Nov 5, 2008
Executives
Mary Jensen - VP Jordan Kaplan - President and CEO Bill Kamer - CFO
Analysts
Anthony Paolone - JPMorgan Ian Weissman - Merrill Lynch John Guinee - Stifel Nicolaus Michael Knott - Green Street Advisors Chris Haley - Wachovia Capital Markets Michael Bilerman - Citi Rich Anderson - BMO Capital Markets Jamie Feldman - UBS Mitch Germain - Bank of America.
Operator
Welcome to Douglas Emmett 2008 third quarter Earnings Call. Today's call is being recorded.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow management's prepared remarks.
At that time instructions will be provided to queue up for questions. I'll now like to turn the conference over to Mary Jensen, Vice President of Investor Relations for Douglas Emmett.
Please proceed.
Mary Jensen
Thank you. With us today are Mr.
Jordan Kaplan, President and Chief Executive Officer and Mr. Bill Kamer, Chief Financial Officer.
Please note that this call is being webcast live on our website and will be available for replay for the next 90 days and by phone for the next seven days. Our press release and supplemental package has been filed on Form 8-K with the SEC and those are also available on our website.
During the course of this call, management will be making forward-looking statement. We caution investors that you any forward-looking statements are based on the beliefs of, assumptions made by and information currently available to us.
The actual outcome will be affected by known and unknown risks, trends and uncertainties and factors that are beyond our control or ability to predict. But we believe that our assumptions are reasonable, they are not guarantee of future performance and some will be negatively prove to be incorrect.
As a result, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of these risks, please refer to the company's press release and the current SEC filings, which can be accessed in the Investor Relations section of the Douglas Emmett website at www.douglasemmett.com.
Please know that the market data sources that referenced in management's prepared remarks are CB Richard Ellis for the Honolulu and Los Angeles office market, REIT for the Los Angeles office market, MTF Research for the Los Angeles multifamily market and Property & Portfolio research for Honolulu multifamily market With that, I would like to turn the call over to Jordan Kaplan, President and CEO of Douglas Emmett.
Jordan Kaplan
I would like to begin with a short summary of the opportunities developing in our markets and the company's current operating position. Bill will then provide a more detailed account of our third quarter financial and operating results.
To state the obvious, the condition of our global economy and financial markets are dramatically different today from last quarter. Declines in consumer spending and tourism, constrained credit availability, slowing international trade, and the overall pessimistic business climate in our country will most definitely have an adverse effect on our business.
While these substantial negative forces will not leave us unscarred, we believe that we are well positioned to resist the downward pressure. The uncertainty and fear dominating our nation's financial landscape is a comfortable operating environment for Douglas Emmett.
We feel that the greatest acquisition opportunities usually arise during these times and that strong real estate operating platforms are appropriately rewarded. For example, during the early to mid 90s when capital for commercial real estate was also highly constrained, Douglas Emmett seized many extraordinary real estate opportunities that today form the core of our portfolio.
We believe that this new period of financial distress will once again provide us with opportunities to substantially enhance our portfolio at very attractive long-term pricing. As you may know, in recent months, we have been highly focused on raising an intuitional close end fund, to increase our capital availability, without putting too much stress on our balance sheet.
The initial closing of Douglas Emmett Fund X was on October 7 and the six office properties that we acquired in March, were contributive to the fund on October 29. The fund commences with $300 million equity commitments, which includes the company’s $150 million commitment.
The first closing is particularly gratifying, since that occurred in October, the capital markets worse month in decades. As previously announced the fund is expected to range in size from $509 to $1 billion in equity commitments.
We believe that we are on track to reach that goal. The fund will be focused on opportunities within our core markets using the same disciplined underwriting and leverage principles that have governed acquisitions at Douglas Emmett for more than 20 years.
It will be the company’s exclusive investment vehicle and will have an investment period of up four years followed by the value creation period of up to ten years. In addition, to the capital available through the fund our $370 million credit line was a further source of substantial liquidity.
Our credit line had approximately $40 million outstanding as of October 31, and its maturity date can be extended to October 2011. We also have no term debt maturing until June 2012.
Interest on all of our term debt is effectively fixed by swaps to an average rate of approximately 5.14%. Douglas Emmett’s core business strategy is designed to both maximize the trend in an up-cycle and to be resilient in a down cycle.
We own many of the highest quality properties, concentrated in the strongest and most desirable submarkets in Los Angeles and Honolulu. We have a highly diversified tenant base of over 2,000 office leases, representing a broad mix of vibrant industries.
Tenant diversification provides us with a consistent lease expiration schedule during the next five years. Large size tenant expirations can be damaging in a soft market.
Our smallest size tenant base is resilient to downsizing and has historically maintained high renewal rates. While we do have a few relatively large near-term these expirations, generally they are with small tenants.
For example, we have 448 leases averaging less than 4,000 square feet, due to expire in 2009. Our submarket and tenant diversification strategy has proven to be effective in prior downturns.
At the bottom of the last cycle, rental rates within Douglas Emmett submarkets were over 30% higher than the other Los Angeles submarkets. Occupancies within our portfolio also remained relatively high.
While history does not predict the future, there are reasons to suggest that this down cycle may be milder in our markets than previous market declines. Over the last 30 years all prior market declines had been accompanied by two dominating factors.
A significant amount of new supply and the collapse of an industry with a major presence in the Los Angeles office market. In the early 90s, the aerospace industry contracted following the end of the cold war.
In the early 2000s, we had the dot-com but today they’re very different. Almost no new office supply was delivered in our submarkets during the last several years.
Nor is there any significant amount of new space coming online in the foreseeable future. While the contraction of the nation’s financial industry will have some modest impact on tenant demand in our markets, unlike New York or Charlotte, we do not have large financial tenants that are drastically downsizing.
Los Angeles continues to maintain its diverse economic base including the growing entertainment industry, a robust healthcare sector, a strong university system, and international trade in the developing Asian markets. The recent housing declines in California, which are concentrated in the outlined portions of the county and the related unemployment from the construction industry, have a very marginal impact on office demand in the submarkets where we operate.
This is a time, when the expertise and experience of our operating management group and leasing team is most evident. I should note that as a result of M&A activity in recent years, there are not many real-estate companies with integrated operating platforms left in our market.
We feel that having one of the few, remaining, and seasoned management groups will provide us with a tremendous competitive advantage in running our portfolio and in buying properties within our core markets. Now, I'd like to turn the call over to Bill Kamer, who will provide specific details on our third quarter operating results.
Bill Kamer
Thank you, Jordan. For the third quarter the company reported FFO of $51.1 million or $0.33 per diluted share, an increase of 9.6% compared to the third quarter of 2007.
For the third quarter the company's AFFO was $36.8 million, an increase of 30.8% compared to the third quarter of 2007. Year-to-date, the company reported FFO of $156.1 million or $1 per diluted share, an increase of 10.1% compared to the same period in 2007.
Year-to-date, the company's AFFO was $110.9 million, an increase of 26%, compared to the same period in 2007. Our same property results for the third quarter continued to be strong.
Same-property net operating income increased 4% on a GAAP basis and 9.2% on a cash basis. Same-property total revenues increased 2.4% on a GAAP basis and 5.5% on a cash basis.
Breaking out the office and multifamily portfolios; same-property office revenues increased 3.1% on a GAAP basis and 5.6% on a cash basis. Same-property multifamily revenues decreased 1.8% on a GAAP basis and increased 4.4% on a cash basis.
As we discussed last quarter, the GAAP decrease is due to a decline of approximately $1 million in FAS 141 income. This decline resulted from the second quarter expiration of approximately half of the multifamily FAS 141 amortization that commenced at the time of our IPO.
FAS 141 multifamily income should total slightly less than $900,000 in the fourth quarter. Moving away from same-property statistics, total revenues for our entire portfolio increased 15.7% to $153.2 million in the third quarter 2008, compared to the third quarter 2007.
Office rental revenues increased 19.2% year-over-year to $112.8 million in the third quarter. Office parking and other income rose 21% year-over-year in the third quarter as a result of higher rates in validations.
Our total FAS 141 income for the third quarter was approximately $10.6 million. On the expense side, for the three months ending September 30th, office operating expenses increased 17.1% compared to the third quarter of 2007.
Multifamily operating expenses for the third quarter were $4.2 million and G&A in the third quarter totaled $5.2 million. Interest expense in the third quarter of 2008 increased to $52.6 million from $41.5 million in the third quarter of 2007.
The increase is primarily explained by the new loan that we obtained in 2008. In addition, the non-cash amortization of our pre-IPO swaps totaled $5.6 million in the third quarter compared to $3.4 million in the third quarter of 2007.
We expect that we will continue to have significant volatility in our quarterly swap-amortization interest expense until pre-IPO swaps are amortized to zero. If the pre-IPO swaps were amortized on a straight line basis, the amount would be approximately $4.6 million per quarter going forward.
Recurring capital expenditures average $0.32 per square foot year-to-date and $0.12 per square foot for the third quarter. Recurring multi-family capital expenditures average $293 per unit year-to-date and $101 per unit for the third quarter ended September 30.
We are still estimating that annual recurring capital expenditures for office portfolio in 2008, will approach $0.50 per square foot. However, we now estimate that annual recurring capital expenditures for multifamily portfolio in 2008 will be less than $500 per unit versus the previously estimated $600 per unit.
Now I would like to turn to our debt position. The Company has focused debt financing strategy for many years.
We have avoided securitized loans preferring instead to develop and maintain ongoing relationships with lenders in the bank and insurance companies syndicated market. The company typically obtains non-recourse loans at LIBOR floating interest rates, which we fix with swap.
Our loans provide considerable financing flexibility and generally we make pre-pay loans with little or no additional cost and without the fees [and yearly] maintenance. We do not have any ongoing financial covenants in our loan documents.
We do not have any corporate level debt and thus do not have the covenants and other restrictions that typically accompany corporate debt. In August, we obtained a non-recourse five year secured term loan for an amount of $365 million to replace the bridge loan we obtained when we acquired the six office properties back in March.
The term loan bears interest at a floating rate equal to LIBOR plus 165 basis points. Interest rate swap contract effectively fix the rate at 5.15% in the first four years.
Our financing request was substantially over subscribed at this favorable pricing by nine different lenders including a few lenders with whom we have not done business previously. Clearly, the financing market has tightened considerably in the past month.
However, we continue to maintain excellent relationships with our lenders, which positions us well for future financing. As we previously announced we have transferred the $365 million loan to the fund in connection with our recent property contribution.
To reiterate Jordan’s earlier remarks, none of the company's current term loan debt matures until 2012 and the interest rate on that debt is fixed by interest rate swaps at an average rate of approximately 5.14%. The company's owned other loan obligations are $375 million secured revolving credit facility, whose maturity can be extended by the company until October 30, 2011 and $18 million secured acquisition loan whose maturity can be extended by the company until March 1, 2011.
Turning to the operational side. Within the ten submarkets where Douglas Emmett office properties are located, the percent leased declined sequentially by approximately 30 basis points to 91.3%.
Rents within the ten submarkets where our office properties are located increased 1.6% from the second quarter. During the third quarter, we entered into approximately 115 new and renewal office lease transactions, totaling approximately [514,800] square feet of office space, up from 396,000 square feet in the second quarter of 2008.
Our office portfolio was 94% leased at September 30th, down 80 basis points sequentially and was 93.3% occupied, down 50 basis points sequentially. Our multifamily portfolio was 99.6% leased at September 30, which was up 40 basis points sequentially, and up 30 basis points year-over-year.
Our office tenant improvements, leasing commissions and other capitalized leasing costs during the third quarter, totaled $14.30 per square foot compared to $13.66 per square foot for the second quarter of 2008 and compared to $19.05 in the third quarter of 2007. Our mark-to-market and rent roll-up metrics have declined, but remain at healthy levels.
On a mark-to-market basis, the spread between our in-place cash rents and our asking starting rent was 28.8%, down from 27.7% in the second quarter and down from 37.2% at the end of the third quarter of 2007. On a straight line basis, the average rent from expiring leases compared to the average rent from new leases signed for the same space in the third quarter 2008 was 37.5%, down from 43.4% in the second quarter and down from 53.1% in the third quarter of 2007.
On a cash basis, the ending cash rent from expiring leases compared to the beginning cash rent from new leases signed for the same space, decreased to 20.1%, down from 26.8% in the second quarter and down from 29.7% in the third quarter of 2007. Before I conclude with an update on 2008 guidance, I would like to address an issue that has received some recent scrutiny in the REIT industry, margin stock.
As many of you know, the executive officers at Douglas Emmett own a significant portion of its stock. None of the Douglas Emmett stock owned by our executives is margined or pledged to securities for loan.
Now turning to guidance. We are providing a fourth quarter guidance range of between $0.32 and $0.34.
As a result, our full year 2008 FFO guidance range has been raised to between $1.32 and $1.34 per diluted share. The previous 2008 FFO guidance range was $1.30 to $1.32 per diluted share.
This guidance excludes any impact from future acquisitions, dispositions, additional equity purchases, debt financings, recapitalization or similar matters. With that, I will turn the call over to the operator, so that we may take your questions.
Anthony Paolone - JPMorgan
Thank you. Can you talk about your sequential occupancy declines in Santa Monica in Beverly Hills in the quarter and what may have driven that?
Bill Kamer
Sure, Tony. This is Bill.
The main driver in the occupancy decline really is the portfolio, but it will happen to be in Santa Monica, was that we had a long scheduled move out of a 62,000 foot tenant in Santa Monica. We back-filled 22,000 feet of that and the remaining 40,000 feet, which we just got back in September, we’re now remarketing that.
We’re taking one of the floors and we’re out what we call spec suites, and I think some other companies call as build suites, which is a product that is very attractive in Santa Monica. The other floor, we’re actively marking for full floor tenant.
This is part of the trend that we've been moving the portfolio and particularly in the submarkets like Santa Monica, of moving from relatively larger tenants to smaller tenants. From a timing standpoint, we wind up with the 40,000 feet that were not leased, as of the end of the quarter.
That that counts for the entirety of the decline in Santa Monica, as the big portion of the overall decline. In Beverly Hills, a handful of smaller tenants that we happen to have a lot of roll in the quarter, and we are in the process of back-filling that as well.
Anthony Paolone - JPMorgan
Okay. And can you talk about what Health Net's intentions are, which I think they have - part of their lease coming due this year?
Bill Kamer
It's 50,000 feet of the overall space that comes due at the end of the year. They've decided they are going to consolidate that space and that need and some other space that they have that's not in our portfolio.
That 50,000 foot lease will not be renewed. As we've been saying for sometime, we've been expecting to see some increase in vacancy in the Warner Center market over the next several quarters in that we have some relatively larger for us -- relatively larger lease expirations coming up in next couple of quarter and I think we would reiterate that we do expect to see some increase in vacancy there in the next couple of quarters.
Anthony Paolone - JPMorgan
Okay. And then finally with respect to the fund, can you talk about how conversations have gone with perspective investors, in say, the last few weeks or month, or maybe how they’ve changed either with respect to the hurdle rates or they view towards putting money into more or less blind pool at this point?
Jordan Kaplan
This is Jordan. Generally, it’s hard to raise money, and it continues to be hard.
I don't know that it was so hard before that, and I don't know if I can tell if it's any harder now, but it's hard. We've always dealt with investors that were used to going into a fund and so if we are talking to them, they must have some interest in the fund.
It is true that many of them are saying to us, well, I'm coming into the fund, but maybe I have more money, I might want to put in LA, would there be an opportunity to do a joint venture. One of the things where we’re on the road, trying to raise money that's for the fund, that's relatively apparent that there is for large investors that want to just generally have money in the United States.
And if they have focused on having money in Los Angeles, there are not a lot of ways to get equity into the better markets in Los Angeles, other than through us. There are not a lot of access points.
We can have a little better success than most do, just because we don't have a lot of competition in terms of being a good gateway into the best markets in west LA, and have an operating platform set up, et cetera. Which helps us to encourage them to at least come into the fund at first, and then if they are something too large for the fund, that means it’s JV then maybe they would have an opportunity to do that.
In terms of hurdle rates, I don't think for the last 20 years we've been doing this. There hasn't been pressure on hurdle rates to raise them.
I don't sense that the pressure is any greater now than it has been in the past.
Anthony Paolone - JPMorgan
Okay. Thank you.
Operator
Okay. Thank you.
And our next question comes from Ian Weissman with Merrill Lynch. Go ahead please.
Ian Weissman - Merrill Lynch
Yes. Good afternoon.
Can you talk a little bit about the product that you're seeing that might be suited for the fund right now?
Bill Kamer
It's some of the stuff that we saw trade or not trade in '07, and earlier, they’re the people are trying to get back out of -- they’re trading more on a portfolio basis. There are also individual buildings they traded in '05 and '06 where the people need to get their equity out, there is something else that's going on.
There are also situations where people are looking for some liquidity and this is still a market where you can get liquidity out of your building, maybe some other markets where there is just no buyers at all. What's driving the sales, we are seeing some pretty nice buildings come up.
I mean nice, down the centre line, Douglas Emmett classic, high-rise office buildings.
Ian Weissman - Merrill Lynch
Where would you say pricing has come from the beginning of the year to now?
Bill Kamer
You know, we don't have very many data points. Still, from the beginning of the year, that's from a different point.
Most people have been asking from kind of a high point in the middle of '07, early '07. From the beginning of the year to now, I think in '08 prices went down, and the only reason that people still feel like they are declining is that there weren't any trades, and therefore you didn't put the pen in the board to see that the pen was already down there because there were no transactions happening.
There were deals that came to market in early '08 and they just failed. There were failed bids and they didn't sell.
So where do you mark that? Because then they come back again in six months or eight months and maybe they sell now, but probably they are selling now for the same price they would have sold for then.
Ian Weissman - Merrill Lynch
Well, you bought the Arden portfolio in the beginning of the year. Did you take a haircut putting into the fund?
Bill Kamer
No. We told you before, that was an extraordinary deal, which we were even telling the fund investors we don't think we are going to be able to duplicate.
The deal with the Arden portfolio going near the fund, which we described earlier, was that the fund got all the income from the Arden portfolio, and we got 8% only on our net invested equity, which is exactly how it worked, when that was contributed in. In fact, if you offset those two, there wasn't a very extraordinary difference.
We did tell you guys that, that deal generated a lot of income and when we contributed into the fund, that we would feel the loss in the REIT, which we outlined.
Ian Weissman - Merrill Lynch
Okay. And finally last question.
You have about 40% of your roll next quarter in Warner Center, Woodland Hills which is one of your weaker markets. Can you just talk a little bit about the dynamics of what see dynamics in the market?
What is the opportunity to lease that space? Is that where you are going to see maybe a tick-up in the vacancy, and what are rents doing there?
Bill Kamer
We do expect to see a pick up in vacancy over the next few quarters. There's no doubt that the market overall has been declining, as Jordan addressed in his opening remarks, and it is coinciding with expirations of a few, for us small, more like national standards, even by New York landlord standards, that large for us, ten tenant expirations that are coming up next several quarters.
So we do expect to see a tick up in vacancy in the next few quarters. In terms of rents, overall, in our markets have declined somewhat from the peak period at the end of '07, which had that huge run up, the 30% run up in the LA submarkets, which we always felt was unsustainable.
There is no question, there's been a correction there, going along with the market’s softness. We think that rents now are pretty stable.
But that's not to say that on a selective basis on deals that they come up and are doing a new tenants in markets that have some softness that we wouldn't have to go and meet the market on those deals to get those deals done.
Ian Weissman - Merrill Lynch
But nothing, no specific comments on Warner Center/Woodland Hills in terms of the weakness in that market and what do you expect?
Bill Kamer
Let me put this in a historic context. We've been giving a forward look at softness in that market for a few quarters, coming up and trying to getting everybody used to the idea that we thought we would see some of that now.
What actually happened so far is, last quarter in our portfolio, occupancies increased in that market and this quarter and second quarter, even though we had some overall declines, particularly as I addressed earlier in Santa Monica and Warner Center/Woodland Hills has been pretty flat. It’s the quarters coming up, next couple of quarters coming up, where we do expect the thing we've been discussing for several months to start to be reflecting in our numbers.
Jordan Kaplan
And we are still having good activity there.
Bill Kamer
On a gross basis, we are certainly filling up -- we were hitting a lot of singles and doubles, and the volume is up and the activity is good.
Ian Weissman - Merrill Lynch
Okay. Thank you.
Operator
Thank you. And our next question comes from John Guinee with Stifel Nicolaus.
Go ahead, please.
John Guinee - Stifel Nicolaus
John Guinee, how are you?
Bill Kamer
Hi John.
John Guinee - Stifel Nicolaus
Nicely done. As you know, when you are refitting the spaces that goes anywhere from Pink Carpet to [gutting] down from the [studs] and starting again.
What are you dealing with on these major rollovers? Was it Pink Carpet or it gut to the studs?
Bill Kamer
When we say major, we are not talking about eight contiguous floors -- like in Santa Monica, as I mentioned, we had three floors that came back from for studs move out and we leased one floor there on expansion. There is some obviously higher level of TIs involved there than you would for a smaller tenant.
One floor as I mentioned we are building out spec suites, smaller spec suites, which are a great small product. For the reason you are saying, our whole focus is on having the portfolio continue to evolve into a smaller tenant market, and one of the big advantages of that is to keep your capital costs low and have a standardized product.
We are on those kinds of buildings and those large leases we would expect to see some larger TI packages than we do in smaller ones. We've said really since the third quarter of '07, so full year now, there have been variations quarter to quarter in our capitalized leasing cost, and there were some declines in some prior quarters and we said they’re sort of aberrational and that what we've seen overall is a pretty level situation where TI costs have been pretty steady overall.
Obviously, larger tenants, larger TI packages.
John Guinee - Stifel Nicolaus
Great. All right, thank you.
Operator
Thank you. Our next question comes from Michael Knott with Green Street Advisors.
Go ahead please.
Michael Knott - Green Street Advisors
Hey guys. A quick question on the fund.
What would be the time frame that we should think about in terms of either seeing additional closings or getting more clarity on, whether you are going to be closer to 500 million or a billion?
Bill Kamer
Well, at this point what happens is we have, within the fund, nine months. I'm hopeful that we do it quicker than that and we have some good leases and activity that gives some reason to be hopeful.
With that said, and the economy we are in, it could take the whole nine months. It would be also be reasonable to expect to take the whole nine months.
In terms of closings, as people commit they sign subscription documents. We can and do even up with them at that point or we can wait till a later time.
All that's meaningful going forward is that process -- because people can just keep signing up as time rolls on sort of on their own schedule now. There might be some odd stuff going on that would cause us to want to do this.
But I don't know why we would have another even up, until maybe January, but it depends on how things work out. I'm optimistic, and I still feel like we'll get to the sort of the mid-point of the $750 million.
The reason we have the range of $500 million or to $1 billion is the market we are in today, which had a very strong fund machine. We have done nine funds before this, and we were very good at raising the money and getting a place, and we sort of sidelined ourselves when we didn't like what was going on with the market, combined with the fact that we went public, and getting back into it now and seeing the economy that we are in, I think I mis-estimated how tough it was going to be, to raise the fund and very frankly, its taking longer than I expected.
I still expect us to be successful. I'm still hoping, and believe, that we will get to somewhere in the mid-point.
But there's a reasonable feel that we could be as low as 500. We also have a shot to of getting up to a $1 billion.
Michael Knott - Green Street Advisors
Okay, and then you had said before the fees were going to be 125 basis points on the equity. Did you experience any diminution there or is that still…?
Bill Kamer
Well, a couple of things. We haven't finished, some other big guy can come in and negotiate, so things can always change.
That has always been the case, and we've been very good at holding on to the fees that we thought were fair, which tend to be at the low end of the market to begin with. We don't make a lot of income on the fees.
That’s not an acquisition fee, that's not a disposition fee. It's just 1.25% asset management fee on equity.
The deal that I described two calls ago, is in all aspects exactly the way that the fund had its first closing. I'm happy to answer right now the questions, any questions you guys have about the fund.
But going forward until close the fund, we are going to try not to get ourselves in a position where every quarter, unless we tell you things close, now we will tell we are closed. We are a company with a big thermometer on the front door, where every quarter we’re asked, okay, how much did you raise this quarter, how much did you raise this month.
I want to go about the business of finishing up the fund. We'll tell you guys about acquisition or any type of capital transactions that happen relating to the fund, but I want go about business to finishing out raising the fund and then will let you know where it ends up.
But my best estimate today, is that we make it to potentially to mid-point and I hope to obviously to make it above 500 and we would cut it off ourselves at a $1 billion.
Michael Knott - Green Street Advisors
Okay and can you just comment on the strength of your legal tenant base, some of the other peers in the group have had some problems with some legal tenants? Can you just comment on that portion of your tenancy?
Bill Kamer
Yeah. That's another aspect of the small tenant focus.
We’re pretty much the law firms, and we have as you can know from our industry diversification, legal industry is one of the highest industry concentration in with the diversified portfolio, but since the law firms are small, they don't really have any negative impacts at all from that. We don't have the kind of law firm size that's coupled with the type of business where you would see the major layouts.
We don't have one of the main ways in which our portfolio is resilient in a downturn, is we don't have those large tenants where they do major downsizing of their office space. They tend to be kind of right size through the down cycles.
Michael Knott - Green Street Advisors
Okay. Thank you.
Operator
Thank you. And our next question comes from Chris Haley with Wachovia.
Go ahead please.
Chris Haley - Wachovia Capital Markets
Good morning.
Bill Kamer
Hi, Chris.
Chris Haley - Wachovia Capital Markets
Hey guys. What color can you provide on the fund -- the commitments you receive, how many of those would say are a repeat from prior [time] and how many are new?
Bill Kamer
I think there is a lot of repeat and a couple of new. The new ones are the ones that just take longer and are slow.
We actually have a lot of good kind of lead times on some new guys and new investors I think like [my new task] and will be a good investors in the fund, but the process is slow but with what's been going on in October and let's say periods earlier, but particularly in October, and it has even slowed that down more. And a lot of our regular investors have done so much with us and done so many funds with us, that all the noise of October wasn't as hard on them, and they're like, yeah, we've known that you invested two markets like this and they're already comfortable with us in these types of markets.
They were able to go forward and make commitments to move on, whereas if you had another, let say, $100 million or 150 million, $200 million guy, they keep kind of saying, no, we've got to go. Then, something like in October hit and that we just had hits and they're like, you know what we're still good.
We're still good to go. Now we're very distracted because we're figuring out what our exposure is in other sectors of our portfolio to whatever may be in the finance industry or dog catchers or whatever, because that's the latest things that everyone is worried about.
It's a slower process of new people, and many of the new people are larger.
Chris Haley - Wachovia Capital Markets
You may have just scared the dog catching industry. With that, what are the things that we are appreciative of our keeping the eye on the ball, I mean, operating in an investment standpoint, particularly for the local sharpshooter that you are.
And one of the things that we're a little nervous of is, depth of the personnel in your organization to continue to go down this fund path, recognizing that you all can do get to work with your advisors. And also continue to record top [decile] operating and investment metrics.
Could you give us a sense as to what you've been doing or what you might be planning on doing over the next 12 to 24 months regarding fund and external communications to these fund investors?
Jordan Kaplan
Well, in terms of communications to them, they get a quarterly report that's not dissimilar to the type of reports that you guys get on the REIT, including the activity, any capital transactions that happen and then the other operating metrics of the fund. Are you saying we would be distracted by operations within the fund as opposed to keeping focused on REIT operations and fund operations?
Chris Haley - Wachovia Capital Markets
I guess that's a related question. I just wanted to understand how you feel your infrastructure is internally to handle additional funds, whether this gets done possibly next – or else you think might be necessary at the Emmett corporate level?
Jordan Kaplan
That's easier to answer. In terms of being structured to handle funds we are in real good shape there.
Before we went public we were operating nine funds. Let me just tell you structurally how it works.
The only area where you have real segregation is in accounting, which each fund has a separate accounting team because investors have separate needs and questions, but other than that the properties are operated on a geographical, regional basis. For instance, we own a lot of properties in Santa Monica and the REIT, and then maybe also the fund owns a property in Santa Monica.
The portfolio manager, the managers there and the leasing guys, they are all rewarded and focused on Santa Monica. They don't really differentiate between one fund building versus REIT buildings.
So to them we just added a building. They don't really see it because of the way the signature box works.
Chris Haley - Wachovia Capital Markets
Right.
Jordan Kaplan
So at a place where you mean we have a management structure that is scalable and as we buy buildings, it scales up and maybe we add a portfolio manager or divisional manager, but that whole structure is already in place. The only place where a separate group has to be developed each time is the accounting group of two or three people for each fund, for the accounting, for the fund, and preparing the fund reports, which is really a completely different task because of the way the accounting has to work.
T the reports we prepare for you guys, even though it contains a lot of the same information, they are just the way accounting requires it reported on a different basis.
Chris Haley - Wachovia Capital Markets
Okay, thank you. My last question has to do with the organic expense levels year-over-year increase or decreases in multifamily expenses.
One, is there anything extraordinary in there or therefore looking towards 2009, what would be a reasonable assumption to use for organic expense growth?
Bill Kamer
We are working right now to give 2009 guidance in the next call. We are working now through our budgeting process.
It's little premature to give you a lot of visibility on what 2009 expenses look like. I think the short answer is, in the multifamily side, it's a relatively small part of our overall portfolio.
Smaller, absolute moves create a more of a percentage impact than you see on the office side. I don't think that there's anything extraordinary in terms of what's going on, on the ground in terms of expenses.
I think it's timing. How different accrual type things work.
I wouldn't view the event of a decline as significant. I think if you look over both of the years we've operated and put them together and average the two, and look at it as a baseline to grow forward, you’re probably in the right ballpark.
Chris Haley - Wachovia Capital Markets
Okay. Thank you.
Operator
Thank you. And our next question comes from Michael Bilerman with Citi.
Go ahead, please.
Michael Bilerman - Citi
I have questions on funds as well. Are any of the $150 million that you raised from third parties contingent on getting up to $500 million of total equity?
Jordan Kaplan
No.
Michael Bilerman - Citi
And so if everything shuts down you just keep the fund as is 50/50 and these investors will be rewarded when you sell these assets down the road or refi down the road?
Jordan Kaplan
Are you trying to jinx me?
Michael Bilerman - Citi
No. I have one the things -- I just wanted to make sure --
Jordan Kaplan
That is correct.
Michael Bilerman - Citi
A worst case scenario, only that is you like them whether you bought them 100% or 50% you enjoy the returns, so…?
Jordan Kaplan
That's correct.
Michael Bilerman - Citi
And then looking at the 150 that you raised, can you just talk a little bit about sort of the size of maybe the largest or the couple largest commitments in there and sort of the totality of number of investors?
Jordan Kaplan
I don't want to get into the exact details oft that. I don't want to get into the details of the investors.
I want to finish raising the fund, and then I'll be happy to give you a good description of what’s going on out there. I think its around 12 or 15.
Michael Bilerman - Citi
And what was the largest commitment?
Jordan Kaplan
I am not going to get into that. We were the largest commitment.
Michael Bilerman - Citi
I'm thinking more so about the third party?
Jordan Kaplan
Let's wait and see how it plays out.
Michael Bilerman - Citi
Okay. And then just on the income statement Bill, what's the other income expense that was negative this quarter?
I don't know if there was something a charge or something in there that was written off?
Bill Kamer
There was a charge off there. When we bought that little Honolulu club property in Hawaii, we wound up leasing part of the building to a third party health club operator and transferred the assets of the health club over to them and there was a charge off in connection with that.
Michael Bilerman - Citi
And what was the size of that, of the charge off?
Bill Kamer
I don't have that handy. It's under 100 grand.
Michael Bilerman - Citi
And then just a clarification. On the lease expiration schedule on page 20, the expirations that you show, is that reflective of the leases that you've already renewed in terms of the footnotes or that is the stuff that you haven't been able to renew yet?
Or release yet?
Bill Kamer
It would reflect the current situation as of September 30. To the extent we already renewed leases that are not on the schedule.
Michael Bilerman - Citi
They are not on the schedule any more?
Bill Kamer
Right, That is reflected in the footnotes on that page which talks about what the original amounts were and gives you an idea of what was already renewed.
Michael Bilerman - Citi
And I was looking at the fourth quarter 2008, the total only went down by 10,000 square feet but you renewed 125,000 more square feet. I was just wondering what happened sequentially?
Jordan Kaplan
Well, the renewals in the quarter could be for future periods. So the activity in the third quarter, renewal activity their lease expirations cover multiple quarters.
Michael Bilerman - Citi
Right, I'm just thinking that your 4Q expiration in the last quarter were 396 million in the fourth quarter, and as of June 30, you had already renewed 126. In today's disclosure you have 380,000 square feet scheduled to expire in the fourth quarter but as of September 30 you had been…?
Bill Kamer
Yeah, in the renewal there is some short-term extensions.
Michael Bilerman - Citi
That would have happened in the third quarter?
Bill Kamer
Right. So, the two numbers don't tie.
Michael Bilerman - Citi
Okay, so it's about 100,000 square feet that you push 3Q to 4Q?
Bill Kamer
I think so. Yeah.
Jordan Kaplan
Michael, just thinking about your question while you were asking it, I feel what you were worried about was that we have one large investor and a bunch of little ones that's not a case at all. It's a mix of all, not just something [re-sized] investors.
Michael Bilerman - Citi
And then just returning back to that, did any of those investors say, look we recognize the current environment, let's put in 15 million or 25 million whatever it is and then come in '09 we may tee up for another 25 or 50? Or do you view those -- the guys who came in, they are sort of in and done?
Bill Kamer
That’s hard to know. One of the things that happens in this kind of environment is people start out at a higher number and then they just get frustrated with their own process not going well.
A guy can approve such and such [name] and maybe the guy started out at 70 and he finally said look, I can pool myself 40. So I am just going to be 40 because I am higher with this.
That kind of thing is happening now. It slows the whole thing down.
Michael Bilerman - Citi
Yeah. Okay.
Jordan Kaplan
What happens is next year is he decides, I am going to go back, get my rest, who knows. One decisive thing is we definitely have plenty of people that have done the work, are doing the work and saying, but it has to be a '09 deal for us.
It can't be an '08 deal so we can't find a subscription until '09.
Michael Bilerman - Citi
Right.
Jordan Kaplan
That wouldn't necessarily be something that is already invested.
Michael Bilerman - Citi
Are interested in buying back any of your stock at all?
Jordan Kaplan
It's quite interesting to be in a blackout during the wildest time I have ever seen in the stock market, which I guess is the case for most everybody in the REIT industry or most everybody where we can't trade in our stock. In terms of specifically for the company, it's the same thing, there are great deals out there then just buying the stock.
That's a great deal, and you got to just look at the two as alternatives. The only kind of one negative that goes along with buying the stock is, it has a double impact towards stressing your balance sheet at a time when kind of liquidity and having the strong liquidity that we have acts as a good support for the company and the stock price for investors that are already in your stock.
It's something that takes a lot of thinking and which frankly we haven't even had an opportunity to do since this all happened.
Michael Bilerman - Citi
So, you were saying more so personally you would be buying the stock rather than the company buying back?
Jordan Kaplan
I don’t want to get into this. Let's move on.
Michael Bilerman - Citi
All right, Jordan. Thanks.
Operator
Thank you. Our next question comes from Rich Anderson with BMO Capital Markets.
Go ahead please
Rich Anderson - BMO Capital Markets
Thanks, and good morning. I guess I'm a little confused.
The portfolio or the Arden portfolio is $610 million and you have $300 million of equity, but how did you get compensated for bringing those assets in? How did the REIT get compensated?
Jordan Kaplan
When we started raising the fund, the fund investors are obviously concerned -- one of the biggest concerns of fund investors is cherry picking. They want to know that any deals you do, that they are not going to get right, you are going to get the good deals put them in the REIT and the mediocre deals go in the fund.
So you have to set a date that you say everything I buy after this date and I commit it to putting it in the fund. We had hoped to have an earlier closing, so we had set that date, I can't remember if it was March 1st or something.
The date was set because this transaction was helpful in raising the fund and so we said okay we'll put this in the fund. The way that we were compensated for giving a good deal of this fund is that allows us to even have the fund.
In terms of the hard economics, basically the deal that was made was on our invested net equity. We made an 8% return fixed.
Rich Anderson - BMO Capital Markets
Okay.
Jordan Kaplan
No more no less, and they get all income that was generated by the portfolio into an LLC, so all we did was transfer the LLC interest over to the fund at that. When we transferred it in, we got our equity and 8% on it and then they get all the properties and the operations from the properties, which netted to be pretty close.
Rich Anderson - BMO Capital Markets
Okay. I understood.
I remember that I missed that. With this fund created as it has or at least started with the contribution a couple of days ago, was that contemplated in the previous guidance that you issued in the second quarter?
The timing was a little bit off?
Bill Kamer
The timing, as Jordan said, was going to be a little bit earlier and it winds up, because the acquisition is strong and accretive by pushing it along and closing it a little bit later, if we wind up with some more FFO in…
Jordan Kaplan
A little bit stronger numbers.
Bill Kamer
A little bit stronger numbers on our REIT.
Rich Anderson - BMO Capital Markets
That's what I was going to ask you, so it was a little bit later that's why our guidance went up by $0.02?
Bill Kamer
That’s a factor. There are other factors, which we mentioned, as well as that we had some lower expenses than we had originally.
One, we are conservative. Two, we wind up with some expenses coming in lower than we had anticipated earlier.
There are multiple factors but the delay in the REIT contribution is one of them.
Rich Anderson - BMO Capital Markets
Okay. Jordan, did you happen to see the article in the journal today on LA?
Jordan Kaplan
No. I was practicing.
Rich Anderson - BMO Capital Markets
Okay. We'll read it and maybe you can tell us what you think about the title being “The Worst Is Yet To Come,” it's the title of the article.
Jordan Kaplan
So.
Rich Anderson - BMO Capital Markets
I assume you will disagree or maybe you won't. I don't know.
And last question is, Jordan, you sound like you're sounding opportunistic about some things that are out there for you well capitalized, organizational, what is worrying you today? Like, what’s the sort of stuff that worries you besides your stock price I guess?
Jordan Kaplan
I want my stock price should be strong for my investors, but it's not something that I have much control over. The things influencing at the moment don't feel like things that we have much control over.
In one sense we're watching the global economy and waiting to see if there's some extraordinary impact on our tenants, on the underlying economics of our buildings that we haven't figured in or something that we are not used to, because as a team we have been through a number of these, two really significant ones: there was dot.com in early 2000, and the one in early '90s. We feel like we have some way to predict where things are headed and what kind of happens to the portfolio when we get into this.
That's one thing I'm worried about. We calling it right in terms of the way the tenants are going to react and let's say the defaults that we are going to have and what's going happen with rents and vacancy, that's one thing.
The other thing is, at the time when the broad consensus of people agree that we've hit the bottom, I don't want to miss some of the opportunities that are coming up soon, because we are trying to be so accurate to hit it to the right day and the right month and the right minute or whatever the occasion maybe. We are working very hard to do all the work we can to understand where the numbers are without a lot of transactions, where we think they can go to, what we think is coming up, so that we don't miss those opportunities.
Those are the two main fronts that we are working hard to be particularly good at, where it's easy to make a mistake.
Rich Anderson - BMO Capital Markets
Right. Okay.
Thank you.
Operator
Okay, thank you. And our next question comes from Jamie Feldman with UBS.
Go ahead please.
Jamie Feldman - UBS
Thank you very much. I was wondering if we can focus a little bit more on the fundamentals.
Can you talk a little bit about what sectors are driving demand right now in your markets. Showing that you are doing, who you are with.
It seems through the third quarter earnings a lot of companies have been talking about just a real slowdown, maybe you just can’t tell?
Bill Kamer
Because we don't have either a particular big industry focus or particularly large tenants, we don't really see that. The thing one of the comp points that Jordan mentioned earlier, which is the general business pessimism, that is a pervasive thing that obviously accelerated in October and the trend, which we discussed last quarter of tenants being just across the board, being more conservative about their extension commitments for space, in term we have seen pull back in shorter term extensions.
We've had some lowering of expansions. I think in second quarter we had about 30% of our renewals had an expansion component.
This past quarter that number dropped to like 15% to 20%. I was impressed but there were still ways that many in the current climate that had expansion components but it definitely dropped from what we have seen in the prior quarter.
It just seems to be that a general pessimism or conservatism across the board and somewhat of a slowdown but we are not seeing any particular impact in one area that is really driving things.
Jamie Feldman - UBS
Okay. Have you had any discussions with AIG about the SunAmerica space?
Bill Kamer
Well, the SunAmerica space in Warner Center is the tenant there, it's SunAmerica Life Insurance company.
Jamie Feldman - UBS
Right.
Jordan Kaplan
It was merged in AIG when they merged SunAmerica, so, the operation out there is like company and retirement operations and that lease goes out to 2013. That situation seems pretty stable for the foreseeable future.
But to answer you question, the answer is no.
Bill Kamer
The [talks] question is no
Jamie Feldman - UBS
Okay. To be honest I mean, there is no reason to I guess at this point?
Jordan Kaplan
You are worried about, are they initiating a conversation or us?
Jamie Feldman - UBS
No. You guys is given AIG status if that has even come up or..?
Jordan Kaplan
No. We are still feeling good about that lease.
Jamie Feldman - UBS
Okay. And then in terms of just how the competition is acting, are people increasing TIs aggressively or are they dropping rents aggressively, kind of how is the market behaving?
Jordan Kaplan
I think we are starting to see a little skittishness from our core landlords and that’s going to add to the noise and how hard it is to kind of run the portfolio well through this period, but that negative is more than offset by larger landlords that maybe aren't comfortable operating in this kind of environment which then cause them to sell. That just creates a better opportunity on the other side.
They create a little noise for us for a couple of quarters but it creates an opportunity to make good, well priced long-term purchase and that’s certainly worth it.
Jamie Feldman - UBS
Okay. And then I'll take my one fund question.
Have you laid out what the restrictions are in redemptions? I know it's early and it shouldn't happen for a long time but just in case?
Jordan Kaplan
Well, this is a close end fund, so there is not really redemptions. The way the fund works is, we have a four-year acquisition period and then we have a ten-year kind value creation period, and what we commit to them is without the investors voting to extend the fund, that we'll sell the properties before the end of ten years, but in particular what we then say is at that time we'll sell the properties.
If it’s a longer term fund, sell the properties when we think is the best time to get the best long-term IRR for you. In terms of their particular interest, under certain circumstances, they can trade their interest, but we don't have any obligations to create liquidity for them through activity within the fund.
Jamie Feldman - UBS
Okay. All right.
Thank you very much.
Operator
Thank you. Our next question comes from Mitch Germain with Bank of America.
Please go ahead.
Mitch Germain - Bank of America.
Hey, guys, the questions is answered. Thanks.
Jordan Kaplan
Okay next
Operator
Thank you. We have a final question, a follow-up question from Chris Haley.
Go ahead please.
Chris Haley - Wachovia Capital Markets
Jordan you started your comments referencing the higher diversification in LA and then also less supply. So, therefore that would lead me to believe that there is less downside and at the same time you are saying that there are investment opportunities that are much more appealing today.
But the two starting points suggest that other investors also see more diversification, less supply. So I'm interested in your comment that more investment opportunities are coming to you.
Fundamentally that doesn't appear to be the case. Is that driven by financial structures of how assets were held or placed in LA?
Was LA more aggressive this time around than in the past?
Jordan Kaplan
The reason I think the opportunities are better is, it's value based on two basic things. One is the supply-demand metric of office space and tenants.
How much supply of office space is there and how much tenants are there that want that space. That gives you your rental rates and the underlying economics of the building.
That's one metric. It's going to be very healthy, very good going on forward.
The other thing that helps set the other big factor in the value of the building is the supply-demand metric associated with the amount of capital that wants to buy the building and the amount of buildings that are up for sale. The supply of building for sale versus the amount of capital that is to buy buildings.
If there's a lot of capital and not many buildings, for sale the price goes up. If there is not very much capital and people become particular easy about selling buildings, the price goes down.
The best environment for us, for a company like ours operating company is good underlying economics and horrendous capital market economics, and that's what I think we are looking at today. We feel like in the early '90s when we did a lot of buying, and you had a significantly more -- we had lost in the industry at that.
I mentioned that that one was the contraction of the aerospace industry as a result of the end of the cold war and then at the same time you had a ton of new supply that came on at the end of '90. Really, from the early '80s through today we essentially at least on the west side doubled the amount of office space from let's say 20 to 44 million or something square feet.
We had all this office space. We had a pro forma absorbing, as well as completely dislocated capital markets.
It was a little bit trickier pro forma analysis that you are doing. Whereas today, I think we feel a lot more comfortable about where cash flow rents, what kind of hits we can take in terms of vacancy or potential vacancy in not only buildings that we own, but buildings that we may be buying will be?
That seems like an easier part of the metric to figure out value. The capital markets are so screwed up, that we are seeing great value, great depressed pricing related to some still very good -- you are seeing it from our quarterly calls that our properties are a great proxy for the same stuff that we are buying.
I think you’ve not actually mentioned that you are seeing the decline, the occupancy decline, you are seeing the steady occupancy decline, that's right. If you look at everything that is going on, they are not horrendous and we are still releasing for above, the rents of the previous tenant was at.
We still have a lot of strong things going on and a lot of good industries that we are relying on. That's a long answer, but that's why we are feeling so good about being able to make very accretive acquisitions at pricing that we like in these markets.
Chris Haley - Wachovia Capital Markets
That's very helpful. And just to clarify, the PV received on the equity, is that on equity committed or equity invested?
Jordan Kaplan
It's on equity invested.
Chris Haley - Wachovia Capital Markets
Okay. And then are you -- do you have the flexibility to buy have [slimmer] interest in assets, [debt] interest in the fund?
Jordan Kaplan
We have a lot of flexibility to do all sorts of things, but it would be very unlikely that we would do -- we have done both. We bought debt and foreclosed.
We bought interest as a path of getting the entire project but we don't do those things as standalone investments. If you see us buying a piece of debt, you are going to assume that we are doing it and also still trying to get the property or if we buy an interest in a deal, it is to with the hopes of expanding to control the deal or maybe give us control over the deal.
Chris Haley - Wachovia Capital Markets
Okay. Great, very helpful conference call.
Thank you.
Jordan Kaplan
All right. Thanks.
Operator
Okay. Thank you.
That concludes our question-and-answer session for today. I would now like to turn the call back to Mr.
Jordan Kaplan for any closing remarks. Mr.
Kaplan?
Jordan Kaplan
Thank you all for joining us. We are looking forward to a less exciting next quarter and we all look forward to speaking with you again.
Thank you.