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Douglas Emmett Inc
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Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett’s Quarterly Earnings Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. After management’s prepared remarks, you will receive instructions for participating in the question-and-answer session.
I would now like to turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Thank you. Joining us on the call today are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Mona Gisler, our CFO. This call is being webcast live from our Web site 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 Web site. 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 Web site. 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, and happy Valentine’s Day. We had a very good year in 2017. We grew our FFO by 8.9% and our AFFO by 10.9% and just raised our dividend by 9%. These amounts are investing over $300 million in acquisitions and development. We reduced our share of debt by over $400 million and lowered our weighted average annual fixed interest rate from 3.28% to 3.09%. With the exception of the loan on our development project at Moanalua, our next term loan maturity is four years away in 2022.
We purchased four office buildings and increased our market share and our submarkets to 28%, leased the first 60 units at our Moanalua apartment community and fully entitled our 376 units high-rise apartment tower in Brentwood. On the sustainability front, we reduced our electrical usage per square foot by another 2.6%, our 10th consecutive year of lower consumption. Over 95% of our eligible office space is ENERGY STAR certified.
The fundamentals in our markets remain strong with robust demand across a diverse set of industries. As we have often discussed, this demand is not being offset by new office supply. The entire construction pipeline across all our submarkets is less than 50 basis points of existing supply. Stuart will discuss leasing spreads, but suffices to say they reflect our strong market fundamentals.
Looking forward, we will need to steer through a few headwinds. Disruption from construction and the recapture of previously restricted units is temporarily impacting our Hawaii residential portfolio. The benefits from our sustainability programs are being offset by higher utility rates. And the rising minimum wage, which hits $13.25 in Los Angeles this year, is putting inflationary pressure on payroll cost for us and for our vendors. Even though these factors impact our same property growth, we expect very positive overall result in 2018.
I will now turn the call over to Kevin.
Thanks, Jordan, and good morning everyone. We continue to find good Westside acquisition opportunities. In December, we acquired 9401 Wilshire, a 146,000 square foot Class A office property in Beverly Hills for $143.6 million, pushing our share of the Beverly Hills submarket over 27%. The property sits in the heart the Golden Triangle across the street from Spago and next to the Montage Hotel.
To fund the purchase, we issued 2.6 million OP units, used a small amount of cash on hand and assumed $32.3 million loan. As Jordan mentioned, our developments projects are making good progress. At Moanalua, we expect to deliver the remaining units, as well as the new fitness center and pool over the next year. Rents continued to exceed our pro-forma assumptions at over $5 per square foot.
In Brentwood, we are gearing up to start construction of our 376 unit apartment tower. In December 2017, a consolidated joint venture that we manage under which we own 20% interest, borrowed $400 million under a secure non-recourse interest only loan maturing in December 2024. The loan bares inertest at LIBOR plus 130, which was effectively fixed at 3.47% for five years through interest rate swaps. The joint venture used a portion of the proceeds to pay off $365 million acquisition loan facility.
Last week, we borrowed $335 million on a secured non-recourse interest-only loan that matures in March 2025, and bears interest of LIBOR plus 130. We have effectively fixed that interest rate at 3.84% per annum through March 2023. We use the proceeds of that load, as well as our credit line to pay off two loans totaling $426 million.
With that, I will now turn the call over to Stuart.
Thanks Kevin, good morning everyone. In Q4, the lease rate for our total office portfolio increased to 91.4%, and occupancy increased to 89.8%. We signed a 194 office leases covering 699,000 square feet, including 321,000 square feet of new leases. With excellent Q4 leasing spreads, which increased to 28.1% for straight-line rent roll up and 12.2% for cash roll up. For all of 2017, we achieved straight-line rent roll up of 26.8% and cash rent roll up of 10.7%.
On the multifamily side, our lease rate improved to 98.8% at quarter end. Our Los Angeles portfolio remains fully leased and we made progress backfilling the vacancy the one property in Hawaii caused by lower enrollment and a nearby university, which we have already indicated is the short-term issue. However, we expect to continued leasing headwinds at Moanalua and from recapturing our previously income restricted units.
Santa Monica we recaptured a total of 14 pre 1999 units in 2017 compared to seven in 2016. On average, we raised the rents of each of these units by over 50,000 per year. As of year-end, we still had 212 pre 1999 units remaining.
I'll now turn the call over to Mona to discuss our results.
Thanks, Stuart. Good morning, everyone. We are pleased with our Q4 results. Compared to a year ago in the fourth quarter of 2017; we increased revenues by 7.5%; we increased FFO 13.7% to $95.4 million or $0.49 per share; we increased AFFO 21.8% to $76.1 million; we increased our same property cash NOI by 4.8%. For all of 2017, we increased revenues by 9.4%.
We increased FFO 8.9% to $354.7 million or $1.90 per share; we increased AFFO 10.9% to $288.4 million; and we increased our same property cash NOI by 5%. At only 4% of revenues, our G&A for the fourth quarter remains well below that of our benchmark grew.
Finally, turning to guidance. For 2018, we expect FFO to be between $1.97 per share and $2.03 per share. Based on the strength of the fundamentals in our markets, our guidance assumes that we will continue to see good revenue growth even with the headwinds mentioned by Jordan.
Our guidance for same property cash NOI growth is impacted by over 0.5% because we assume that Cam reconciliations and lease termination fees, which are difficult to predict, will be lower in 2018 than in 2017. As usual, our guidance does not assume the impact of possible future acquisitions, dispositions or financings. For more information on the assumptions underlying our guidance, please refer to the schedule in the earnings package.
I'll now turn the call over to the operator so we can take your questions.
Thank you. We will now begin the question-and-answer session [Operator Instructions]. And our first questioner today will be Craig Mailman with KeyBanc Capital Markets.
Just curious, you guys had almost 11% of cash spread in '17. Just want to get a sense of what you guys are baking in for '18 here?
Craig, we don’t give guidance on our roll ups, it's very difficult to give that. So you see the numbers we did in Q4 very strong, the trends we think remain very strong, no reason to think that we’re seeing any softening there. So we remain bullish on the trends, so we don’t give guidance on that. We still think there is great demand across a diverse set of tenants and industries. And so we think the trends will remain very good for roll ups.
And then just on the Time Warner expiration in '19. Just curious if there is an update there, I know it’s in your sole Burbank building. Is that long-term a disposition candidate or do you guys think that's a longer-term hold?
It's better a long-term hold. I think we're commenting on individual tenants. We don’t comment on individual tenant negotiations, so no update. But can't really comment on disposition candidate, I think it's something that's been in the portfolio for a long time and that’s a great asset, very classic, more private best building one of the best buildings in Burbank.
And in that market it’s a very good market and very good location.
Our next questioner today will be Emmanuel Korchman with Citi. Please go ahead.
Have you seen difference in the make-up of the potential tenants in the newer buildings versus your Heritage portfolio in terms of either user type or user size or any other characterizations?
No, not really. I think they’re very consistent. The stuff we've been buying is right in our core submarkets, in many cases it's next door or across the street from buildings we already own. I think the tenant mix is almost identical to what we've add in the legacy portfolio.
And then how -- I'm hoping to extract this. But how much cannibalization, if you will, for lack of a better word is there, between those current assets and filling in the vacancy in a building that you would have just acquired?
You are asking us, we are taking tenants out of buildings we already own and moving them into the buildings we just acquired, because they have more vacancy? Is that's your question…
Not just to say the more vacancy, but just how are you measuring that type of rotation, what tenant is not renew in same space and moving into one of the buildings that were more recent acquisitions.
Well, we've got a good -- I will say this, in general, you can just see it because you can see our occupancy and our lease rate. So you can see we buy buildings, our lease rate suffers a little bit from vacancy and buildings we buy but as they move up down and it improves. But I would say that booking -- and I guess we’re taking some tenants from other buildings. But overall, tenants are coming in the market and tenants are expanding. So it hasn’t really been who is losing for us to win.
The one area which we’ve talked about on other calls, which has been pretty good for us, is as we control more and more space in general, we’re doing a better and better job of putting tenants in that right spot and right sizing into space that properly fits them without having to tear things up too much. And then as you know from the past, we’ve been pretty aggressive about just taking back space and re-leasing it. So saying we got, okay, you can -- if the price point in this market is too high for you, how about this market moving there will just take us back, because he couldn’t handle is renewal. And then that put someone else in there at a much higher rate. That’s been a very successful program for us.
And the next questioner today will be Alexander Goldfarb with Sandler O’Neill. Please go ahead.
So two questions, first just going to the wages. We obviously have seen this trend from a number of the apartment REITs this quarter. You guys has pretty sharp you had in the fourth quarter in your apartments now expecting it in the full year. So was this more on the property level or is there some of it in corporate G&A, because G&A is higher. And then do you think that this is start of a trend so that ’19 we’ll see a continuation of this, or is this just a one year catch up?
Well, I think we did do more catching up this year than -- the things have been moving up for a couple of years, and it’s going to keep moving for two more years out of it. Because end of the day, they’re trying to get minimum wage in the fair to be $15. So they’re moving up at a certain clip. It doesn’t work to just move at their number. You got to move ahead of it, A. And then B, you have to also -- you don’t just move like the minimum wage people, you got to move all people above of market and really aggregate them when someone making close to their pace.
So it has a ripple all the way up the chain impact. I think we took on more of it in this round went early to go where to some degree so to know where we know we’re going. But there is still some left probably over the next couple of years. I mean they’ve pushed very hard on the bottom and therefore everything is having to absorb that impact all the way through their system.
And it’s both corporate and property, or it sounds like it’s more at the property level?
I think it’s throughout. Yes, it will be felt more at the property level, it’s obviously where we’re particularly mentioning is in the same-store, which is where you’re seeing it. And here we’re seeing it both in the office and residential side. There is probably a lesser impact at corporate.
And then the second question is, Mona, you mentioned that lease terms would be down. But if you could quantify how much you expect them to be down this year? And then as part of that, last year you guys did some proactive space recapture. Is that all done so there is nothing else in your portfolio where you want to get out some low paying tenants? Or you think that we could see more of that later this year?
And I wouldn’t say that it’s all done, I think that’s the program that’s ongoing has been successful for us, as Jordan had mentioned. The tricky part about lease termination fees is that they’re difficult to predict. And so we go into each year having a general idea of certain terminations that we expect to happen during the year, for this year heading into ’18, there are less of those. And I think part of that is probably coming off of the last couple of years so where we did have an elevated amount.
So looking ahead, it looks right now, like a slowdown. It’s really tough for us to be able to predict whether or not those go back up to the levels that we’ve seen in the last couple of years. In terms of the impact, and we gave you an all-in for lease termination fees and the Cam recoveries, there’s about 0.5% on our same store.
And the next questioner today will be John Guinee with Stifel. Please go ahead.
Does this minimum wage increase help you guys in your comp plans? I couldn’t resist I apologies.
That’s a good one.
Yes, I really feel the pressure coming up on me…
One thing that jumped out, a couple of things have jumped out here. First is, it looks to me like your gross rents are only about $46, which strikes me as very low; one, is that an accurate number? And then two, it seems to me that your re-leasing costs have jumped over $6 per square foot per lease year, and that seems like a high number given that you’re not moving around, you don’t have a lot of full floor attendance, you’re now moving around a lot of demising walls. Why is that number ticking up?
On the leasing cost, John, we’ve seen a couple of things. So rates go up, our leasing commissions go up. So those are elevated. And as we’re doing acquisitions, we fine that there is a lot of space we have to spend higher TIs on as we’re first taking over building as opposed to buildings that we’ve had in the portfolio for a long time. We spend a lot of time and a lot of effort building out space that is reusable that doesn’t force us to cheer everything out every time for the next tenant. And that tends to be not what we find in buildings that we’ve recently acquired. So the acquisitions are causing that number to be up a little bit. But we can get that under control after a few years if we get something into the [technical difficulty].
And our next questioner today will be John Kim with BMO Capital Markets. Please go ahead.
UCLA and Morgan Stanley expanded in your portfolio this quarter. Can you just comment on this? Are they expanding overall at the footprint, or consolidating space or any other commentary that you may have?
Well, we don’t talk about individual tenants. When you first said that, I wouldn’t say that. But it wouldn’t be odd to expect UCLA to be a big tenant since we own most of the buildings in Westwood, and that’s where UCLA is. But you can see I mean we do break out the number of leases there. So I think UCLA is up to 24 leases with us and so they continue to expand that spread across the number of buildings in a number of different leases. And I think Morgan Stanley expanded it and did one additional lease...
Can I ask question about the impact of tax reform. I think your tenant profile is probably a little bit different than most other office REITs. But in your conversations with tenants, what's the mood like? Do you expect that this year will be a busy year here on leasing as last year you were up 24% year-over-year. Any color you have would be great?
Well, you said tax reform but that’s saying we’re up 24% on leasing. So first of all, I don’t think the tax reform is going to have any impact one way or another in terms of what's going on here to the extent anyone has been able to decipher it. But in terms of back to that, or I guess not rolling up the leases, is that what…
It was more about -- the tax reform was meant to benefit small businesses more than perhaps others….
I think in general because probably like you’ve been in a coastal state with higher state taxes and higher property taxes, it's been -- the tax reform has been a little bit of a mix tag for California. On balance, maybe for most of our tenants, it's a little bit of an improvement in their tax situation. But I don’t think it's driving anybody to really do much of anything.
Our next questioner today will be Rob Stevenson with Janney. Please go ahead.
Can you talk about what you are seeing fundamental wise in the Warner Center Woodland Hills market and where you’re seeing relative strength and relative weakness in those sub-markets?
Yes, pleased to see a good activity and a good jump up in the lease rate. We've been hearing a good leasing volume there for last couple of quarters, so good to see that move up. Warner Center continues to be us converting full-four tenants to smaller tenants there, and that just takes time. So we're working through that process, took a step back this quarter but transaction volume there and leasing volume there remains good.
Can you talk about the lease-up of the Moanalua apartment you haven't given any concessions to get those leases? And where are you rent wise in the new units versus the competing products in the submarket?
Well, there is not really much. We’re putting brand new products in market that really doesn’t have anything that's competing with it. And as Kevin said, we're doing over $5 a square foot on the new product that we’re putting out. So we’re building smaller type units, smaller SKUs and smaller ones primarily for what we’re delivering. So there is not a lot of brand new competitive product that you compare to across the island. And I think that's one of the reasons that's being so well embraced and leasing so well. And your other question was…
Are you giving any concessions, how many units…
No, I don’t think [multiple speakers] no, those are real rates.
And the next questioner today is Blaine Heck with Wells Fargo. Please go ahead.
Just starting out on guidance, sorry if I missed this. But is there any way you guys can give us your same-store guidance broken out between office and multi-family. Is there any meaningful divergence there?
We don’t typically break that out. But I think Jordan had mentioned that in terms of the breakout between impact, the higher costs that we're seeing on the utility and the payroll side are impacting us really across the board, so it's not being skewed. We do have the headwinds that we’ve talked about, those are going to impactful, and the financial. But in terms of the breakout that's just not something we typically provide.
And then my second question and looking at the expirations page for the next few quarters. I noticed you guys have almost 100,000 square feet expiring in Santa Monica in the third quarter at or around $80 a square foot. Are there any larger leases in there, and it’s obviously a high rent market. But is there any reason we should expect rents to coming in at negative spreads to that $80?
We could see that, yes. So I don’t think -- when you say large tenants, no, we don’t really have any large tenants at Santa Monica. I think the way you think about large tenants and for us the full course large tenants maybe 20,000 seats. So pretty small I think by any standards, maybe larger than our average. And you could have some leases that are 10 year leases that have had 4% or 5% bumps in Santa Monica that could get up to pretty astronomical rents by the end there. So it is possible to have leases roll down on an individual basis.
Blaine, just to circling back on the same store, maybe just a couple of more points to help you with that. And overall our office space has been followed and we expect that to continue in 2018. Our residential -- we have seen a split down in our rent growth there. We were running around 5% plus so we expect that to head us maybe closer to the 3%. But again, in terms of our overall cost, we’ve been really successful in controlling those costs over the last five to six years. We’re going to continue to try and work through that but the utility cost in the minimum wage are going to have an impact. So hopefully that helps you to gauge a little bit more between those commercial and residential.
And the next questioner today will be Dave Rodgers with Baird. Please go ahead.
Maybe for Kevin or Jordan, to start out with the acquisitions. Obviously, position the balance sheet well last year, another acquisition in the fourth quarter. How do you feel about the pipeline today? And how do you handicap the chance to put more money to work here pretty quickly in ‘18?
I think the chances are pretty good that we’re going to put money to work. But the last 24 months have been pretty exceptional in L. A. as far as transaction volume in L. A. in general and in our markets. And we’ve added what 10 properties over the last 24 months for them last year. I don’t want to give you guys the impression that we’re going to be adding five properties every year, but we’re certainly underwriting everything that comes to market and we are very, very focused on what’s strategic.
And I said this before -- but what’s strategic to us are properties where we can use our operating platform to add value, so properties with either high vacancy or where the operating expenses are quite as we’d like them to be here properties that we can reposition. And so when those assets come up, we’re going to definitely aggressively pursue them.
And maybe on some redevelopment, you guys have started a little bit more on the redevelopment side with some office, whether its lobby renovations, et cetera. How much downtime or maybe loss occupancy do you estimate that you have maybe in ‘17 with respect to that? And do you see that’s changing meaningfully as you move into ’18. Is that a ramping program for you?
Yes, there is more and more buildings because we have programs going on in a lot of buildings where we’re making changes, whether it’d be lobbies, exteriors or as you know, at Moanalua where we’re literally building on the same property where we’re operating. I don’t know whatever it is 700 units and we’re building another 500. And it’s tough because strictly speaking most of what we’re doing is not really displacing lease space.
And then I guess Moanalua did displace a certain amount of units in the whatever the classic side of the project versus the new site. But you do get noise. I mean, when we go into a building and we do enough, which I think is great move which will create great returns. Whether you create so much disruption that you lose a tenant to having to be close to that or something like that, it does happen. And it does create a noise in that particular building for a while in terms of keeping it fully occupied. But I don’t think -- I hope it doesn’t show up much in our numbers. I don’t think it will show up much in our numbers, but it will definitely happen because we’re working in so many of our buildings doing construction projects.
And the next questioner today will be Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
I want to go back to just the leasing spread CapEx. So if you look at your 4Q '16 supplemental, your expiring rents were at 3650, now you’re looking at 4116 in 2018. So did you say you think you can maintain similar leasing spreads as you did in '17, I guess rents move that much? Or are you just saying you think they will still be positive, because it looks like you’re heading into a period of much higher expirations than we’ve seen the last few years?
Jamie, interestingly, when you look at our expirations, it tends to be submarkets with higher rents that have had higher rent growth. So when we get a quarter where the expiring rent is higher, we actually tend to sometimes get higher rent roll up. And when you get a quarter where you get skewed to more leases done and maybe market like Warner Center or Honolulu where we haven’t had the same rent growth, we can have a lower rent roll up quarter. So just elevated expiring rents that tell me that the trend in our roll ups would be negative.
But it sounds like you have some outliers like the 3Q '18 Santa Monica at 80…
Individual leases you can have certainly things of two things like I said, you could have a high roll up lease in Santa Monica that could be negative on an individual basis. And that’s why it’s choppy quarter-to-quarter this metric and one of the main reasons we don’t provide guidance, it’s very difficult to predict.
And I guess back to Kevin, we’ve seen a move here in the tenure some conflicting economic data. Just do you give any pause on putting money to work here like after a pretty active couple of years?
Well, I guess the tenure has moved. It’s moving in anticipation of more robust economic growth, which should translate into better economic tenant activity and better rents. So it’s something we’re definitely keeping an eye on. And as we underwrite all of these properties the cost of debt that’s going to be a factor, but at this point, it’s not a factor that’s causing us to pause and our desire for more assets.
And have you changed your rent growth outlook at all for underwriting or have your partners?
I think that we’re underwriting it on a pretty consistent basis. So I don’t want to get into the secret sauce and how we underwrite. But I would say to you can expect more of the same.
The next questioner today will be Jed Reagan with Green Street Advisors. Please go ahead.
Just to I guess following up on Jaime's question. On your office re-leasing spreads, I know you have provided this metric in the past. But can you just update us where your rents at versus market overall on your portfolio?
Yes, it’s about 10%.
And then in terms of the '18 guidance, can you give a sense of what you’re assuming overall for expense growth in '18. And I think on this call last year, you mentioned 2% to 3% rent growth, I assume for '17. So just wondering how it might compare to that. And then specifically, if you can break that up between multifamily and office that would be helpful.
We don’t have a breakout between multifamily and office, but I don’t think the typical 2% to 3% is going to hold. We think it's increasing it's going to be higher than that, and that's what you have baked into what we've been showing you. So that's why when Mona went through that list, because you’re seeing it in same-store, is on the office side we feel like we’re getting very good revenue growth. We said on the residential side, not necessarily, it’s good as it has been in the past but still good. But while we've been doing a good job of controlling cost across the board, those costs are impacting office and residential in both energy cost and in terms of wages.
And then keep in mind that this type of inflationary impact is also affecting our vendors, so it's not just internal.
5% is that a reasonable estimate?
Well, it's reasonable and that it’s higher than the 2% to 3% that I say would be higher than 2% to 3%. I mean we have been giving guidance on what we're doing to expenses. And I actually, to be totally fair, don’t know the number of apartment versus offshore. But I know it's higher, because we've had to suck up these changes even though in the past we've been reducing our utilization and it's been doing a good job of offsetting the increase in energy cost. It just -- just like you would think -- we deal with the Department of Water and Power. So just with any governmental agency, they are doing a great job of out-pricing any type of conservation that anybody could reasonably put in place. So we're fighting against that and I've already talked about the wage inflation that we're facing.
And then last one from me. It looks like you've got quite a bit of rolling in Sherman Oaks/Encino this year and curious if there is any expected move outs as part of that. And then can you give any sense of where rents at in that submarket, above or below market?
Yes, I think Sherman Oaks expiring rents are below market. Sherman Oaks did expect some roll up there, not as robust probably on some of the Beverly Hills and Santa Monica type markets. But still good roll up there, so we’ve some decent rent growth in Sherman Oaks/Encino. And I don’t think there is anything standing out in the row that we’re concerned about nor move outs in Sherman Oaks/Encino that we’re concerned about.
The next questioner today will be Mitch Germaine with JMP Securities. Please go ahead.
Kevin, what’s the plan for the Beverly Hills power. Is there any capital that you are expecting to invest? So is there a near term roll opportunity, what’s the three to five year plan there?
Well, this property unlike the other ones that we've recently been purchasing was 99% leased. But a lot of the leases are significantly below market. And so we've got a nice growth story within that domain. Every time we buy a building, we put together a capital plan and we have one for this asset as well. It's situated on the corner of Canon and Wilshire, it has a very big plaza and it's pretty underutilized right now. It’s got some planters that really prevent you from using it. And so we’ve got some money there to upgrade that and turn it into a better indoor-outdoor experience at the property.
And then any change in the bidding pool in the market. Are you seeing maybe less foreign capital or any takeaways there?
It’s funny, there was a report about how LA eclipse New York City on the amount foreign capital that came into it last year. And I really think that’s more of a function of New York transaction volume was down so far last year rather than increased foreign activity in LA. I mean especially in our markets where like this last purchase that we did was 140,000 foot building, that’s really tough for the foreign capital to underwrite both from the size perspective and just like digging into the market. And so I don’t think we’re seeing any more foreign bidders. And frankly with some of these smaller assets, we get more competition from the high net worth investors than we do really foreign investors.
I think smaller deals are getting push, small maybe that we wouldn’t necessarily by anyways, are getting pushed out aside by literally individual billionaires buying, it’s just with in the area.
And the next question will be a follow up from Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.
I mean just wondering the magnitude of the drag from Hawaii and the asset repositioning. I assume that goes away in ’19. So what’s the impact on the ’18 numbers?
The drag on what aspect of it…
On earnings, like can you quantify pennies per share or some other metric…
Well, when you say drag on earnings, it’s a drag on growth of earnings you’re saying, right because obviously as we’re leasing up the units, it’s creating earnings. So where we are always talking about that is when we’re talking about same-store. We’re not saying you our earnings in our resi side is going down.
And Jamie, last quarter we gave you some numbers around the roll off of that low income agreement that we had there. So that is impacting our expenses this year right away. And I think we said last year that expenses probably up around $800,000. Just on the tax issue alone with that property.
But what about on the occupancy side?
Well, we’re going to have construction for another year. And so that’s going to be headwinds as there is noise in trucks and everything moving around. I think that’s stressful for the classic units that are there. And as we’re delivering these new buildings, we’ll continue to do it through a lease up phase. So far that’s going great and the demand has been good, we expect it to be good but it will take us certainly through the next year and then probably a few months after we’ve delivered the last -- we’ll be leasing all the way through as we’re delivering these units.
Our next questioner will be Rich Anderson with Mizuho Securities. Please go ahead.
Thanks. Came in and out of the queue a few times, I thought my question was answered, but I’ll maybe I’ll ask it in a different way. Jordan, you said individual billionaires buying smaller buildings that happen to live in the area. And I’m curious notwithstanding the comment about foreign capital what about for a transaction activity at the intermediate or larger buildings. It’s a more complicated market, difficult to get into get past the velvet rope, so to speak. I wonder if you worry about capital flows longer term just because it’s such a different market relative to others could be regulation, on taxes or building heights or whatever it is. Does it ever get to the point where capital from outside of the areas just gets scared away and doesn’t -- because when you have all these, you mentioned 10 assets purchased over the past 24 months, or with a seller in those transactions as well. So I'm just curious if you worry about that at all.
No. I mean, the best way to answer you is, no. There is a lot of bidders and interest and capital. Frankly, I wish we did scare them away more but we don’t and they are all there. I think what actually we’ve created is a lot of very big funds that feel they’re under allocated to LA, particularly the markets we’re in and that are fighting to get their piece of it so that they have an allocation. And they are making it -- I mean they’re very aggressive. And if it wasn’t for -- are very, very significant operating platform edge, we would really be struggling against them.
I think there is plenty of capital trying to -- especially when now that you’re going to the area of the more institutional buildings we’re buying, there is more than plenty like an overwhelming amount of capital available for those deals.
But you don’t think rising interest rates obviously impacts maybe the broader swath of the nation but maybe that you don’t see that having an impact right now on cap rates?
Well, I'm sure that rising interest rates will have some kind of impact on cap rates. But I think most of what impacts cap rates is people’s expectation for rent growth going forward that’s the giant thing. So you have a well occupied market and you think you’re going to continue to get good rent growth. It’s hard to notice the impact of interest rates in that, because people are buying all cash with very low leverage just like we are too.
So there is not -- and I don’t think very many of the people that are managing large pools of capital are looking very hard at their leverage returns anyway. They are mostly looking at the all cash IRRs. That still has to be compared to 10 year treasury, what kind of spread are your investors looking for over the 10 year treasury. So that’s still little bit meaningful, but it’s not nearly a strong factor as where people expect rents go going forward in terms of calculating new supply coming-in in a market, expansion of their tenants in it, the demand side, I think that’s the much larger numbers in the equation.
The next questioner will be Jed Reagan with Green Street Advisors. Please go ahead.
So with the multifamily revenue growth slowing a little bit here in the past couple of quarters. Just wondering if that’s all explained by the Hawaii dynamics you described or to what extent you’re seeing some slowdown in West LA fundamentals in the apartment side, also.
Well, as I said, I think in residential I think the growth has slowed down. We were doing 5%, 6% for a while certainly 5% plus, and now we're around 3% or maybe we’ll be a little above, little below. But we’re in that territory. Probably for many quarters now, I've been saying I don’t understand why we’re not at that number anyways that would be a more typical number to expect. I think that higher growth rates held up for much longer than I would have expected to it, I feel like we went it's like five or six years seeing 5% and 6% growth. When you have that kind of growth in residential, it’s very different from having it in office. And residential, a great portion of the portfolio you’re able to turn every year, you get it right away. So that's going to create extraordinary growth.
So then if you won't go between Hawaii and West LA, that's where you start talking about the noise that we're talking about, having an impact on that growth versus West LA, we don’t have that kind of thing going on. So you’re probably seeing a little stronger in West LA. But Hawaii has still been extremely good. I mean the only way to really evaluate how does the demand look in Hawaii is just a look at what we've been doing. I mean we brought those units that we’re almost leasing on as fast as we’re bringing them amount.
And so they’re leasing very quickly and we're getting above our pro forma. We've already told you it's over $5 a foot. I don’t think anyone in Hawaii thought that was going to happen when we went into this project. So those are very strong returns for that project.
The West LA change, I mean you chalked it on board to like a tick up in supply or maybe demand growth slowing down with jobs slow down, or what do you ascribe that to?
I don’t say tick up in supply, I'm not saying job slow down, I think jobs are tight. I think it’s just moving back to its mean or what it's history. We were just very high before. I think we were oddly high before. And what I would expect is three to four.
And there are no further questions. So this will conclude our question-and-answer session. I would now like to turn the conference back over to Jordan Kaplan for any closing remarks.
Well, thank you all for joining us and we look forward to speaking with you again next quarter.
And the conference has now concluded. Thank you for attending today's presentation. You many now disconnect.