparable – a comparison between this year and last year, and obviously it's a good market with low unemployment. So we'll have to see what the market pressures are, but in terms of just those mandated increases, we think that we've addressed that at this point.
On the expense side, with regards to utilities. We've talked about our sustainability in the past and we've really put in some great measures to try and minimize our utilization and that being said, the rates are going up and so that's something that we continue to see quarter-over-quarter and you got good as mine as to what happens going forward on that one. But it's something that we're keeping an eye on.
We're pretty happy with our lower utilization and the sustainability factors that we put into place. And we'll continue to look for ways to improve that. But it's been a weird warm summer/fall. I keep waiting to have to put on a coat and that's going to drive our utility is going forward as well. So we’re going to have to wait and see on that one.
Okay. Yes, it sounds good.
By the way Nick the same-store roll-up, but it's driven by stronger than expected fundamental. I mean your fundamentals just keep getting stronger-and-stronger and you guys see it in that – in those roll-up numbers, which we answered in the last question going back just quarter-after-quarter sustaining.
Right? And Jordan, what are your latest thoughts on the potential for Prop 13, split role and a couple of years and how does that affect any decision making you make on your portfolio or even acquisitions you mentioned you sound like you're positive on the acquisition opportunity. How does that thinking on Prop 13 affect your decision making there?
Well, in general, in terms of modifying Prop 13, doing this spilt role, I do that as being a relatively low probability thing Prop 13 is very popular. And pulling at anyway you cut it old people, young people, business people, I mean it doesn't even matter. It poles very strong and it poles week to make any changes, including polling for split role and all the rest of it.
It's a complicated law and there's never been at much appetite for any changes to it. We have – it's worth saying about Prop 13 and its impact on property taxes that we actually have had very – in general for the State of California. We've had very similar property tax growth in revenue as many other states and we're actually, I think in terms of property somewhere around 19 or I think under 20 in terms of property taxes.
So it's not like we're a very low state on that front. We're also a state with a balanced budget and with actually excess tax income because we have very high personal income tax in this state with a convex X amount that's added in over a certain number.
So I'm pretty optimistic that there won't be any changes to that. Now, if you go to the very specific question you asked me about buying buildings. Regardless of what happens with a Prop 13 the most of whatever happened is that building would be valued at whatever you would buy it for at the time you bought it or some approximation of that number.
So it wouldn't get in the way of anyone buying buildings because they're going to pay the current tax rate. But the whole thing about Prop 13 is that the building value only resets when there's a transfer. If you hold the property, it only moves up at 2% a year. So it wouldn't stop everybody buying buildings, that's included everybody, puts it pro forma about full property taxes when they're buying it because that's what they're going to be impacted by after the purchase.
So it wouldn't impact the value of buildings at all. I've never seen analysis where someone was just cleaned selling a building where they thought anything but full property taxes, we're going to impact it.
I guess that my point was that if you already have some low property taxes within your portfolio because you've owned assets for a while and there are some risks that your property taxes are going up. Does it make sense, buy more in the market ahead of that?
I think it makes sense to buy more in the market because I'm bullish on the market. We have a mixed that – property tax basis in our existing portfolio because remember, you can have a higher property tax number, then you can file Prop 8 when you think the market is down, it can go down, but then when it goes down they could raise it very quickly on you again because still you're only capped by that higher number.
So those numbers actually move around quite a bit. But in terms of buying or building values, even if you – for anybody that understands Prop 13, even if you were guaranteed that there was going to be a split role, it would have no impact on value. No seller would make their price lower, because of that, because it doesn't have any impact on our recently sold building. But I think in general if you said, are we bullish for buying buildings? We are and hope to make more deals, but for all the reasons of fundamentals that you guys are familiar with.
All right. Thank you.
And the next questioner today will be Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey everyone. This is Laura Dickson here with Craig.
Hi Laura.
Good afternoon. So you mentioned that you expect to complete several of your repositioning projects in 1Q. I was just wondering if you could give us some detail on which assets the associated spend and then how big the pool of remaining assets is currently?
So we've been spending in terms of the repositioning projects. We’ve been spending anywhere from $5 million to $15 million and in some cases even a little more than $15 million on a building. And when you look at the size of the buildings we are working on, that’s a very small amount relative to the impact that we feel it can have in rental rate. So the returns on these things are enormous. So that's all the very good news.
Now the bad news is it's very disruptive to the building. You don't want to take on too many at a time and you can only put out so much capital in that process. We've already told you that we think that process we're in right now, the combination of buildings that we purchased in the JVs and buildings that we wholly-owned total up to about $100 million. And we're rolling through that process now and a good chunk of them both JV and wholly-owned ones will start rolling out over the next few months, so end of this quarter, beginning of next quarter and then as it rolls forward.
And as we do that, we have a very strong pipeline to wall more in. And so we're looking at doing the preparatory work for what we want to roll in. And we're also doing the completion work on those projects. At the same time, just because you asked the question, give me a chance to say it. We're also looking at other sites for ground up development.
So we have ground up development at various stages now. We haven't being completed in Hawaii for those first 500 units. We’re coming out of the ground, clearly out of the ground now in Brentwood. But we have other sites where we're starting to work through entitlements to be able to keep that program rolling. And I think we have in both fronts, which is really the best, the most exciting thing about what we have coming up because it's our opportunity to take advantage of the position we have in this market.
On the front of repositioning buildings and on the front of ground up construction, we feel real good about those opportunities. And I'm not trying to take anything away from the acquisition side, but those opportunities we think will carry for awhile. They're not necessarily – I would say the most appealing to the public markets because they're slower. I mean, we do the work and the revenue rolls in over time, but in terms of long-term, extremely strong growth that come out of our earnings, especially on a per share basis and all the rest. That's a great source of that. So I'm excited about those programs.
Can you just remind the ground up development? Is that primarily multifamily?
It’s all multifamily.
All multifamily, yes. Okay. Appreciate the color. And then just to follow-up on Jamie’s question regarding move outs in Century City and Santa Monica, what kind of downtime are you expecting to backfill those for leases?
And Laura, we're not kind of giving any timeline about backfills, but I will say, I mean look at – historically IT’S Santa Monica and Century City. They've been very strong performers for us. There's a lot of activity in those spaces, so I know we have tenants out there. And I think we're feeling good about the prospects to do that quickly.
Okay, great. Thank you.
Thanks.
And the next questioner today will be Manny Korchman with Citi. Please go ahead.
Thanks, everyone. Stuart, just not to beat a dead horse, but I'll try anyway. Those spaces given that they were large tenants, I assumed you knew in advance they're moving out. Was there a reason that there couldn't have been tour activity? Do you wouldn't have more confidence in the timeframe that they get done or do you have the confidence and you just don't want to lock yourself in and tell us what that timeframe is?
I'm not sure I answered the question.
He wants to know how confident you are in your answer that. We have a very good pipeline of interest in those spaces. Now doesn't take time. You got to get leases done and build the space before they're paying rent. That's a little tougher to predict, but if you're asking about confidents level of those paces, being back with solid good tendency answer is extremely confident.
Is there a way, it’s Michael Bilerman speaking your average tenant size is 5,000 square feet meeting and it's like 2,500. So I guess from a larger tenant space, so that you said one was like 50,000 and the other two are like 20 piece. Is there any way that you can give us a little bit more color because I assume those larger leases you do have a little bit more of a negotiating window with that tenant because it's a big space relative to the 1,000 of leases that you're doing all the time with a much smaller tendency? So I guess that's where our questions really coming from.
Well, larger leases are definitely slower to get done and then smaller ones. And sometimes we choose to break a space up. I'm not completely sure in this case, we need to do that because I think we have a lot of interest like multiple tenant interests in the spaces, but still that predict for you how quickly they will be, the lease will be signed in. They'll be paying rent. I mean we're not in the business of doing that, especially on single leases.
Well, I guess what's the story behind these larger leases, but why the tenant decided to leave. What you think the significant markup? Is there a lot of CapEx needs to be put in those spaces because typically we wouldn't be talking about leases on your call with the 2,500 to 5,000 square foot lease, right? We're only going to talk about the larger, which is very rare and so it did cause a decline in occupancy, which is why we're asking about it?
I think tenants are mostly like 20,000 – I don’t think that’s rare…
Are you talking about 20,000 per tenant…
Yes.
We have tenants that role like that all the time. It's not uncommon for a market…
Yes, not say marking by other leasing, so you guys don’t notice it. I don't think those guys moving around that much of that rare and I think we have a good pipeline for them. But either case, I don't have give you the guidance if you had some good guidance, but those guys just don't always, it's those tenants are what you're putting out. That's correct.
Is there not as much of a flow business where we can kind of predict what's going on when you're dealing with 2,500, 5,000, they're a little more chunky and therefore they pop up that way, but I don't have – only prediction I can give you if you're asking from timing is, we have a really a lot of interest and a lot of tenants we want the space. We've got to make a deal that we like and then we got to get them built an end.
And Michael with the nature of our portfolio with having small tenants that we have, it's why we chose – we tell you that 95% for us is what we consider full. These markets today are sitting at 94%, 93%. I mean Santa Monica has been basically more than fall, operating above that level for a long time and once in a while you'll have ones without take a little while to backfill it. And that's what we're going through now. But look, we're, we're very confident in these spaces.
If you’re going to have space, this is a great market to have it.
Yes, I know, I mean look, it's only five out of your 2,900 leases only 5% or greater than 20,000 square feet. Okay. So that's why, we're just a little bit more focused on it, right? That's not true, bread and butter where 95% of the other leases you have or south of that. But anyway, so a quick question for Kevin, I don't know if you want to talk a little bit about the investment pipeline and sort of the market overall from an acquisition perspective?
So it's a little slower. I mean the era of EOP is over and we reverted back to normalized environment where it's – fewer buildings are being offered out on the market. We're underwriting everything and frankly there's a couple of things that are in the pipeline that we're pretty excited about that haven't come out yet. We're still in the acquisition business.
As Jordan said, we're doing a lot of development and redevelopment but acquisitions are definitely part of the growth strategy going forward. But we're going to maintain our discipline and chase after the assets that fit our portfolio and not just the launch for properties because they're on the market.
Okay. Great. Thank you.
Our next are today will be Alex Goldfarb with Sandler O'Neill. Please go ahead.
Hey. Good morning out there. Two questions, first, just going on the interest rate side of – I think the next floater that you have up is get the $145 million in next in August of 2019. Unless I missed something some refine this. But just curious with the sharp backup in rates, your traditional model of doing a seven-year floater with a five-year swap. Have the economics of that change versus a straight seven-year or 10-year fixed mortgage or as you get calls from your banks, your traditional seven with a five-year swap is still far more competitive option than traditional fixed financing?
Well, a personal. I love how well you know our – the way we do our financing. That's great. I feel like it's taken 12 years or someone to call and say that to me. What we actually liked to be that the region we've always focused on that type of thing. So first of all we've never been big on making kind of a bet on interest rates or the direction of interest rates.
But we have recognized is that just in general for real estate financing, I think people undervalue the optionality of being able to pay alone off the optionality of – or the lack of optionality that you have when you do a fixed rate, long-term loan. So I've rarely seen big fixed rate, long-term loans where the borrower wasn't somewhere down the line wondering why did I do this?
So the reason we structure the loans the way we do is not because I'm saying, Hey, I think interest rates are going to go down or up or sideways or whatever. It's because that's the longest we can go and still maintain the optionality that you get through swapping and not having lockouts from lenders and stuff. So if we're trying to appeal to the big banks, et Cetera, we can't push them longer than seven years. And they're the ones that allow you to do those floaters where you swap in, when why is that important.
To swap is a two way street, right? So if I do a swap and rates go up, that's why it has value. Rates go down, it does not tell you. If I do a fixed rate loan and rates go up, they still charged me a point to pay it off. Even though they're low rate is very low and when rates go down I get charged yield maintenance plus the point. So that's not an even handed right trade. So that's why we've always leaned in the direction of the swaps and, the seven-year deals.
Okay. So it doesn't matter what the rate change would happen on the economics, your view is that this is the way you like to do it for these reasons and the economics are sort of not as a relevant part, is that correct?
Well, it's not correct to say the economics aren't relative. Because we look at where we're swapping as to what the curve looks like. I'm not, I wouldn't swap and we're real steep part of the curve. But in general, we always start with that structure and I try not to take large positions on what direction I think interest rates are going to go in.
I mean the market's already figured that out and those rates are laid out for you at all various terms. Because like many people over the last 10 years, if that rates are going up, they went down, they got caught cause. I mean, it's better just to do the financing that fits with what we like our operation of the company and what fits with the buildings that were financing.
Okay. And then the second question is, going back to the Bilerman’s deal pipeline question. There's been some chatter about LA sort of, the opportunity set, South of LAX, some of the markets down there along the beach that are attracting executives that don't want to sort of cross above LAX and they want to office down there.
So one curious year take on that and then two, if that's something that you think is valid, do you think that you guys may look at opportunities down there because it would fit with your office proximity to the high end executives or those submarkets don't share the qualities that a Brentwood, Santa Monica, et cetera share.
Well, you are right. There is a very large executive community. That’s in the South Bay. And a lot of the kids when they finish from UCLA and USC, the beach cities are their first stop. So those are very good labor pool down there. But within the South Bay markets there's a lot of diversity and where you'd want to be. And so, if you're asking would we want to be near 190th Street in Torrance? The answer is probably no. We don’t want to be in Rosecrans and Manhattan Beach.
That's an area that could make a lot of sense, although it's dominated by one large owner. And then when you get up towards El Segundo, there's a lot of corporate ownership that has a lot of entitlements and so it’s not very supply constraints.
So it's definitely a market that we're tracking and someday would there be an opportunity where we would [indiscernible] with that market potentially, but it's something that we track, but it's not something that we're quite ready to go into yet. Although, the right opportunity came along, it'd be something we'd definitely evaluate.
Okay. Thank you.
And the next questioner today will be Rich Anderson with Mizuho Securities. Please go ahead.
Thanks. Good morning. So whether you meant to signal it or not, as a thesis, your leverage has come down over the past few years. Jordan, I know it wasn't meant to be sort of as – sort of the sudden deleveraging initiative by the company. With that in mind, the developments that you had in mind, looking at redevelopment activity, perhaps buying some assets. Where are you comfortable bringing leverage up if you were to use sort of a debt-to-EBITDA type of metric over the next couple of years?
Debt-to-EBITDA now is 7.9. As I've said it in the past, we looked more at the properties that we’re financing. I don’t want to put any properties at risk, we wouldn't put the company at risk and we look at everywhere our financing flared out and then bunch of stuff like that. We have a lot of excess cash flow. As you know we're in a fortunate position that even beyond our dividend, we've had a lot of cash flows used up and our cash flow has been growing. And I think it was – maybe it was mentioned early on this call, but our cash flow, our real cash flow has been growing at a herculean pace.
And that's the combination of things, as the apartments we're building role in and as the repositionings roll in, and then just as our core markets improve, as we continue to lower the cost of turnover. I mean all those things and all those programs we've been running here for years and can't keep every year tightening up. They're all coming more and more to fruition now. I'm not telling you anything seeing our numbers, but I'm just saying we see that cash flow coming out. So we feel like there's a lot that we can do with that cash flow. Certainly it supports the repositioning projects.
When you move on to do the construction and you say building something or doing whatever, those construction costs when we're doing it, there's a little bit short-term because when they're done and the building's built then you have all that revenue and then you would appropriately leveraged that revenue. So that's kind of an up and down when you're looking at it. So I wouldn't say that we're looking at really changing our leverage levels.
Now, if you switch to the third thing, which is the stuff that Kevin is working on, as we’ve said in the past, anything that was large enough to be meaningful to our system would be large enough that we would bring in those same JV partners or maybe some others that we've been working with. And I actually together trying to find and put together some of those deals. So we would be a piece of that deal, we wouldn't be the whole deal.
Okay, good enough. And then my second question is, Mona, you talked about the minimum wage issue and its implications on your same-store growth profile. I'm wondering if you could – if there's a way to quantify how that has impacted your numbers this year, if you were running it 5% or 6 same-store NOI growth in the past now more like 3% to 3.5%. Would you say the large chunk of the decline is from that factor? Or is it a relatively small impact on how you are growing same-store?
Well, I would say for this year that was a factor, so if you are comparing 2018 so far and through year end compared to prior years, it absolutely was a factor. We haven't given guidance going forward, so I don't want to really speak to what the expectations are going forward. But for this year, that was – something that was an impact that we knew that going in.
Well, I know the factor. I'm just trying to get a sense of magnitude of the fact. I mean, how many minimum wage folks and related type of people do you employ?
Well, I would say more importantly, if you ask what’s the big driver is of a same-store rollout, its rental rates. So expenses, all the expenses as a percentage of what's driving things – or even lower expenses, it's less impactful than the topline rental rates moving.
Now with that said, and it was an executive summary and I think Mona had it in her section. This year has been impacted on the expense side by – because when you do same story, you have a lot of the – people that were impacted by those changes in pay rates are also the properties and properties are what are in the same-store.
So and especially even at the apartments and there's a lot of them there. And so we kind of last year, near the end of the year, we took that on, there's been some minimum wage move, some aggressive minimum wage moves made in California. Not only just in California, but actually in LA.
And so we took on last year, we decided to get ahead of it and make some big moves there. And we also rolled out at an equity program. We did a lot of things that actually has been very successful in terms of retention. Allow us to keep pushing our training programs, all that good stuff.
But we did it near the end of the year, right. So we bought ourselves another, we'll call it three or four quarters. That would be tough comparison quarters compared to even third quarter of 2017. And so we have had to wear that for three quarters of that big move that we made.
The point we've been trying to make in some of our responses is once that big move is now into comparison quarter that will lighten up the pain going forward in terms of just a same-store and you kind of other comparative metrics going forward because that move was really very outside.
But then beyond that, still its low unemployment, there's pressure on wages, there's pressure on some of the other expense things that you've talked about. Still we're very good at controlling expenses and with all that together, the big mover is the roll up and rents.
Okay. All right, good enough. Thanks very much.
All right.
And the next questioner today will be Steve Sakwa with Evercore ISI. Please go ahead.
Thanks. Good morning. Hey, Jordan, I was wondering if you could talk a little bit about Honolulu that market lost about 130 basis points on your percent leased. And I guess I'm just wondering if you could tie in sort of the leasing activity there and I know that you guys have been actively trying to find a rental conversion property to multifamily. I'm just wondering if you could provide us any updates on that and tie it in with the kind of the office leasing environment and Honolulu.
So the office leasing environment in Honolulu has been very flat. It's flat, the larger reason it's flat is that while it's the lowest unemployment state of all states, all 50, 103%, it's very hard to draw population, permanent population in, employees in, so everybody's looking for employees there.
It's hard to draw and then because of the costs of workforce housing, so workforce housing is very expensive there, so it costs to live. There's high mostly driven by the constant workforce housing.
So we know and anybody – everybody there knows that they have a horrific for the size of the island, we have a horrific shortage of workforce housing. We bet on that. We basically built, price wise, we built workforce housing at Moanalua. You guys have seen the tremendous success we've had leasing those units, the head of pro forma, above pro forma, all the rest of the good stuff.
So they're being really just snapped up. And MHA project, I would say is like a 15 minute drive from downtown or something like that. So we took that and we said, all right, downtown has had a very steady tenant base. Matter of fact, our tenants that are kind of swirling around and saying we want to move in consolidate into downtown.
But that on the margin isn't enough to push occupancy over 90% and really impact that downtown market and since it's a longer-term program to draw and more population to allow these tenants to grow. We thought maybe we could do something on the supply side. With the experience that we had at MHA, we looked at building similarly workforce priced units we have to get, the costs after work and that's why we're not ready to say boom, we're doing it, but we're working very hard on getting or evaluating the roadblocks to getting there.
And we said, can we look at one of these buildings and literally take it out of the supplied both pulling one, building out a supply would shift market occupancy to over 90%. So that's how small that market is. And so we're looking at doing that and we're trying to kind of go through that process with them if we’re successful, it will be tremendously impactful combined with other tenants that are even trying to move into the market. It would be really tremendously impactful.
So we're working our way through that and it's something that Kevin's working on and a lot of people are on the expensive people because we want to get there. But we're not there yet because there's still some roadblocks that we have to get through.
Okay. And then maybe just kind of switching gears to Warner Center. I thought in one of your comments to maybe a question, you said that you were seeing kind of good growth on the rent side, but that percent leased figure for you with flat this quarter. It's still around 86%. So I'm trying to sort of reconcile the rent growth with, you still having 14% I guess vacancy if you will, in that marketplace.
Well, so rent growth in the market, I wish it depended on the arguments in our portfolio, but it depends on the occupancy in the market. And the occupancy in that market has been strengthening and it's now I think it's 89%, almost 90%. So that's what's driving rent growth in the market.
Now you can go, what's wrong with you guys? Okay, you're supposed to be super good at saying, why are you underperforming the market? Wherever we're at 86%. It's the only market we under perform. So I could give you the reason for that. The reason for that is in that market, you still have a number of large sentence, at least 100% of buildings.
Therefore, when you look at the whole market, there's 100% guys come in on some of the larger buildings. We own a disproportionate share of the buildings where we've done this to ourselves, but where it's smaller tenants, right? So the smaller tenant, there's still more space there. So our occupancy it’s about 86% against the market that's 89% actually heading with an up arrow.
So yes, rates are moving up. Yes, we're getting the benefit of that, but we are holding more of the vacant space. Then the remainder of the market for the reason I just described, because we have more of the smaller tenants. Now with that said, I do think, as we've rolled out more and more large tenants were less subject to shock.
I still like our format for focusing on the smaller tenants and I think that that will serve us well over the coming years, and I think we will catch up to the market, and in fact, I have a lot of confidence, we will beat the market when all set and done. But we're working through that process.
You know, we're probably one of the few landlords that quotes a number of how we've reduced the number of tenants over 100,000 feet. Most people put a big announcement and say how great it is. They just did it 200, 200,000 foot lease. So we're happy that those are rolling out. We're backfilling with smaller tenants. It's a process we're comfortable with for building out floors and it gives us a more stable set of assets on the long-term and a less risky set of assets.
Okay. If I could just maybe quickly follow-up, do you see the pipeline of smaller tenants kind of growing in that marketplace? Or do you think that's sort of something on the com into 2019 and beyond?
We see it growing – we see it growing and you've seen us, I mean I think when we bought it we had six or maybe more tenants over 100,000 feet when we bought one center. We sit here today with one and it’s just slightly over. And by the way, we backfilled all that space with small tenants and mix it up. So that's a very robust pipeline. And we've been doing a lot of leasing out there.
There were a couple quarters going back where you guys were saying, hey, what's going on with the numbers when our roll up was – if it’s still very strong, but it was a little less strong we'll call it. And we said, because we're doing a lot of leasing in Warner Center, where the numbers aren't moving up as fast as they are on the website. But we're doing a lot of leasing out there and that leasing is allowing us to build up a small space and giving us some more stable long-term occupancy rate. We'll get there.
Okay, thanks. That’s it for me.
All right.
And the next questioner today will be Dave Rodgers with Baird. Please go ahead.
Yes. Good morning out there.
Good morning.
Jordan maybe to start with you, just in terms of whether the Century City and Santa Monica leases that you've addressed before or just maybe even some broad commentary of that. Are you seeing changes in the regions for move outs i.e. price, bad credit can’t accommodate growth, can you add any color around those issues?
Well, I can directly answer the question and say no, but the amount of color I will say this. We are living through and I feel like I've said this last three years, but one of the best leasing markets I've ever seen. And especially if you're talking about the Westside and West LA or even broader West LA and that stripped in Encino and Sherman Oaks. I mean it's just a very strong market. And we're not – I mean take all the signs, tick up in default, we're not seeing it. Tick up in concessions, we're not seeing it. Thinner pipeline, deal flow all of those steps that we see because we have so many transactions here, all strong, everything strong. Rental growth, net effective rental growth, all strong.
That’s helpful. And then maybe just a follow-up for Kevin, and appreciate the color on the redevelopment pipeline and how that'll start to deliver in 2019. I’ll try to make sense out of this question, but is there a higher degree of vacancy? Or as you look at your 2019 redevelopment deliveries, is there a higher component of vacancy where you can kind of immediately start to grab back some occupancy? Do you have a sense for what that number is versus kind of recapturing leases over time, if that makes sense?
The projects that we're redeveloping are all on the Westside, which is very, very highly leased. And so it's a combination of – we're doing some of the recent purchase buildings and some of the legacy portfolio building, so it's more of a role in over time. I mean, our leases are not the 10 and 15-year type of leases, and so there's going to be gradual churn through the portfolio over a weighted average lease term. So we should be mark-to-market on most of these and call it the either side of 60 months?
Yes, the building – I'm pretty confident that buildings will perform consistent with the chart we have in our supplemental. That shows kind of a roll going out that curve. So there's a sort of a curve to our rollout that's extremely reliable. It barely ever moves in terms of – we show you that three years going back average and then we show you what's exactly now, what the roll is going out for whatever amount of years, seven, 10 years.
And I suspect that the buildings themselves will exhibit exactly that. So as you approach the year, you’re around 10%. It tend to be like 13% or 14% in the year following and then you tend to drop like 11%. I mean that's just sort of the way it rolls. But every year that seems to be the way it goes because of the size of tenants and larger tenants tend to go a little longer. We have so many tenants that just drives itself towards that curve.
Great, so I guess when you say – you guys have talk about disruption in the redevelopment to some degree, you mentioned it earlier, Jordan. I guess it really hasn't created a sizable vacancy number that monetizeable immediately and that was the answer, right?
We have been disruptive, but it hasn't created vacancy. It just means we have to go and talk to the tenants and show them how good it's going to be later. And I mean it's just disruptive. I mean, it's not in the economics. It's just you don't want to – just make a lot of people angry for better for worse, which I get it, they don't like it when they pull into the garage and they're used to turn right now they're blocked.
They got to turn left and can't contract with their space because we're doing construction in the garage. They can't get into the lobby of the building that's go around the back because a lot of that aggravates them.
Yes, thanks for the clarity. That's helpful.
And our next questioner today will be Mitch Germain with JMP Securities. Please go ahead.
Kevin, I think you said that there's not a lot of product for sale in the market. I was curious about your thoughts around that. Is it maybe there's not as much active capital is a lot more families and whatnot that hold the inventory. What do you attribute that to?
Well, I think that it's slowed down. As I said before, we had that one seller and Blackstone that had a very, very large portfolio and they sold 11 buildings over a 2.5 year period, which we bought eight of them. And so we're not – that’s like an unsustainable pace that would be amazing churn given the long-term owners in our marketplace.
And so it has slowed down and then there are properties that are on the market, but not everything is necessarily a fit for what we do. And so you might have larger properties that have a long-term single tenant lease or you might have buildings that we looked at in the past that we weren't excited about because of the floor plate and its come back again. And so we pass it on it for that. So it's just – the pace has slowed down, but that doesn't mean that there won't be any trade. And it certainly doesn't mean that when the right product comes out that we won't aggressively pursue it.
Thank you.
End of Q&A
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.
I'd just like to thank everyone for joining us and we look forward to speaking with you again next quarter.
Thank you for attending today's presentation and you may now disconnect your lines.