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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 turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Thank you. Joining us on the call today are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Mona Gisler, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.
During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.
Although, we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material.
For a more detailed description of some potential risks, please refer to our SEC filings, which can be found on 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 excited about 2019, following a very successful 2018 at Douglas Emmett. During 2018, we grew our FFO by 12.7% and our AFFO by 7.4% and raised our dividend by 4%. This straight-line value of office leases signed during 2018 was 31% greater than the prior leases for the same space. And our development platform has matured to the point where it's making meaningful additions to FFO.
Already in 2019, we completed construction at our Moanalua apartment community, which now have almost 1,200 units. With the upgrades to our existing buildings and new amenities this is now one of the most modern and desirable workforce housing communities in Hawaii.
I'm also happy to report that construction is in full swing at our 34-story new residential project in Brentwood. We will soon complete our first group of our office repositioning projects and we are already seeing accelerated rent growth from our efforts. We plan to pursue more repositioning opportunities during 2019 and beyond, which will provide significant, incremental revenue growth and a very high return on our invested capital.
Finally, I am pleased to announce that we plan to add approximately 500 new workforce apartments in downtown Honolulu by converting a 25-story 490,000 square-foot office tower to for rent housing. This project will address the severe rental housing shortage in Honolulu and support the city's efforts to transform downtown into a 24-hour community.
I'd like to spend a moment talking about the quality of our FFO. As many of you know, we love to focus on cash flow. And are proud of the fact that compared to our peers, very little of our FFO comes from non-cash revenue such as FAS 141 and straight-line. Indeed at the midpoint of our guidance for 2019 only 3.5% of our FFO comes from these non-cash items. Because this is only one-third of what is typical for our peers, growth in our FFO translates to disproportionately higher cash flow.
Now, I'll turn the call over to Kevin.
Thanks, Jordan, and good morning, everyone. As Jordan said, we plan to convert one of our Honolulu office towers to much needed workforce housing. The conversion will occur in phases over a number of years as office space in the building is vacated. In select cases, we will relocate tenants to our other office buildings, although we do not have enough vacancy to accommodate all of them.
We currently estimate the construction cost will be between $80 million and $100 million, although the inherent uncertainties of development are compounded by the multi-year and phased nature of this conversion. Assuming timely approvals, we expect the first apartments to be delivered in 2020. Our other two multifamily development projects are also progressing well.
As Jordan mentioned, we completed the current Moanalua project just after year-end and continue to rent units above our pro forma. In Brentwood, we remain on track and on schedule for the construction of our 376-unit high-rise apartment tower, one of the most exceptional residential opportunities in all of West L.A. We expect to complete our 34-story residential tower in late 2021 with cost still estimated at between $180 million and $200 million.
At the same time, we're working on a 1-acre park that would benefit the entire neighborhood including our adjacent 400,000 square-foot office tower and 712-unit apartment community. While development is providing significant growth, in 2019 we also expect more acquisition opportunities in our submarkets. Our balance sheet is strong and our cash flows remain healthy with our AFFO payout ratio under 62%.
Other than our Moanalua development project, we have no loans maturing before 2022. And we have a large number of unencumbered properties to provide flexibility for future financings.
With that, I'll now turn the call over to Stewart.
Thanks, Kevin. Good morning, everyone. The fundamentals in our market remains solid with robust demand across diverse set of industries. As we have often discussed, new office construction in our submarkets is almost nonexistent. The entire construction pipeline represents only 50 basis points of existing supply. In Q4, we signed 183 office leases covering 683,000 square feet including 286,000 square feet of new leases.
We had excellent Q4 leasing spreads 26.3% for straight-line rent roll up and 12.7% for cash roll up. Lease rate for our total office portfolio increased to 91.7% and occupancy increased to 90.3% with meaningful additions in both Honolulu and Warner Center. For all of 2018, we achieved straight-line rent roll up of 31.4% and cash rent roll up of 13.6%.
On the sustainability front, we reduced our electrical usage per square foot by over 2%, our 11th consecutive year of lower consumption. Over 95% of our eligible office space is ENERGY STAR certified based on the most recent numbers. On the multifamily side, our portfolio remained fully leased at quarter end. In Santa Monica, we recaptured a total of 15 pre-1999 units in 2018. On average, each of these units represents about $40,000 of additional annualized rents.
Over the past year, we've increased our total annualized rent from the multifamily portfolio by 7.7% reflecting strong demand for our newly developed units at Moanalua and higher revenues from the rest of our multifamily portfolio.
I'll now turn the call over to Mona to discuss our results.
Thanks, Stuart. Good morning, everyone. We're pleased with our Q4 results. Compared to a year ago in the fourth quarter of 2018, we increased revenues by 8.2%. We increased FFO 7.8% to $102.8 million, or $0.52 per share. We increased AFFO 5.5% to $80.3 million. We increased our same-property cash NOI by 3.1%.
For all of 2018, we increased revenues by 8.5%. We increased FFO 12.7% to $399.7 million, or $2.02 per share. We increased AFFO 7.4% to $309.7 million. We increased our same property cash NOI by 3.5%. At only 4.5% of revenues, our G&A for the fourth quarter remains well below that of our benchmark group.
Finally, turning to guidance. As we indicated last quarter, we are facing two significant headwinds in 2019. First, our FFO guidance reflects the $0.05 per share non-cash reduction caused by lower straight-line and mark-to-market the revenue. As we convert non-cash revenue to cash, a straight-line and mark-to-market in 2019 will represent only 1.8% of our total revenues. This is well below the 5% average of our peers. Second, our FFO guidance reflects the new lease accounting standard requiring us to expense internal leasing cost.
Last quarter, we said that this new standard would have reduced FFO by approximately $0.04 per share had it applied to 2018. We now expect that impact to be only $0.02 per share in 2019 as a result of formalizing our internal leasing compensation structure. The combined impact of these two non-cash headwinds is a $0.07 per share reduction in FFO.
Fortunately, we expect that to be more than offset by 5% to 6% growth in same property cash NOI. As a result, we expect 2019 FFO to increase to between $2.07 and $2.13 per share. As usual, our guidance does not assume the impact of future acquisitions, dispositions or financing. 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.
We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alexander Goldfarb with the Sandler O'Neill. Please go ahead.
Good morning, out there.
Good morning.
So two questions – good morning, Jordan. So two questions first on the Bishop transaction, can you just walk through what the FFO impact of this will be? You guys presumably are going to slowly empty out office floors and then the residents won't move in the next year, but it seems to be a multi-year process. So from an earnings perspective what is included in 2019 guidance? And then how do we think about this as we're thinking about 2020 as far as an FFO whether it's neutral or negative not sure but looking for some perspective?
Well, so the way you described it is accurate. So for a quarter or too, we've actually already been stopped leasing and obviously there was some press about it in Hawaii. We're formally discussing it now. And so, the building had some vacancy in it already that we can start working on. And so we will start on that.
We're not asking tenants to move out. We're not vacating space. And we're trying to do it in the least disruptive way or manner by just converting floor by floor as floors become vacant. So, certainly, it will not be shock to the system by where we would empty the whole building, then build out the apartments and then say, okay, it was like a brand new project.
I am sure that there will be some noise in FFO over the next few years until we sort of stabilized both sides of this, the residential side and the office side. But it won't be as bad as it would have been if we had gone in that kind of more extreme direction. It's probably costing us a little more to do it floor by floor as opposed to sort of emptying it, then redoing it. But I think net, we're better off with how we're handling it. So I hope you won't see much of an impact.
Okay. And then the next question is, given your footprint and your tenant size, clearly, there have been a lot of other leases in the market like the Google lease the Westside Pavilion that have garnered a lot of attention. But you spoke about 4% to 5% or 4% to 6% same-store cash NOI. I think your embedded rent bumps are like 4%.
So do you feel like these bigger leases that are being signed elsewhere outside your portfolio are allowing you to drive that growth in your portfolio? Or is there a spillover that’s occurring from those tenants? Just trying to get a better sense for the transition or the reaction between some of these big headlines leases and the leasing that you guys are doing to see how much of an impact there is or is not?
Kevin, do want to answer that?
Yes. I think, Alex, a lot of this is tech companies but it's their media business and they're very focused on content production. And so, you should look at it as -- we did an informal study in the third quarter and the bigger companies brought like $26 billion production budget as far as we could tell, about half of that was Netflix.
So people like Apple, Google, Facebook, they're just getting in the game. And those production dollars are flowing directly to our small tenant base, so the agencies, the entertainment lawyers, the accountants of production companies. And so, the more money that's swashing around the system with these big leases and they are bringing big production budgets, that's all great for the tech media ecosystem. And we're a big piece of that, just not on the large tenant size.
Okay. Thank you.
Thanks Alex.
Our next question comes from Dave Rodgers with Baird. Please go ahead.
Yes. Good morning out there. Jordan, I wanted to follow up on one of the comments that you made in your prepared comments about the office repositionings getting ready to compete and starting to deliver here in the near-term. I think you used the term high ROI. Can you kind of dive a little bit deeper into some of that, now that you have some project completing and the confidence to go forward with more?
Yes. So as I said, we have projects a list of projects that were begun in 2018 and they're coming conclusion. And certainly enough to conclusion that you could see where it's headed. And obviously, people have watched the construction, what's going on.
If you would have asked a year ago, if you would have said to me, what's going to happen. I'd say, well, a lot of disruption at the buildings and aggravation with tenants. And then, once the thing is done, then we will have a better product and we ought to see some real movement in the rents.
But just like you guys on stock and tenants do when they see something happening, they jump at. And even though projects aren't finished, even though barriers are still up, but you could see pictures of what we're doing. It's clear what's happening, where we’re reskinning a building, et cetera. You could see where you're headed with it.
We are already seeing rents disproportionately move up in those building are kind of Canary in this thing because it's hard -- because rents are generally moving up, so how much are you going to credit what you're doing with that move-up.
So our Canary has been a project over in Century City where we feel like we have a direct comp on the project right next door to us. We’re reskinning the building, redoing the lobby, redoing the landscaping, redoing the amenity package that’s around the building and all the whole thing. And trying to take it even a step beyond what's next to us.
We were seeing a rent spread in those two deals that was certainly over a $1. And so we thought well wherever rents go, if we can start closing that spread, we'll have a feel for what the impact of what we're doing is.
Well, we feel we've already closed more than half of that gap. And by the way still barriers, constructions, it might little past midpoint. And we're seeing similar to the degree you could calculate it, similar results in some of the other buildings that we're working on down in Santa Monica and over in West. So, because of that, we're saying wow hopefully, we'll have the impact we expected and certainly the impact is a little quicker than we would have expected because people are moving on the expectation of completion, they are not waiting for completion. And that's why I said -- I was confident this was going to work and I am even more confident it's going to work now.
I appreciate the color. May be just one follow-up on that front is, did that program get larger the, given the success that you're having, do you feel like you can accelerate it, put more work more quickly?
Well, I guess, we could if he didn't have so many other things, so we're not only doing that program, but as you also know we're doing ground up construction at a couple of sites. We're doing the conversion in Hawaii; we're doing the groundwork where we just polished off MHA. So -- and of course we're doing Brentwood. So we have that and currently seven repositioning sites and adding additional repositioning sites during 2019.
So, we don't want to overload our system, but at the same time, we are -- we've done a good job. Ken and his group has done a good job. A building that's just turned out to be robust enough to take on all of this and we have a ton of construction going on in this company right now. And we're getting it done, getting it on budget, we're getting the impact we want. So, that's all great.
So, I don't want -- we don't want to like push it right over the cliff. So, we have a lot going on. Certainly, it's valuable work that's very impactful. So, we're going to keep trying to build that platform out larger and larger to be able to do even more. But we're probably at the right point right now in terms of the size and number of things that we take on each year.
All right. Thanks Jordan.
Thanks.
Our next question comes from Nick Yulico with Scotiabank. Please go ahead.
Thanks. Just hoping to get a little bit more info on the same-store NOI growth guidance. It looks like you're forecasting occupancy being somewhat flat and so I'm not sure if there is a same-store expense growth benefit this year since I know higher expenses impacted growth in a negative way last year?
Yes, so I'll take -- hi, Nick, I'll take both of the pieces of that. I think I heard a question about the same-store NOI as well as what the occupancy impact is going to be in that given that our range is consistent with last year. On the occupancy side, we thought about 3 million square feet over the last couple of years. And those acquisitions came with lower occupancy in it. It just takes a few years for us to get that stabilized. But we're making good progress there. And we still have upside too. And we can see that on the Westside, as we kind of filter through those new acquisitions. And then, we're obviously aware of upside at Warner Center and then in Honolulu, which Jordan just talked about what our approach is there.
On the same-store NOI side, I talked a little bit about the impact of our non-cash revenue. We have historically always had fairly low non-cash revenue, particularly compared to our peers. But over the last couple of years with our acquisitions we've seen an increase in the amount of our non-cash revenue plus we had some larger yields and so that's driven that up as well. As those start to mature, we're going to see that reduction in 2019. But it also means opportunities as it converts to cash.
Okay. And then just I guess just following-up on that. Is it possible to get to what is the same-store expense growth that's embedded within your same-store NOI growth? Because it just feels like that's one of the drivers of why same-store NOI growth is higher this year versus last year when you did have that expense issue impact same-store?
We don't typically provide guidance on -- separately for the expenses. We're looking at our operating expenses just generally though. I think historically, we’ve always said we look to a normalized rate of 3% to 4%. I think that would be our expectations heading into a 2019 as well.
I don't Nick – I don't think it's really coming out of the expense side. I just have to tell you. I think it's coming on with the roll-up you're seeing, right which we've been telling every quarter that impact rolling in and rolling in at the same time as we're rolling out the non-cash items. And even now you look at the occupancy number and you go wow how come we're not changing that? How come it's still the same range? There's a lot of churn in that range and remember the Westside – if you go back away. So Westside was kind of our big anchor, that 95%, 96%, and then it held up the numbers on Warner Center and on Hawaii.
And now, we have that churn on the Westside, so it's taking a little longer to create the lift again to get back to its number. So you get the upside in the Westside. We think we got real upside in the Hawaii side, right, because you know what we're doing there. And even Warner Center has been – the market has been outstripping us. So I would not be surprised to see the same-store where it is. Because we've churned through all that stuff and we know the roll-up we've been having in the rents.
Okay. Thanks. Appreciate it.
Our next question comes from Jamie Feldman with Bank of America. Please go ahead.
Great. Thank you. I wanted to talk about both I guess for Kevin, just you mentioned maybe an uptick in potential investment activity. What you were seeing on the acquisition side? And then also just your capital plan for the year. How you plan to finance additional acquisitions and also all the redevelopments spend?
Sure. Look the acquisition pipeline looks pretty good. There should be more opportunities in 2019, and there's a couple of things that are going to be coming out, I think towards the end of this the quarter that we are excited about. So I'm fairly bullish on 2019 in the acquisition platform. I mean, Jordan, do want to add on?
Yeah. So, I just don't want to have like -- bullish on acquisition platform means bullish compared to not the times when black is almost selling, not the whole things. So compared to other times, not those times, right, because those were kind of -- there's a crazy amount of flow during that time.
Now if you want to compare acquisition pipeline in 2019 to acquisition pipeline in 2018, that's a very low bar since got them half. So we are bullish from that perspective.
In terms of the capital plan, we actually have -- I mean, not only -- and we're doing a good job. We have a lot of free cash flow coming out of the operations. You heard in Kevin's section on the prepared remarks, less than 62% of our AFFO is being dividend out, which actually leaves a pretty substantial amount of money for the construction activities that we're doing. And so, that is so close to covering it that it wouldn't be meaningful to look at something beyond that.
In terms of new acquisitions, we still have all of the optionality around the JV platform and all that structuring. So it just seems like the problem on capital, we need some good deals to come up and get them purchased. And I'm sure we won't go two years. I'm sure this year, we will do some deals, which we'll feel great for all of us because we like doing.
That side of our growth story has always been important to us. But we are now leaning in the direction of the construction side to make sure that we're able to maintain the kind of growth that we'd seen over the last decade in our cash flow, our AFFO, whatever metric you happen to look at.
Okay. And what are your thoughts on leverage by year-end?
I don't know that you'll see dramatic changes in leverage between year beginning and year end. I mean, we have one refi we need to do, which we'll do in some way, and that's it. That's on a building where we doubled the number. It's a more MHA one, and we've doubled the number of units. The cash flow is going to better than double. And the loan on there probably equates to 25% or 30% or 20% of EV, something crazy, because we did the whole thing with cash flow. So it's still just the original loan on there.
Okay. And then just to follow-up on the acquisition activity. Is this in your existing submarkets, office versus residential? Just what's kind of the -- of what you could see? I know you said it's -- you're coming off a low base in 2018, but just if you -- well, you could see, how does it change the complexion of the portfolio?
Same markets. There's a little bit of office. I mean, there's office and a little bit of residential and same markets we're in.
Okay, all right. Thank you.
Our next question comes from John Guinee with Stifel. Please go ahead.
Great. Thank you very much. This is more of a curiosity question, but two questions. First on Brentwood, it looks like your incremental cost is about $500,000 a unit. How should people think of the value of the land for the Brentwood high-rise development? That's one question.
And then, second, Bishop Street in Honolulu. These are 20,000 square-foot floor plates. Looks like you're going to spend an incremental $180,000 per unit to do this master redevelopment. How do you handle such things as elevator banks? I imagine you can't have residential and office users sharing the same elevator bank. And do either of these projects have affordable housing units involved?
Okay. So Brentwood, I will tell you how you should think about though -- if you're trying to do a kind of academic study on the cost of building a high-rise residential tower on the Westside, you would try to impute some cost of land. But in terms of practically looking at it, the land has as close to a zero cost as you can get. I mean, we're building on surface park. We had a supermarket that gave up their option -- or might have accidentally lost their option to continue at a very reasonable rate for them. And so, we took that, which was not a big in terms of square footage and a surface parking lot and we're now building an entire residential apartment tower.
So the cost of land is close to zero, and we have some incremental value we're getting out of the fact that the parking is already built for the entire project, although it's not cheap to go three, four layers of parking to build a tower. So I don't feel like the land is costing us anything. And by the way, if we weren't doing this the land would just still be sitting there doing nothing. In terms of -- and in terms of -- I think there's 16 units of controlled housing, right -- affordable housing in the Brentwood project out of 376. And the MHA -- no, you're asking about the other one. You're asking about 1132 Bishop.
At 1132 Bishop, our goal is to build housing that will fit in that 80% to 120%, I mean, regardless of anything else, because changing the nature of that downtown, creating what I'll call with a small W, not capital workforce housing, so that commuting patterns, 24-hour community down there, whether it be restaurants and other amenities change, that's something we're after on that. So our hope is that, that entire building fits within that range, that 80% to 120%, in terms of the people occupying those units and their rental rates.
Let me just ask one little follow-up question. So how do you share elevator banks during the conversion?
You know what, there is -- it's so tricky because -- and I'm not the -- no one on this call the right person to really hit this subject. But they have to come up with vertical shafts that allow them to provide, whether it would be utilities and other things for assistance to support the residential floors while at the same time not disrupting the office floors. And I know that, that -- I mean, probably the primary reason that we -- there was so much discussion of this project and we weren't announcing it, is the chore of figuring out a way that was actually buildable and doable to put in the residential floors and at the same time, keep the office floors working was what has been holding for our confidence in doing this. As well as -- and I have to have a appreciation for the city and particularly the mayor's office support in allowing us to do what needs to be done to get this conversion done. I mean, they played a role on it too, but with those two things that held us up from announcing this maybe like a quarter or two ago
Great. Thank you.
Thanks.
Our next question comes from Blaine Heck with Wells Fargo. Please go ahead.
Thanks. Just following up on same-store from earlier. Do you guys have a GAAP same-store NOI guidance range for 2019? I guess I'm just trying to triangulate how much of a tailwind the burn-off of free rent or just in general the change in straight line is providing for cash same-store versus maybe what you would be expecting on a GAAP same-store basis?
Yes, we haven't provided guidance on the GAAP same-store.
Yes, frankly. But we did provide guidance on a burn off of the non-cash. So, you can kind of reverse engineer your way into some of that, but -- and as we said I mean they're non -- the portion of our revenue, so we gave you two steps, right. The amount of our FFO that non-cash makes up now which is out of that less than 3.5%. And then we also gave you on the revenue side the 1.8% of our revenue. So, it's playing a smaller role. And as non-cash plays a smaller role you know that GAAP and cash closing in on each other, but there's other stuff that’s in there. I mean--
I guess the question -- most of that burn off is in the same-store numbers. Is that right?
We floated through -- what we did do for you is because we were giving you the revenue number and we have consolidated properties on our balance sheet and those consolidated properties it would have been hard for you to flow the non-cash from the revenue side and figure out the impact to the FFO side to our shareholders. We also give you the FFO numbers. So, we unwound that for you. I don't know that we did -- I mean that is the version we did.
Yes, we can follow-up. I can figure it out. I guess secondly Jordan you talked about cash flow in your remarks and you guys added a slide in the presentation showing that you guys have had an AFFO growth rate at 7.2% CAGR over the last 12 years which is certainly impressive.
When you look forward are there any specific risks you see that could keep you guys from hitting that level of growth over the next few years? Do you think given how tight the market is that still an achievable number?
Well, I hope it's achievable. I will tell you this. The history -- and I don't want sound like broken record, but our history has been to grow our earnings, primarily through acquisitions and obviously, we have the operating platform that supported us and all the leasing and all the stuff we've done there.
We looked a few years ago and said how can we make our growth -- our external growth more reliable and predictable. And because of the position we have in many of these markets we have opportunities that literally nobody else have. And so we started this construction and we developed ground-up construction and redevelopment platform from all that.
And I have to say I feel if you look out the next five years, six years, seven is whatever your time frame is that our growth that we can drive that we control right because before it was kind of I hope something is for sale, may hope we get it. I don't know if it will be for sale now this is all stuff that is within our control. It actually feels more predictable more reliable than it has been for right you're looking at lower last 12 years.
That's helpful. Thanks.
Our next question comes from Manny Korchman with Citi. Please go ahead.
Hi Manny.
Kevin, in the past, when we’ve talked about Hawaii in the past you guys talked about potentially buying another office building to either convert or to have as sort of overflow space for the tenants that are going to get relocated. Can you talk about what changed in that plan? Or is that still on the table?
What really changed in that plan was when we first set out we didn't have the results in our Moanalua development yet. And so we were thinking that when we did the resi development we weren't sure what the returns would be? And so that we would need incremental office space and vacancy to make the deal work and then as we finished that first phase in Moanalua and we saw the rental rates that we were achieving, we looked at it and said hey, maybe this works on a stand-alone basis.
And as we looked at the properties within the downtown, we figured out that the one that was most suitable for redevelopment was actually one that we control. And so, we just took a look at it and said hey, what if we do this in a stand-alone basis? What's the impact to our overall portfolio? And what would be the potential return on cost?
That's not to say that if one of the other office buildings came available that we wouldn't do it because we'll see how this impacts the downtown market, but we didn't need that additional office building to make the development work, so we decided to go forward.
Thanks. And Mona just following up on the lease accounting changes, maybe I just don’t understand what changed from the $0.02 to $0.04 you mentioned changes in compensation? Is that all sort of accounting-driven or is it going to actually cash impact in any of that?
Well probably a little bit of a combination on that, let me explain so when we had given you the original $0.04 guidance that was based on the 2018 leasing cost and looking ahead with an assumption that most of that was going to be expensed.
But we've always had linkage to our leasing and our compensation. What we did is we went back and formalized that compensation structure. And in our linking that directly to being paying by transaction, we've actually been able to -- we will be able to capitalize more than we had initially thought and that’s equating to the $0.02.
I don't think it’s the cash side there, just the average really. It’s just we took what we did in the past and by putting the memo I'm saying, okay we are formally doing this based that already we can capitalize $0.02 or the $0.04. That's all we have.
Thanks.
Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.
Hey guys. May be just a follow-up on the downtown conversion, kind of what do you guys thinking is the return on the incremental spend their? And maybe you guys kind of down stand-alone basis what kind of rent uplift do you flow through to the rest of the office portfolio with the pullback in stock?
Well, originally as Kevin said, I was worried that the return on the residential side would be below development returns. I think now, we're probably at the low end of development returns which is acceptable because we have larger goal we want to achieve downtown. But it's going to be at the low end of development returns.
Now as we start planting out just like we were surprised when MHA we hope to get a positive surprise on that, but that's where we're at today. In terms of the rest of the market, I'm sure there'll be some impact on the rest of the market. There's other things going on. There is another big tenant that moved it and took a 100,000 feet in the market. There's a very large tenant that looking to consolidate downtown. And then there's what we're doing.
So there's a number of positive things happening in the market. Rents are moving. I think it would be fair to say there's double-digit movement in rent in Downtown Honolulu now. Where that goes and how's that goes is a function of all those things. So it's going to be a little -- it's going to take a little bit of time to put a real prediction on it.
And then, just on the occupancy guidance. I know there are some puts and takes, but I guess just looking at the expiration schedule for 2019, it's a little bit lower than the next couple of years out. You guys have kind of held new leasing pretty steady. I mean is there something that – a larger tenant may be that’s coming out later in the year, that's keeping it seemingly more conservative? Or do you guys just -- I would think there'd be a decent amount of net absorption over the next couple of quarters, just given the lower lease hold?
Well, there is churn, and a churn and renewal and the whole thing. I think that until we get – well, I don't know. I think we made a reasonable -- we gave you a reasonable estimate. That estimate is a range. And frankly on a portfolio of our size, if you go to the higher end of our range, you have a pretty good amount of absorption, right?
So we gave a range. It's likely you'll see some good absorption in Honolulu. We're already seeing absorption in Warner Center. And as we churn through the new product that we purchased in the Westside, we got to see something there too.
But you know what, that's a matter on the Westside in particular, because that's the dog. I mean, these other ones are the tail. And as we churn through and maybe you're seeing how strong our rent roll up is. And when you have a lot of -- really significant roll up on rents and you just bought 3 million feet, some of those tenants maybe aren't as ready for that roll up, right?
So you have a little more churn in that portfolio then you would otherwise have. And that's been kind of gating to the Westside, being kind of the rock that's held our occupancy up more to the 95s and plus and dragging up the others. And until we kind of settle that in, I don't think the Westside will be able to do that. Now maybe we'll get of that settled this year, but there might even still be some leftovers the next year.
Yeah. That’s helpful. Thanks.
Our next question comes from Daniel Ismail with Green Street Advisors. Please go ahead.
Great. Thanks. Good morning, guys. Just a follow up on the rent roll up. So it's been fairly consistent in the low teens, call it, the past two years. Is that still pretty good betting line for the overall rent roll up embedded currently in the portfolio?
Hi, Daniel. We don't provide guidance on the rent spreads. It's very hard to predict. As you know, its choppy quarter-to-quarter, but we have seen very good trends there. We don't see any signs of those rents softening. So we expect still good rent going forward, but we're not going to give any specific guidance.
Okay. Fair enough. So maybe just going back to an earlier comments on Santa Monica resi. I think you mentioned 15 units captured from the pre-1999 apartments. Can you remind us how many of those apartments are still left? And sort of the pace of recapture annually?
Yes. There's about 200 left in Santa Monica. Last couple of years, we've gotten about 15 back each year.
And no expectations for change in place over 2019 or 2020?
Very hard to predict.
Yes. Very hard to predict. The tenant has an incredible deal, right? But at the same time, we've been in the space for super long time. So they are older. There is more opportunity for the life circumstances to change, whether it'd be getting married or so many kids who live there, whatever the case maybe. So in one sense the longer the program goes, the more you think it turned in. In another sense, the longer the program goes the better the deal they have and more motivation they have not to move out. So those two should bounce in our favor eventually, but it's hard to predict.
Fair enough. Thanks guys.
Our next question comes from Jason Green with Evercore. Please go ahead.
Good morning. Can you guys talk about what changes there may have been this is the same-store question to same-store pool? If they where increases or decreases what the comparable occupancy was in fiscal year 2018?
Yeah. Sure. So for the pool for 2019, we are adding properties for the pool for 2019. What we wanted to do is make – have that pool represent as many of the properties in the portfolio as possible to really represent the whole portfolio. So for 2019, we're going to be adding, a recent consolidated JV acquisitions as those have matured. Also some of the too conservative in taking some of the repositioning projects out last year. Those are really been creating less noise in vacating than we expected. So those – some of those are coming to the pool. So the pool is going from about 11.8 million feet-up to about 15.3 million feet next year and it much better represent our overall portfolio.
Got it. And are you able to say what occupancy was on that new pool for fiscal year 2018?
No. I don't know typically on that pool, the difference in occupancy. No. I mean, you know that we're putting in all the stuff that we bought two years ago, right and which he brought a very low occupancy, so that's been just slowly working its way up. And I just felt last year, we did ourselves a real good services in terms of representing the growth in that portfolio and the growth in our markets. And I said, let's be pushy this year about getting as much into that pool as we can. And that was a very big shift for us.
Got it. And then maybe broadly, if you could just talk about the effect, the repositioning of 1132 Bishop is going to have not on the multi-family market, but on the vacancy in office market in Honolulu?
Well, the building itself represents about 10% of the market. And the market is in mid-to-low 80s. So the math never works that way. People move in and out of the market. Changed amenities might draw people in and who knows. But it will have a – it will create, for sure, a more balanced market between, kind of the landlords and tenants where the market has historically had you might say, one building too many. So that's – and that's another good goal of this project, but -- it's positive for the whole market.
Got it. Thanks very much.
[Operator Instructions] Our next question is a follow-up from Jamie Feldman with Bank of America. Please go ahead.
Great. Thanks. What's the percent lease currently at Mauna Loa?
We think it's about half the units.
About half. And then in your guidance what do you assume for leasing up the rest? Is it occupied? Is it contributing the half?
Correct, correct. Yeah, occupied. We haven't provided any kind of lease-up guidance or timing on what we're leasing up. We're leasing up at a good clip, and we hope that continues throughout the year, but haven't broken out any events for that.
Okay. And then what do you -- across the portfolio, what would you say your average rent bumps are right now? And what are you thinking for rent growth this year -- market rent growth?
Average rent bumps on the office side you want to know, right?
Yeah.
So the average in-place is somewhere between 3% and 3.5%, I'd say. For the last few years, we've been getting very good rent bumps. All the deals on the Westside are going out over 3%. It's a lot of 4s, a lot of 3.5s. We're getting a lot of 3.5s in Sherman Oaks/Encino as well. Honolulu and Warner Center are still down at the 3% range. So we balance that all out, I think, in-place is somewhere between 3% and 3.5%.
On the rent growth -- do you want to comment on just market rent growth?
Well, if you look at occupancy across the market, you would think that we would continue to have pretty good rent growth into the next few year. And I don't know -- I mean, the thing that will not -- look, there's only two sides to that equation, which is supply, and there's not really any supply coming on. And the demand side, the industries that are in our markets and there they would be impacted by something national. They are not being impacted by anything here. I mean, here, they are generally just growing. So that would just add pressure and continue to move rents the way they have been moving.
Okay, all right. And on new leases, you'd say 3% to 3.5% average too on the rent bumps across the portfolio?
On new leases, we're doing better than that.
Yeah. We're probably doing 3.5% to 4%.
Yeah, the Westside's a lot of 4s. And then we're doing 3.5s and 4s in Sherman Oaks/Encino as well. So on new…
So the weight is to the upper end.
Yeah, the weight is to the upper end on the new, but the overall in-place would be probably between 3% and 3.5%.
Okay, all right. Thank you.
Thanks.
This now concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.
Well, thank you, everyone, for joining us, and we look forward to speaking with you again next quarter
The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect.