Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Q2 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. If you require operator assistance, please press star then zero. I will now turn the conference over to Mr. Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.
Thank you. Joining us today on the call are Jordan Kaplan, our President and CEO, Kevin Crummy, our CIO, and Peter Seymour, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the investor relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package. During the course of this call, we will make forward-looking statements. These forward-looking statements are based on the beliefs of, assumptions made by, and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect.
Therefore, our actual future results can be expected to differ from our expectations, and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the investor relations section of our website. When we reach the question and answer portion, in consideration of others, please limit yourself to one question and one follow-up. I will now turn the call over to Jordan.
Good morning, everyone. Thank you for joining us. We had an excellent second quarter. Fundamentals in our markets remain strong due to continued healthy tenant demand from a wide range of industries and meaningful barriers to new supply. During the quarter, our total portfolio lease percentage moved above 92%, and our straight-line rent roll-up was 31%. These successes drove excellent operating results for the second quarter. Same property cash NOI up 7.7%, FFO up 7%, and AFFO up 26%. Operating results like these, together with thoughtful management of our balance sheet, have been the foundation of our long-term success since we went public 13 years ago. We see current long-term rates and tight lending spreads as an opportunity to do some strategic balance sheet management.
As a result, by the end of 2019, we expect to eliminate all of our debt maturities prior to 2023, add almost 5 years to the weighted average life of $1.5 billion-$2 billion of debt, pushing our average debt maturity for that debt to 2027, fix the interest rate on all our outstanding floating rate debt, add almost 5 years to the fixed interest period and lower the interest rate on the debt we refinance, increase our future financing flexibility by expanding our pool of unencumbered properties to almost 40% of our portfolio, and reduce our share of outstanding net debt by nearly $200 million before the impact of new acquisitions this year. Kevin will fill you in on our progress towards these goals.
Over the long term, this program will provide ample liquidity for attractive acquisition and development opportunities while reducing future interest rate exposure. I would like to talk a minute about our guidance. The combination of excellent operating results, The Glendon purchase, and the impacts from our balance sheet activities make guidance this quarter a little complicated. First, based on the strength of our operating results, we are increasing guidance for occupancy and same property cash NOI. Second, we expect those stronger operating results and the acquisition of The Glendon will positively impact our 2019 FFO by approximately $0.03 per share. Finally, we expect that one-time cash and non-cash refinancing costs and dilution from the equity issuance will negatively impact our 2019 FFO by $0.04 to $0.06 per share.
The net impact of these items reduces our guidance for 2019 FFO to between $2.08 and $2.12 per share. With that, I will turn the call over to Kevin for more details.
Thanks, Jordan. Good morning, everyone. We had a busy quarter in the capital markets. During the last three months, we paid off $630 million of debt with an average interest rate of 3.5%, including $220 million just after quarter end. We closed $540 million of 10-year secured non-recourse loans with interest effectively fixed at an average of 3.25% through 2027. This total includes the acquisition loan for The Glendon. We reduced our overall leverage by $200 million by issuing common stock at $41 per share, and we extended the fixed interest rate on a $102 million loan for another three years.
We are continuing to focus on extending our debt maturities and capitalizing on favorable interest rates and tight loan spreads with the goal of refinancing a total of $1.5 billion-$2 billion of debt by the end of 2019. During the second quarter, we acquired The Glendon, a luxury mixed-use apartment community. The Glendon sits on a 4.5 acre parcel in the heart of Westwood Village, with an easy walking distance of 3 million sq ft of Class A office buildings, UCLA's campus, the UCLA Medical Center, and over 300 local shops and restaurants. We paid $365 million for the 350 units and 50,000 sq ft of street retail, which works out to roughly $870,000 per apartment unit. The Glendon is midway through a unit renovation program that has been very successful in increasing rents.
The going-in cap rate was just under 4%, and we expect that to stabilize in the mid-5s as the renovation program is completed. The property is owned by one of our existing consolidated joint ventures in which we own a 20% capital interest. Growing our multifamily division has long been a goal of ours. Between our development program and the acquisition of The Glendon, I'm pleased that we've successfully grown our multifamily portfolio by over 15% during the last year to more than 4,000 total units. Our development projects will continue to fuel our residential portfolio growth moving forward. In Brentwood, the construction of our 376-unit high-rise apartment tower is progressing well. In Hawaii, we still expect to deliver the first of about 500 new apartment units at 1132 Bishop in 2020. With that, I will now turn the call over to Stuart.
Thanks, Kevin. Good morning, everyone. In Q2, we signed 221 office leases covering 869,000 square feet, including 295,000 square feet of new leases. Leasing spreads for the quarter were 31% for straight-line rent roll-up and 12% for cash roll-up. The lease rate for our total office portfolio increased by 45 basis points to 92.2%, with increases in our lease percentage in almost every one of our sub-markets. Occupancy increased by 10 basis points to 90.4%. As we mentioned last quarter, Honolulu is seeing increased tenant demand as a result of our office-to-residential conversion strategy at 1132 Bishop. With our Honolulu office portfolio now 94% leased, we have less than 100,000 square feet of vacancy, with more than 350,000 square feet of office tenants still needing to relocate out of 1132 Bishop.
On the multifamily side, our portfolio remained essentially fully leased at quarter-end, including our new Westwood property, where we acquired slightly more vacancy than our portfolio average. I'll now turn the call over to Peter to discuss our results.
Thanks, Stuart. Good morning, everyone. We are pleased with our Q2 results. Compared to a year ago, in the second quarter of 2019, we increased revenues by 5%. We increased FFO 7% to $107.8 million, or $0.54 per share. We increased AFFO 25.8% to $95.5 million. We increased our same-property cash NOI by 7.7%, driven by 8.6% office growth. Our multifamily same-property growth was restrained by some one-time insurance items, and without them, growth would have been closer to 3%. Our G&A for the quarter remains around 4% of revenues, well below that of our benchmark group. Now, turning to guidance. As Jordan mentioned, based on the strength of our operating results, we are increasing our guidance for same-property NOI growth to between 6% and 7%, and our guidance for average occupancy to between 90% and 91%.
With respect to our FFO guidance, we expect that stronger operating results and the acquisition of The Glendon will positively impact our 2019 FFO by approximately $0.03 per share. We expect that one-time cash and non-cash refinancing costs and dilution from the equity issuance, partially offset by interest expense savings and interest income, will negatively impact our 2019 FFO by $0.04-$0.06 per share. These two offsetting factors net to about $0.02 per share. As a result, we expect 2019 FFO to be between $2.08-$2.12 per share. Other than the planned financings we have discussed, our guidance does not assume the impact of future acquisitions, dispositions, or additional financings. For more information on the assumptions underlying our guidance, please refer to the schedule in the earnings package. I will now turn the call over to the operator so we can take your questions.
We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Again, as a courtesy, we please ask that you limit yourself to one question and a single follow-up. If you have further questions, you may reenter the question queue. We will pause momentarily to assemble our roster. The first question comes from Alexander Goldfarb of Sandler O'Neill. Please go ahead.
Hey, good morning out there.
Good morning.
Question on the balance sheet. Historically, Jordan, you've been hesitant to issue equity, but you seem to be much more comfortable despite if we use consensus of $45, you issued below. At the same time on the debt side, you guys have always maintained a pretty flexible strategy and your debt cost over the next few years is pretty low, only 3%, and yet you're aggressively going after it. Maybe you could just speak from the equity side and from the debt side, why you feel more comfortable issuing, especially below NAV, and given that your debt position is pretty good, why you feel compelled to get aggressive on going after debt that matures over the next three to four years.
Well, first of all, I'm never comfortable issuing equity. That's one of the most uncomfortable decisions that we ever have to make here. My most uncomfortable decision, you know because I've known you for a long time, that.
I want to own as much of the company as I can, and every time we issue equity, it dilutes us, me, Ken, Dan, all the rest of us that's sitting here. We also have commitments to other goals vis-à-vis the balance sheet and reducing leverage and reducing our exposure to leverage and interest rate risk. We came upon a situation where we were doing the deal for the apartment in Westwood, The Glendon, and it fit properly there to do that. We did end up putting that into a JV, and so we went ahead and reduced our leverage and built up a little more firepower going forward in terms of all the development and things that we're doing. We generally have been trying to, over the years, slowly, with excess cash, reduce our leverage each year a little bit. That's on that side.
We have not been very aggressive equity issuers. We've only issued equity three times in 13 years. The amount of dilution that equity's created has been very minimal, compared to literally when we went public. In terms of debt, we keep our leverage very flexible, just like you said. It's flexible because it's non-recourse loans that are on properties, on pools of property, and they're all LIBOR floaters that are swapped. We watch for opportunities to improve that, whether it's improving the index or improving the spread. We happen to be at a time right now when the indexes are very low and spreads are very tight in our opinion. We did a deal at 90 over. We did a deal at 110 over. Those are low. In history, I would say we would average 125 to 140.
When the numbers get above 150, spreads are getting wide. When they're below 120, I'd say spreads are tight. Certainly, in terms of the index, indexes are quite low now. I'm not saying they're at their lowest, but they're quite low. When we see that happen, when those two come together. A lot of times, index will go down, but spreads will gap out. When we see them together come down with opportunities to do deals in the low threes or even in the mid twos and put away debt, then we go, we're going to do that, and we stretch the horizon of our debt out each time. That way, you're not letting your last loan determine which market you refi in. We determine which market we refi in. Historically, we tend to refi a couple of years early, right?
On a seven-year loan, we'll refi two years early, a year and a half early. We're always going to be a little early on debt as it comes up. That's because we never want to have our back against the wall with debt that's coming due and face maybe a closed debt market or a poor interest rate market or whatever else may be going on. When we see an opportunity like this come up, which I feel this is an opportunity. When we see something like this come up, we run to extend our maturities, lower our rate the best we can, and that's what I have literally everybody in the capital markets is working on at the moment, except Kevin, who's working on buying. That's a program we're trying to pursue, and because it's so impactful to everything we're doing, we haven't completed it.
We're midway through it, but we wanted to make sure the information got out to everybody now that that's what we were doing.
Okay. The second question is, I think this came up on the last call, the upcoming lease expiration in Honolulu, Sherman Oaks, Encino. Maybe you can just talk a little bit about that. Obviously, you spoke about your guidance, how it'd be going up if not for the capital activities. Does that mean that the lease expirations in these markets won't be a drag on your numbers? They'll be accretive, or is there a little bit of headwind in the next few quarters?
Alex, overall, it looks like pretty normal roll for us. What you're seeing in Honolulu is probably some expirations at our conversion at 1132 Bishop. That we're not worried about those. Obviously, we're actively moving office tenants out of that building. Sherman Oaks, Encino, has some medium-sized tenants rolling later this year, but we've seen really good activity there.
Thank you.
Thanks, Alex.
The next question comes from Alexander Goldfarb of Bank of America Merrill Lynch. Please go ahead.
Hi, thanks for taking the question. I was wondering, just keeping in with the topic of leverage, can you talk more about your plans for target leverage on a net debt to EBITDA basis and what that number look like in the short term versus the intermediate or longer term?
Well, right now, I think we're a little under a seven, right?
Yeah.
Yeah, six and a half. I don't feel we're in a position that I need to do anything about it, like in a net risk position or anything like that. There's debt, generally, debt can be very good, right? Leveraging your position with a fixed cost against equity that gets all the remaining economics, that improves things for all of us. The only problems with debt are, number 1, repayment risk, which can risk the mortality of the company, or number 2, the cost of maintaining that debt can go up if you have to refi at a time when interest rates are higher. We refi very early in the process to make sure we don't get caught at tough times. I don't think there's any question about mortality risk.
I mean, our leverage is down around 30%. For real estate, that's a very low number. I don't think there's any question that we have a level of debt that risks the mortality of the company. The only question with debt is how exposed do we want to be to moving interest rates?
If I step back, if we step back and look at the company, and we look at the risks, just globally, at the risk facing the company, and I'm not making any predictions about rates here, but I would say this: we feel very comfortable about the direction of where our tenants, tenant demand, the lack of new supply, the fundamentals in our markets, and the fundamentals of growth in rental rates and our ability to continue operating our properties, continue our development programs, and that there's not much that can get in that way, save two things. One is a big move in the national economy. The national economy would obviously impact us. Second, a big move in interest rates. We can't do anything about a big move in the national economy.
We can, when it's opportune, not all the time, because it's expensive to do this, reduce our exposure to interest rate risk. As we continue reducing the amount of leverage we have vis-a-vis the size of the company, then big moves in interest rate the wrong way, which I'm sure will happen at some point in the future, I'm not predicting it anytime soon, we would be less subject to, and it would be less painful for the company. Not deadly painful, just less painful.
Okay, cool. It sounds like.
Did that answer your question?
Yeah. It sounds like you're not targeting a specific level or anything of that. You're just going to continue to be opportunistic with it. Cool.
Yes.
I guess my second question would be, could you talk a little bit about the Warner Center? It seems to be the laggard of the submarkets. Can you maybe give us an update there on market conditions and what you're seeing for leasing prospects?
Alex, we continue to see good activity in Warner Center. Obviously, it's a laggard versus the rest of our markets where it sits right now. We have made good progress there over the last year and a half. I think we're up 250 basis points in lease rate over the last year and a half. Generally pleased with the direction it's heading. We are seeing good tenant demand there. We're optimistic going forward.
Awesome. Thank you.
The next question comes from Blaine Heck of Wells Fargo. Please go ahead.
Thanks. Good morning. You guys had a great quarter from a same-store perspective, mostly driven by the 7% increase in same-store cash revenues, I think. Can you just talk about the drivers of that growth? I know you guys have got some occupancy growth year-over-year in there, and rent growth has been strong, but was there anything else in the quarter you can point to that drove that large an increase?
No, it's just the fundamentals of the business. It's what you pointed to, occupancy increases and steady growth in revenues. It's a strong quarter, and we expect generally that to continue.
All right, great. Second question. I was hoping you could give a little bit more detail on the timeline for 1132 Bishop. You've taken 125,000 square feet offline already. Stuart, you just mentioned some more expirations coming up. Are you just going to be taking back all of the space that expires, or is there any challenge with respect to making sure you're repositioning the space in large blocks? The supplemental also says that in order for the first units to deliver, timely approvals need to be obtained. Can you just talk about the nature of those approvals and your thoughts on getting those by the delivery date?
Sure. Hey, Blaine, it's Kevin. We do have a little bit of wood to chop with the city relative to some approvals, but it's nothing that we don't think we're going to work through. We've announced that our timing is to deliver the first phase of the units next year, and we still feel comfortable with that. Regarding the timing of the overall project, I mean, it's going to take a couple of years to bleed everybody out of this building and migrate them out into the marketplace. The timing of this, I think that the more construction we do, the more rapidly some people will want to get out of their leases. So, I can't really give you a defined timeline for the actual conversion, but it's going to be somewhere over the next couple of years, before we have that building 100% residential.
We're able to convert. When we get an entire floor back, we're able to convert floor by floor. Obviously, you can't convert half of a floor.
Right. That's helpful. Thanks, guys.
The next question comes from Craig Mailman of KeyBanc Capital Markets. Please go ahead.
Hey, guys.
Hey, Craig.
Just to clarify on the debt side, it seems like pro forma $220, you guys paid off subsequent to quarter end, you still have about $700 million of kind of 2022s that are left that you guys would want to pay off this year. Is that kind of correct? You guys don't have any more refinances in guidance. Is that because of minimal impact of where you could refinance versus kind of in-place rates, or is it just going to be sort of end-of-year timing?
I don't have that, what you're looking at in front of me, but I could say this. I believe when we end this year, we're trying to get a billion and a half to $2 billion of debt refinanced. That debt, once it's done, will have eliminated all maturities through 2024. Is that right?
Into 2023, four quarters.
2023? All the maturities before 2023. I don't know what on the schedule you're looking at, but there's that amount of debt that we can shift out.
Okay. It's more than $1 billion still.
Yeah. Just to clarify, on our schedule, the three loans that mature in 2022, it's $920 million of principal.
Right. You guys paid off $220 subsequent to the quarter end, right? Is that any of-
That was the 2023 maturity.
That was the 2023.
That was the 2023 maturity.
Got you. Okay. You guys still north of $1 billion to refinance, roughly?
Yeah.
Okay. That's helpful. Just on the investment side, you guys have talked about kind of $200 million a year spending between redev and developments. Could you kind of talk about maybe where you are in the next one or two to go on ground up for the resi program and maybe timing on when we should expect to hear more about those?
Well, we effectively finished the one at MHA. We have a big one launching in Hawaii, right? The conversion. We have the one we're building on Wilshire, right? Those are taking a lot of cash to do those. We're working actively at two additional sites, both of them Actually, three additional sites, one in Hawaii and two in L.A., to get them geared up for entitlements so that they kind of are entitled online as those are completing. Those will sort of slot into, and hopefully we'll be able to properly move crews over to it.
Awesome. Thank you.
The next question comes from John Guinee of Stifel. Please go ahead.
Great. Thank you. I'm looking over the last three and a half years of your lease economics, and it's been stunningly consistent, about 27%-30% growth in GAAP rents, 11%-13% growth in cash rents, holding a releasing cost between about $5.75 and $6 per square foot per lease year. Is this sustainable, and for how long?
Well, we hope it's sustainable. I think that it's sustainable as long as the national economy keeps up, holds its own. In terms of a gateway market that's performing that way, I think we have stronger, more solid underpinning to be able to continue performing than some of the other markets that are single industry dependent. I also think that we continue, as we sit here now, to be priced below, whether it be New York or certain areas in Boston, certainly San Francisco or areas in Washington. Without a national trip, I think that we have a very good running path ahead of us. A change in the national economy obviously could be hard on us and whatever, some type of trade war that was particularly impactful to the West. I don't know what it is, but it's nothing happening here local.
A follow-up, most of your peers have big 50,000, 100,000, 150,000 sq ft lease expirations, which always seem to go vacant. Do you have any of those on the horizon?
No, not that I can think of, because we really don't barely have any of those. Even when you look at our kind of largest tenant list, those tenants tend to be many tenancies at different locations that make that single person or something, whether it be Bank of America and their various locations, or CLA and their 20 locations, or whatever it is. We don't happen to have that sort of chunky, severe depression followed by elation of having signed a gigantic lease. We are much more of a flow business.
Yeah, I think in the entire portfolio, there are only four that are over 100,000 sq ft, and those don't expire anytime soon.
Great. Thank you.
Thanks.
The next question comes from Manny Korchman of Citi. Please go ahead.
Hey, everyone. Thank you for the equity discussion earlier in the call. I guess, as you thought about doing the common equity, how did you weigh that against contributing more assets to either the existing JV or other JVs?
Well, it's much more complicated to contribute assets that I didn't just buy, to contribute assets that we've owned for a while, than it is to contribute an asset that we just purchased. When you contribute an asset that you just purchased, you don't have to have a price discussion with your partners because it's the price you purchased it for. When you contribute one that you've owned for a while, it's more complicated because they don't feel like you're exactly on the same page with them in terms of the price it should go in. Now, that's not to say Those aren't also discussions that we have. We weren't prepared to have that discussion then.
Thanks, Jordan. Just, can you give us updated thoughts on what's going on in downtown L.A., and how interested you are to get involved in that market right now?
Well, I'm happy that there's development and construction and things going on in downtown L.A., and all the great activity around USC and things that are happening. Not putting it in negative, not positive, nothing. It's not a typical Douglas Emmett market when you look at how focused we are on smaller tenants, a mix of industry, amenity base, being able to control what's going on, lack of new, real limitation on new supply. You shouldn't expect to see us headed down there soon.
Thanks, Jordan.
The next question comes from John Kim of BMO Capital Markets. Please go ahead.
Thank you. On your multifamily same-store growth, I know it was impacted a little bit by insurance this quarter, but, overall, it seems a little bit weaker than some of your multifamily peers. Can you just discuss the occupancy dip that you had in Santa Monica and Brentwood? Also on Santa Monica, looks like the rents were flat sequentially. I just wanted to see if you could elaborate on this.
Well, I felt that the same store on our resi was a little weaker than we expected it to come out as. Obviously, part of that has to do with a bad expense comparison in the previous quarter. I think, in Peter's remarks, he said that it would've been more like 3% had we not had the insurance income come in in the previous quarter. Our resi, you're right. When you look backwards, we've been running more of a four to six program, which has been extremely strong. Now even taking out the insurance gain that we had before, you're looking more of a 3. I don't know of anything going on that is limiting on that front. We've had tremendous growth. I don't know what would cause a pause. Certainly, there's noise quarter to quarter.
Certainly, we aren't taking it as an indication that resi's slowed down. I know, because I'm reading reports all the time, that there's a tremendous shortage of for-rent housing in the markets that we're in. Certainly, everyone from the city council to the governor to everybody else is trying to figure out a way to increase the for-rent housing in these areas along transit corridors. Really, a lot of the areas where we own apartments now, because you're just running at 100% full always, and rents continue moving. I don't know of any issues, but I also agree with you. I thought this quarter was a little lighter than I would've otherwise expected.
Okay. On the office front, I think by recollection, you had seven office assets that were repositioned. Five were back in the same-store pool this year, two are still under renovation. Can you just clarify those numbers, but also, what was the impact of the renovated office assets to your same-store growth this period?
Well, we're getting the renovated buildings as they roll in, are definitely improving our same store because, as we've said to you, the renovations are impactful. We're seeing shifts. Even when the renovation isn't completed, we're seeing shifts. Obviously, we're anxious. First of all, we're anxious to have the same-store pool be as large as possible, because when it's too small, it gives too much kind of random noise quarter to quarter. As it gets larger, it's a little easier to predict. We're trying to push as much into it as we can. If you're saying the renovated buildings are carrying their load and more, I'm sure they are. Because when you're doing same store and comparing back, we're seeing same-store accelerated improvement from those renovations. Which is, by the way, what we predicted.
I'm just wondering because some of your peers will keep the renovated assets in the same-store pool through the renovation process, some do not. I'm just wondering if you had considered, I guess, the more conservative approach.
Well, I will say this. I would reverse what you just said, because we actually, I would say a year or two ago, we went around and met with people, and they're like, "You're out of your mind. You have so little in same store. You have all these buildings out that you're doing. You need to include more buildings in same store." We said, "All right, we'll put them in." Which more conservative is to include as much in same store as you can and not pull buildings out, which could be accused of cherry-picking or whatever the case may be. We said, "All right, we'll put everything in. It's going to make things better, not worse." Which at the time, people were thinking that we were keeping them out because it made things worse. We put them all in. Okay?
I would say that if you were to talk to your peers, they'd go, "Okay, thank you. You took the conservative approach. When those are drawn, you put most of your buildings in, unless they were extremely impacted." That's what we did. You're calling that the not conservative approach? Yeah. That's not what we were told. Part of the change also was including most of the buildings in the JVs, because we had previously excluded all the buildings in our JVs from same store. That included buildings that are not going through repositioning. Got it. Thank you. All right.
The next question comes from Dave Rodgers of Baird. Please go ahead.
Dave?
Just one moment, please. Mr. Rodgers, please go ahead, sir.
Yeah, can you guys hear me?
Yeah. Yeah.
Oh, hey. Sorry, not sure what happened. I guess on the acquisition pipeline, just curious if Kevin can give us some additional detail on the change in interest rates and spreads, if that's kind of shaking more things loose, increasing the appetite, and maybe how the pipeline looks today between multi-family and office?
Well, the interest rate movement is all kind of so recent that Real estate's a slow business, and it takes a while to sell something. Most of the people who have made decisions to gear up and sell made those decisions early in the year. The pipeline has been pretty good. I don't think that we're seeing a lot more flowing out due to the movement in interest rates, but the number of offerings in the market has been pretty solid. I think the balance is kind of the same between multi and office that we typically see. Things like The Glendon don't come up very often because that was 350 units, which is a larger property for our markets, but there's a steady flow of multi-family throughout the market as well.
Maybe Jordan, just going back to your comments earlier, with regard to leverage on the portfolio, obviously if the goal is to kind of continue to push leverage down, not necessarily to a specific number, you've got a lot of developments. Would you contemplate kind of contributing those developments or redevelopments at completion? Is it really just going to be the acquisitions, and I guess I'm thinking where the equity component's going to come in to continue to de-lever the portfolio with the bigger and bigger development and redevelopment pipeline?
We are willing to do deals where we contribute assets into a pool, and there's a JV-style pool. It's just much more complicated. We have a group of JV partners and documents that are organized extremely well to just buy something and put it in on structure and fees and otherwise that's been pre-negotiated and ready to go. Of course, in that situation, there's no issue about what the cost that it's contributing on. It's much more complicated to contribute, whether it be development assets or a section of a group of assets or whatever, because you have to agree on pricing and other things. That is something that we do think about doing. We just haven't happened to have done it here.
Thank you.
The next question comes from Rich Anderson of SMBC. Please go ahead.
Thanks. Good afternoon. Or I guess good morning still. Jordan, when I think about your office portfolio and how it's so different than many of your peers in terms of its size, typical tenant size and whatnot. Then I think about your history running multi-family assets over the past many years and still do today. Does it feel like your business, having experience for a wide range of different types of office buildings, flows more like a multi-family portfolio than an office portfolio, just in terms of CapEx and some of the other sort of things that tend to bite other office REITs in the neck because there's so much capital involved? Does it feel a little bit like multi-family to you, or is that just a kind of a silly observation on my part?
That's 100% the way we feel. That's exact, on the nose, exactly how I feel. Thank you for saying it. It's funny to have someone say it back to us because I've been saying for a while, we're trying to move I'm saying internally, though, I haven't been saying to the outside world. We're trying to move the feel, the look and feel of leasing office space over to the same look and feel that you get when you rent an apartment. If you go to rent an apartment, you don't walk in and say, "Hey, got the place, and I'm gonna send in my planner." You don't say, "Let me introduce you to my lawyer." You don't say, "Let me introduce you to my construction company that we're gonna have do all this." You know what you say?
Can I get paint and carpet?" You hand them the lease. Okay? That's what happens. That is what we're going for, and I'm telling you, we're achieving it. When you look at the stats in terms of speed to move in, TI costs, our Signature Suites program, which is the prepared suites and moving people into them, the form leases, the quickness of negotiating these leases and getting them done because we only have certain clauses that are allowed to be changed. You would see that we've actually taken giant steps in that direction.
A reason for all that is, it seems like in the office business, when you look at the office business, the most discussed item is rental rate, but the most important item is turnover costs, and that's TIs, commissions, and downtime. TI commissions and downtime represents so much more year in and year out money than whether you got another nickel or dime or whatever the case may have been in the rental rate. The whole platform has shifted to focusing on those things. As it has, what we've recognized is we need to operate more like the residential business, where they're looking for very little downtime between units and to move the tenants in. That's exactly right.
All right, great.
That's kind of the mantra around here.
Say that again.
You're exactly right, and that is the mantra around here.
Okay, thanks. Secondly, again, along the lines of the typical size of your tenants, how do you feel about a company like WeWork and just what they're attempting to do? Is that a good tenant for you, or do you feel that that's competition? I don't know to what degree that they're in your markets, but I'm just curious where you stand on that issue.
I don't know that they're a plus or a minus vis-a-vis our markets or us. I know they're very anxious to get some space in our markets. Our markets are fairly well leased, It's hard for them to get in. My guess is the question of whether they're a plus or a minus has more to do with the end game of WeWork. Do they end up with a strategy that works long term and therefore they don't create, like during recession, a giant vacancy across everybody's markets? At the moment, they haven't been very impactful, plus or minus, in our markets. We don't have markets with a lot of vacancy. I think there's markets with vacancy where they've come in and taken huge amounts of space and improved the economics of those markets because they soak supply up.
Great. Okay, that's all I have. Thanks.
The next question comes from Daniel Ismail of Green Street Advisors. Please go ahead.
Thanks. Good morning. Jordan, you've been pretty vocal about your thoughts on Proposition 13. I'm curious to hear your thoughts on the failure of Measure EE and if that provides any sort of litmus test for 2020 Proposition 13 ballot measure.
I thought it did provide a litmus test. Obviously you know, it needed to pass by, do you pass by two-thirds?
Two-thirds, yes.
It didn't even get 45%. The only advertising that was out there was the advertising in favor of it that was essentially seemed to be sponsored by the city. I feel that there will not be, for the people that haven't heard about this already, it's been proposed by some groups that Proposition 13 should run as a split roll. You should have Proposition 13 protection on residential, but not on all commercial space. Commercial space is very broad and impacts all small businesses, all everybody. It's just a dramatic change. The county assessors for the various counties have already come out and said they don't know that that's even something that they could do, would be to reappraise every single commercial property in the state.
One even said whatever revenue the split roll would generate, he'd need more than that to hire the people to do it. Anyway, I do not feel that this state has voters that are at all sympathetic to a split roll or frankly, any modification to Proposition 13. In fact, they have shown that they're not very sympathetic to almost any further taxes going forward. We're operating at a very high tax rate as it sits today, and you're just not hearing a lot of that, whether it be from politicians or others. You have individual groups that would like to get their hands on more money that are pushing things, but you're not seeing that institutionally across the state. Certainly, a change to Proposition 13 would be a particular shot at the residents of California, right?
Because if you're gonna say, "If you're willing to have your business and do business in California, we're gonna tax you. But if you're willing to have your business in any other state and only sell products in California, you can get out of the tax." That's a strange way to go, right? You would think that would be the opposite of what a state would want to do. In fact, when we talk to politicians, I think they feel that way, too.
Great. Maybe just shifting over to the office markets just for a moment. Can you guys give us an update on year-over-year net effective rent growth in your various West L.A. submarkets?
Well, we're seeing very good growth. It depends on the market. Obviously, we're starting to see some reasonable growth in Hawaii. We're seeing very good growth on the Westside and seeing on Sherman Oaks, and we're seeing what I would call very modest growth in Warner Center market. Even that one, as I think Stuart mentioned, has finally got a clear up arrow, which is nice.
Relative to 2018, would you frame it as a deceleration, stable, or an acceleration in terms of year-over-year growth?
I'd say 2018 had an up arrow and 2019 has an up arrow, but I wouldn't say the arrow is any bigger or smaller for either year. Are you just talking about Warner Center? Is that what you're asking?
Oh, no, for West L.A. office.
All of it is just our up arrow, as was asked earlier on the call, or the same store, our up arrow is getting a little cloudy when you say up arrow on market and up arrow from the gains we're making from redoing our buildings. We might be seeing a little more action than the average of the market from those activities. The activities are seeing good gains, but of course, spread across the whole portfolio, they're still having some impact, as was brought up earlier.
Okay, great. Thanks, everyone.
The next question comes from Bill Crow of Raymond James. Please go ahead.
Good afternoon. Jordan.
Hi, Bill.
What is the possibility that they could try and solve the housing issue by speeding up the permitting process?
Oh, please. I will tell you this, it's not even lost on politicians at this point that CEQA has turned into a drag on providing housing, and housing is a big goal across the board. If you go from city councils to mayors to governors to county board assessors, it's all housing, housing. Okay. What they're hearing back is, first of all, you got to find a way to deal with the NIMBYs or bananas, not in my backyard. Everybody goes, "We need housing, just not in my backyard. Put it in that guy's and that guy's for sure, not mine." Okay. That's number one. Number two is we got to figure out a way to modify CEQA, because CEQA is used not to protect, it's so rarely used to protect and so often used as a sword and to attack.
You can see CEQA claims being generated out of law firms that are out of state. They find one person here. We had one against us where the person left and then the guy's secretary became the CEQA claimant. It's just turned insane, and it's being used to just drag these out. Now, you know what? They're not as effective against a company like ours. The way a CEQA claim becomes effective is if you need to go out and raise your equity, and you got to go out and raise the debt because you want to build, let's say, an apartment somewhere, and you get a CEQA claim, a lot of times the debt won't fund till its claim clears, or the equity won't fund till the claim clears, and that gives them leverage.
Even the worst claim in the world that certainly you'll win if you can get into court, can stall a deal to the point where now that developer has to go and now argue with those CEQA claimants. This is not lost on these law firms. They're in the business of doing this. That is in the discussion, but obviously, there's points on both sides. The original reason for CEQA was probably a good reason. It's just being horrifically misused now. We need to look for ways to fix that. You've seen there's precedent for that, because when the state wants something big to happen, a stadium downtown or whatever, something big to happen, they will literally pass a bill and exempt them from CEQA to get them free of those nuisance lawsuits so that they can move through and get done.
I'm hopeful for something like that. I don't know how quickly it will occur, but it is certainly recognized that that is one of the things that's in the way.
Yeah, I always like to hear your perspective on the politics out there. The follow-up question was on the Signature Suites, which you referenced a few questions ago. How important is that becoming to your business, and what is the rent differential between a Signature Suite and traditional office space?
Well, it's very important to our business. I just saw something that said we're trying to build out 30 a month. Is that right? Was that the number? 30 a month. We are so focused on those suites, and they are doing so well for us. I would say, to be most accurate in the question, is not that the rent in the suite would be higher or lower. I would say the net cost of renting the suite and the downtime is a much better package than when someone comes in and, no matter how fast we are, when we have to modify that suite to fit them, that's a completely different deal. Someone could come in and look at one of those suites. We can have them in it next week.
These numbers are crazy they're so good in terms of the speed, the cost of the TI. There's no TI, right? Having a suite also that is reusable at very little TI cost. Remember, we're using all space planners to build the suites to the most standard feel that we know will be appreciated by the widest class of people. When we do that, we get something that's very reusable and cost-effective. Then you would say that by itself would be a fantastic win. Then you say, "Oh, by the way, we lease them faster. By the way, those build-outs are cheaper than the build-outs that we have to do when the person's spec-ing something that they particularly want. By the way, they're in the space almost immediately and paying." Okay, everything good about that program.
It sounds like that's one of the kickers to the same-store growth as well, right? Just above and beyond what the market might be giving you.
Yes, it is.
All right. That's it for me. Thank you.
Okay, thanks.
This concludes our question and answer session. I would like to turn the conference back over to Jordan Kaplan, Chief Executive Officer, for any closing remarks.
Thank you for joining us. We look forward to speaking with you next quarter.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.