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Douglas Emmett Inc  (NYSE:DEI)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Douglas Emmett's Quarterly Earnings Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will receive instructions for participating in the question-and-answer session.

I will now turn the conference over to Stuart McElhinney, Vice President of Investor Relations for Douglas Emmett.

Stuart McElhinney -- Vice President of Investor Relations

Thank you. Joining us on the call today are Jordan Kaplan, our President and CEO; Kevin Crummy, our CIO; and Mona Gisler, our CFO. This call is being webcast live from our website and will be available for replay during the next 90 days. You can also find our earnings package at the Investor Relations section of our website. You can find reconciliations of non-GAAP financial measures discussed during today's call in the earnings package.

During the course of this call, we will make forward-looking statements. These forward looking statements are based on the beliefs of, assumptions made by and information currently available to us. Our actual results will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict.

Although we believe that our assumptions are reasonable, they are not guarantees of future performance and some will prove to be incorrect. Therefore, our actual future results can be expected to differ from our expectations and those differences may be material. For a more detailed description of some potential risks, please refer to our SEC filings, which can be found in the Investor Relations section of our website. When we reach the question-and-answer portion, in consideration of others, please limit yourself to one question and one follow-up.

I will now turn the call over to Jordan.

Jordan L. Kaplan -- President & Chief Executive Officer

Good morning, everyone. Thank you for joining us. I am excited about 2019, following a very successful 2018 at Douglas Emmett. During 2018, we grew our FFO by 12.7% and our AFFO by 7.4%, and raised our dividend by 4%. The straight-line value of office leases, signed during 2018 was 31% greater than the prior leases for the same space.

And our development platform has matured to the point where it's making meaningful additions to FFO. Already in 2019, we've completed construction at our Moanalua apartment community, which now has almost 1,200 units. With the upgrades to our existing buildings and new amenities, this is now, one of the most modern and desirable workforce housing communities in Hawaii.

I'm also happy to report that construction is in full-swing at our 34-story new residential project in Brentwood. We will soon complete our first group of office repositioning projects and we are already seeing accelerated rent growth from our efforts. We plan to pursue more repositioning opportunities during 2019 and beyond, which will provide significant, incremental revenue growth and a very high return on our invested capital.

Finally, I am pleased to announce that we plan to add approximately 500 new workforce apartments in downtown Honolulu, by converting a 25-story, 490,000 square foot office tower to for-rent housing. This project will address the severe rental housing shortage in Honolulu and support the city's efforts to transform downtown into a 24-hour community.

I would like to spend a moment talking about the quality of our FFO. As many of you know, we love the focus on cash flow and are proud of the fact that compared to our peers, very little of our FFO comes from non-cash revenue such as FAS 141 and straight-line. Indeed, at the midpoint of our guidance for 2019, only 3.5% of our FFO comes from these non-cash items. Because this is only a third of what is typical for our peers. Growth in our FFO translates to disproportionately higher cash flow.

Now, I'll turn the call over to Kevin.

Kevin A. Crummy -- Chief Investment Officer

Thanks, Jordan. And good morning, everyone. As Jordan said, we plan to convert one of our Honolulu office towers to much needed workforce housing. The conversion will occur in phases, over a number of years, as office space in the building is vacated. In select cases, we will relocate tenants to our other office buildings. Although we do not have enough vacancy to accommodate all of them. We currently estimate the construction costs will be between $80 million and $100 million, although the inherent uncertainties of development are compounded by the multi-year and phase nature of this conversion.

Assuming timely approvals, we expect the first apartments to be delivered in 2020. Our other two multi-family development projects are also progressing well. As Jordan mentioned, we completed the current Honolulu project, just after year-end and continue to rent units above our pro forma. In Brentwood, we remain on track and on schedule for the construction of our 376-unit high-rise apartment tower. One of the most exceptional residential opportunities in all of West L.A.

We expect to complete our 34-story residential tower in late 2021, with cost still estimated at between $180 million and $200 million. At the same time, we're working on a one-acre park that will benefit the entire neighborhood, including our adjacent 400,000 square foot office tower, and 712 unit apartment community. While development is providing significant growth, in 2019 we also expect more acquisition opportunities in our submarkets.

Our balance sheet is strong and our cash flows remain healthy, with our AFFO payout ratio under 62%. Other than -- on Honolulu development project, we have no loans maturing before 2022 and we have a large number of unencumbered properties to provide flexibility for future financings.

With that, I will now turn the call over to Stuart.

Stuart McElhinney -- Vice President of Investor Relations

Thanks, Kevin. Good morning, everyone. The fundamentals in our market remain solid, with robust demand across the diverse set of industries. As we have often discussed, new office construction in our submarkets, is almost non-existent. The entire construction pipeline represents only 50 basis points of existing supply.

In Q4, we signed a 183 office leases, covering 682,000 square feet, including 286,000 square feet of new leases. We had excellent Q4 leasing spreads, 26.3% for straight-line rent roll-up and 12.7% for cash roll up. The lease rate for our total office portfolio increased to 91.7% and occupancy increased to 90.3%, with meaningful additions in both Honolulu and Warner Center.

Throughout 2018, we achieved straight-line rent roll-up of 31.4% and cash rent roll-up of 13.6%. On the sustainability front, we reduced our electrical usage per square foot by over 2%. Our 11th consecutive year of lower consumption. Over 95% of our eligible office space is ENERGY STAR certified, based on the most recent numbers.

On the multi-family side, our portfolio remained fully leased at quarter end. In Santa Monica, we recaptured a total of 15 Pre-1999 Units, in 2018. On average, each of these units represents about $40,000 of additional annualized rent. Over the past year, we have increased our total annualized rent from the multi-family portfolio by 7.7%, reflecting strong demand for our newly developed units at Moanalua and higher revenues from the rest of our multi-family portfolio.

I'll now turn the call over to Mona to discuss our results.

Mona M. Gisler -- Chief Financial Officer

Thanks, Stuart. Good morning, everyone. We are pleased with our Q4 results, compared to a year ago, in the fourth quarter of 2018, we increased revenues by 8.2%. We increased FFO, 7.8% to $102.8 million or $0.52 per share. We increased AFFO 5.5% to $80.3 million, we increased our same-property cash NOI by 3.1%. For all of 2018, we increased revenues by 8.5%. We increased FFO 12.7% to $399.7 million or $2.02 per share. We increased AFFO 7.4% to $309.7 million, we increased our same property cash NOI by 3.5%. At only 4.5% of revenues, our G&A for the fourth quarter remains well-below that of our benchmark group.

Finally turning to guidance. As we indicated last quarter, we are facing two significant headwinds in 2019. First our FFO guidance reflects a $0.05 per share non-cash reduction caused by lower straight-line and mark-to-market revenue. As we convert non-cash revenue to cash and straight-line and mark-to-market in 2019 will represent only 1.8% of our total revenues, this is well-below the 5% average of our peers.

Second, our FFO guidance reflects the new lease accounting standard requiring us to spend (ph) internal leasing costs. Last quarter, we said that this new standard would have reduced FFO by approximately $0.04 per share had it applied to 2018. We now expect that impact to be only $0.02 per share in 2019, as a result of formalizing our internal leasing compensation structure.

The combined impact of these two non-cash headwind, is a $0.07 per share reduction in FFO. Fortunately, we expect that to be more than offset by 5% to 6% growth in same-property cash NOI. As a result, we expect 2019 FFO to increase to between $2.07 and $2.13 per share. As usual, our guidance does not assume the impact of future acquisitions, dispositions or 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.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Hey, good morning out there. So two questions. Good morning Jordan. So two questions, first on the Bishop transaction, can you just walk through what the FFO impact of this will be, you guys presumably are going to slowly empty-out office floors. And then the residents won't move in next year, but it seems to be a multi-year process. So from an earnings perspective what is included in 2019 guidance and then how do we think about this as we're thinking about 2020 as far as in FFO -- whether it's neutral or negative. Not sure, but looking for some perspective.

Jordan L. Kaplan -- President & Chief Executive Officer

Well, so the way you described is accurate. So for a quarter or two, we're actually already been stopped leasing and obviously there were some press about it and why we're formally discussing it now. And so the building has some vacancy and it already that we can start working on. And so we will start on that, we're not asking tenants to move out, we're not vacating space and we're trying to do it in the least disruptive way manner by just converting, floor by floors, as floors become vacant.

So certainly will not be a shock to the system, by where we would empty the whole building and build-out apartments. And then say OK, now it's like a brand new project. I am sure that there will be some noise in FFO over the next few years until we sort of stabilize, both sides of this, the residential side and the office side. But it won't be as bad as it would have been if we had gone in that kind of more extreme direction. It's probably costing us a little more to do it floor by floor, as opposed to sort of emptying it then we're doing it. But I think, net we're better-off with how we're handling it. So I hope you won't see much of an impact.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay. And then the next question is given your footprint your tenant size, clearly, there has been a lot of other leases in the market like the Google Leases, Westside Pavilion that have garnered a lot of attention, but you spoke about 4% to 5%, or 4% to 6% same store cash NOI. I think, your embedded rent bumps are like 4%.

So do you feel like these bigger leases that are being signed elsewhere, outside your portfolio, are allowing you to drive that growth in your portfolio or is there a spillover that's occurring from those tenants, just try to get, -- trying to get a better sense for the transition or the reaction between some of these big headline leases and the leasing that you guys are doing to see how much of an impact there is or is not.

Jordan L. Kaplan -- President & Chief Executive Officer

Kevin you want to answer that?

Kevin A. Crummy -- Chief Investment Officer

Yeah, I think, Alex. A lot of this is tech companies but it's their media business and they're very focused on content production and so you should look at it as we get an informal study in the third quarter and the bigger company has brought like a $26 million production budget as far as we can tell about half of that was Netflix. The people like Apple, Google, Facebook, they're just getting in the game and those production dollars are flowing directly to our small tenant base, so the agencies, the entertainment lawyers, the accountants -- the production companies. And so, the more money that's sloshing on the system, with these big leases and they're bringing big production budgets. That's all great for the tech-media ecosystem and we're a big piece of that just not on a large tenants size.

Alexander Goldfarb -- Sandler O'Neill -- Analyst

Okay , thank you.

Jordan L. Kaplan -- President & Chief Executive Officer

Thanks Alex.

Operator

Our next question comes from Dave Rodgers with Baird. Please go ahead.

David Rodgers -- Robert W. Baird & Co -- Analyst

Yes, good morning out there. Jordan. I wanted to follow-on one of your comment that you made in your prepared comments about the office repositionings, getting ready to complete and starting to deliver here in the near-term. I think, you used the term high ROI. Can you kind of dive a little bit deeper into some of that, now that you have some project completing and the confidence to go forward bit more.

Jordan L. Kaplan -- President & Chief Executive Officer

Yeah, so as I said, we have a list of projects that we're begin in 2018 and they're coming to conclusion. And certainly enough to conclusion that you could see where it's headed, and obviously people watch construction what's going on.

If you would have asked a year ago, if you would have said to me, what's going to happen. I'd say well, lot of disruption at the buildings and aggravation with tenants and then once the things done, then -- I have a better product and we ought to see some real movement in the rent. But just like you guys on stock and tenants do and they see something happening. They have jumped out, and so even though projects aren't finished, even though barriers are still up, but you can see pictures of what we're doing. It's clear what's happening, where rescheduling (ph) and building et cetera. You can see, where you're headed with it.

We are already seeing rents disproportionately move up in those buildings, are kind of Canary in this thing, because it's hard, because rents are generally moving up. So how much are you going to credit like what you're doing with that number. So our Canary has been a project over in Century City, where we feel like we have a direct comp on the project right next door to us, were we getting skimming the building, we're doing in the lobby, we're doing in the landscaping, we're doing in the amenity package, it's around the building, with the whole thing and trying to take it, even a step beyond what's next to us.

We were saying, rent spread in those two deals that was -- certainly over a buck and we thought wherever rents go, if we can start closing that spread, we'll have a feel for what the impact of what we're doing is. What we feel we've already closed more than half of that gap. And by the way, still barriers, constructions it might, let it pass mid-point.

And we're seeing similar to the degree you can calculate it, similar results in some of the other buildings that we're working on down in Santa Monica and over in Westwood. So because of that we're saying, wow hopefully, we'll have the impact, we expected and certainly the impact is a little quicker than we would have expected, because people are moving on the expectation of completion. They're not waiting for completion and that's why I said, -- I was confident, this is going to work and I'm even more confident it's going to work now.

David Rodgers -- Robert W. Baird & Co -- Analyst

I appreciate the color. And maybe just one follow-up on that front is, does that program get larger then, given the success that you're having, that you feel like you can accelerate it, put more to work more quickly.

Jordan L. Kaplan -- President & Chief Executive Officer

Well I guess, we could, if we didn't have so many other things. So we're not only doing that program. But as you also know, we're doing ground-up construction at a couple of sites. We're doing the conversion in Hawaii. We're doing the ground where we just polished off, MHA. So we have -- and of course we're doing Brentwood, so we have that and currently seven repositioning sites and adding additional repositioning sites during 2019. So we don't want to overload our system. But at the same time, we've done a good job, Ken has done a good job, building that system out to be robust, enough to take on all of this. We have a ton of construction going on in this company right now.

And we're getting it done, getting it on budget and we are getting the impact we want. So that's all great. So I don't want -- we don't want to, puts right-over the cliff. So we have a lot going on, certainly it's valuable work that's very impactful. So we're going to keep trying to build that platform out larger margin to be able to do even more. But we're probably at the right point, right now in terms of the size and number of things that we take on each year.

David Rodgers -- Robert W. Baird & Co -- Analyst

Alright. Thanks, Jordan.

Jordan L. Kaplan -- President & Chief Executive Officer

Thanks.

Operator

Our next question comes from Nick Yulico with Scotiabank. Please go ahead.

Nick Yulico -- Scotiabank -- Analyst

Thanks. Just hoping to get a little bit more info on the same-store NOI growth guidance. It looks like you're forecasting occupancy been somewhat flat. And so, I'm not sure, if there is a same-store expense growth benefit this year, since I know higher expenses impacted the growth in a negative way last year?

Mona M. Gisler -- Chief Financial Officer

Yes, I'll take. Hi, Nick. I'll take both of the pieces of that. I think, I heard a question about the same-store and NOI, as well as, and what the occupancy impact is going to be in that. Given that our range is consistent with last year.

And on occupancy side, we bought about 3 million square feet over the last couple of years and those acquisitions came with lower occupancy in it, it just takes a few years for us to get that stabilized that. We're making good progress there. And we still have upside too, and we can see that on the Westside, as they kind of filter through those new acquisitions. And then we're obviously aware of upside Warner Center and then in Honolulu, which Jordan just talked about what our approaches there.

On the same-store NOI side, I talked a little bit about the impact of our non-cash revenue. We have historically always had fairly low non-cash revenue, particularly compared to our peers and but over the last couple of years with our acquisitions, we've seen an increase in the amount of our non-cash revenue, also had some larger deals. And so that's driven that up as well. And as those start to mature and we're going to see that reduction in 2019, but it also means opportunities as it convert to cash.

Nick Yulico -- Scotiabank -- Analyst

Okay. And then I guess just following up on that. Is it possible to get, what is the same-store expense growth that's embedded within your same-store NOI growth because it just -- it feels like that's one of the drivers of why same-store NOI growth is higher this year versus last year, when you did have that expense issue impact same-store?

Mona M. Gisler -- Chief Financial Officer

We've done -- typically provide guidance on separately for the expenses. If we're looking at our operating expenses generally though I mean, I think historically, we've always said we look to a normalized rate 3% to 4% and that would be our expectation heading into '19 as well.

Jordan L. Kaplan -- President & Chief Executive Officer

I don't, Nick, I don't think it's really coming on the expense side. I think it's coming on with the roll-up you're seeing right, which we've been selling every quarter, that impact rolling-in and rolling-in at the same time as we're rolling out the non-cash items. And even now, you look at the occupancy number and you go-out and how come we are not changing that, how come it's still in the same range.

There's a lot of churn in that range and remember the Westside, if you go back a way, so, Westside is kind of our big anchor that '95, '96 and then held up the numbers on Warner Center and on Hawaii. And now we have that churn on the Westside, so it's taking a little longer to create the lift again to get back to its numbers. So you get upside in the Westside. We think we got real upside in Hawaii side, right, as you know we're doing there. And even Warner Center has been in the market been outstripping us. So I mean, I would not be surprised to see the same store where it is because we've churn through all that stuff and we know what the roll-up we've been having in the rents.

Nick Yulico -- Scotiabank -- Analyst

Okay, thanks. Appreciate it.

Operator

Our next question comes from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman -- Bank of America -- Analyst

Great, thank you. I wanted to talk about both I guess for Kevin. Just you mentioned maybe an uptick in potential investment activity. What you're seeing on the acquisition side. And then also just your capital plan for the year and how you plan to finance additional acquisitions and also other redevelopment spend?

Kevin A. Crummy -- Chief Investment Officer

Sure. Look the acquisition pipeline looks pretty good. There should be more opportunities in 2019 and there is a couple of things that are going to be coming out. I think toward the end of this quarter that we're excited about. So I'm fairly bullish in '19, the acquisition platform. I mean, Jordan you want add on that.

Jordan L. Kaplan -- President & Chief Executive Officer

Yeah, so I just don't want to have like bullish on acquisition platform means bullish compared to not the time spend. But some of the whole things, so compared to other times, not those times alright, because those are kind of -- there is a crazy amount of flow during that time.

Now if you want to compare acquisition pipeline in 2019, the acquisition pipeline 2018, that's a very robust and that's (inaudible). So we are bullish from that perspective. In terms of the capital plan, we actually have -- I mean not only -- and we're doing a good job. We have a lot of free cash flow coming out of the operations you heard in Kevin section on the prepared remarks, less than 62% of our AFFO is being dividend that -- which actually is a pretty substantial amount of money for the construction activities that we're doing.

And so -- that is so close to covering it, that it will be meaningful to look at something beyond that. In terms of new acquisitions, we still have all of the optionality around the JV platform and all that structuring. So it just seems like the problem in our capital, we need some good deals to come up and get them purchased. And I'm sure, we won't go two years. I'm sure, this year we will do some deals, which we'll feel great for all of us because we're like doing that side of the -- our growth story is always been important to us, but we are now leaning in the direction of the construction side to make sure that we're able to maintain the kind of growth that we've seen over the last decade in our cash flow or FFO whatever metric you having to look at.

Jamie Feldman -- Bank of America -- Analyst

Okay. And what are your thoughts on leverage by year-end.

Jordan L. Kaplan -- President & Chief Executive Officer

I don't know that you'll see dramatic changes in leverage between year beginning and year-end. I mean, we have one, five we need to do. And went (ph) into some way and that's on a building where we doubled the number, it's still more MHA 1 and we've doubled the number of units that cash flow is going better than double and the loan on their note probably equates to 25% to 30% or 20% of something crazy because we did the whole thing with cash flow. So it's still just the original loan on there.

Jamie Feldman -- Bank of America -- Analyst

Okay and then just follow up on the acquisition activity. Is this in your existing submarkets office versus residential, just with kind of what you could see. I know, you said it's coming-off a low base in '18, but if you -- what you could see how does it change the complexion of the portfolio?

Jordan L. Kaplan -- President & Chief Executive Officer

Okay, same markets. There's a little bit of office, I mean there's office and a little bit of residential and same markets we're in.

Jamie Feldman -- Bank of America -- Analyst

Okay, all right, thank you.

Operator

Our next question comes from John Guinee with Stifel. Please go ahead.

John Guinee -- Stifel -- Analyst

Great, thank you very much. This is more of a curiosity question but two questions. First on Bradwood, it looks like your incremental cost is about $500,000 a unit. How should people think of the value of the land for the Brentwood high rise development that's one question.

And then second, Bishop Street in Honolulu. These are 20,000 square foot floor plates, looks like you're going to spend an incremental $180,000 per unit to do this massive redevelopment. How do you handle such things as elevator banks, I imagine you can't have residential and office users sharing the same elevator bank. And do you have these projects have affordable housing units involved?

Jordan L. Kaplan -- President & Chief Executive Officer

Okay, so. Brentwood, I will tell you how you should think about that. If you're trying to do a kind of academic study on the cost of building high-rise residential tower in the Westside, you would try to impute some cost of land. But in terms of practically looking at it, the land has as close to a zero cost, as you can get.

I mean we're building on surface part, we had a supermarket that gave up their option or might have aciddentially lost their option ticket to continue at a very reasonable rate for them. And so we took that which was not a big in terms of square footage and a surface parking lot and we're now building an entire residential apartment towers. So the cost of land is close to zero. And we have some incremental value, we're getting out of the fact that the parking is already built for the entire project. Although it's not cheap to go through, four layers of parking the build towers.

So, I don't feel like the land is costing us anything and by the way, if we weren't doing this, the land will just -- still be sitting there, doing nothing. In terms of the. And in terms of, I think there 16 units, controlled housing lines affordable housing and that Brentwood project out of 376 and -- no you're asking about the other one, you're asking about, 1132 Bishop. 1132 Bishop, our goal is to build housing that will fit in that 80 to 120. I mean, regardless of anything else, because changing the nature of that downtown creating what I'll call with a small w not capital workforce housing. So that commuting patterns, 24 hour community down there, whether it be restaurants, and other amenities change that's something we're after on that. So our hope is that that entire building fits within that range that 80 to 120, in terms of the people occupying those units and the rental rates.

John Guinee -- Stifel -- Analyst

Let me just ask one little follow-up question. So how do you share elevator (ph) banks during the conversion.

Jordan L. Kaplan -- President & Chief Executive Officer

You know what, there is so tricky, because, and I'm not -- no one on this call, the right person to really hit this subject. But they have to come up with vertical shafts that allow them to provide, whether it would be utilities and other things for systems to support the residential floors, while at the same time not disrupting the office force. And I know that -- that I mean, probably the primary reason that we -- there was so much discussion of this project and we weren't announcing it is the sure, (inaudible) away that was actually buildable and doable to put in the residential floors and at the same time, keep the office force working, what has been holding up our confidence in doing this. As well as, and I have -- of the appreciation for the city, and particularly the Mayor's Office support and allowing us to do it, needs to be done to get this conversion done.

I mean they played a role in a two, but with those two things that held us up from announcing this maybe like a quarter or two ago.

John Guinee -- Stifel -- Analyst

Great, thank you.

Jordan L. Kaplan -- President & Chief Executive Officer

Thanks.

Operator

Our next question comes from Blaine Heck with Wells Fargo. Please go ahead.

Blaine Heck -- Wells Fargo Equity Research -- Analyst

All right. Thanks. Just following up on same-store from earlier. Do you guys have a GAAP same-store NOI guidance range for 2019. I guess, I'm just trying to triangulate, how much of a tailwind the burn-off of free rent or just in general, the change in straight-line is providing for cash same-store versus maybe what you'd be expecting on a GAAP, same-store basis?

Mona M. Gisler -- Chief Financial Officer

Yeah, we haven't provided guidance on the GAAP same store.

Jordan L. Kaplan -- President & Chief Executive Officer

And frankly but I -- we did provide guidance on the burn-off of the non-cash. So you could kind of reverse engineer -- near you way and some of that but. And as we said, I mean the non -- the portion of our revenues. We gave you two steps right. The amount of our FFO that non-cash makes up now, which is out of that, less than 3.5%. And then we also gave you on the revenue side, the 1.8% of our revenue. So it's playing a smaller role and as non-cash plays a smaller role, you know that GAAP and cash are closing in on each other, but there's other stuff that's in there, I mean --.

Blaine Heck -- Wells Fargo Equity Research -- Analyst

I guess the question is just the -- most of the burn-off is in the same-store number, is that right?

Jordan L. Kaplan -- President & Chief Executive Officer

We floated through, what we did do for you is, because we were giving you the revenue number. And we have consolidated properties on our balance sheet and those consolidated properties, it would have been hard for you to flow the non-cash from the revenue side and figure out the impact to the FFO side to our shareholders. We also gave you the FFO number, so we unwound that for you. I don't know, that we did. I mean that was the version we did.

Blaine Heck -- Wells Fargo Equity Research -- Analyst

Yeah. We can follow up or I can figure it out, but I guess secondly, Jordan, you talked about cash flow in your remarks and you guys added a slide in the presentation, showing you guys have had an AFFO growth rate at a 7.2% CAGR over the last 12 years, which is certainly impressive. When you look forward, are there any specific risks, you see that could keep you guys from hitting that level of growth over the next few years. Could you think, given how tight the market is that still an achievable number?

Jordan L. Kaplan -- President & Chief Executive Officer

Well, I hope it's achievable. I will tell you this -- the history and I don't want to intently put, but our history has been to grow our earnings, primarily through acquisitions and obviously we have the operating platform that supported us and all the leasing and all the stuff we've done there.

We looked at few years ago and said, how can we make our growth, our external growth more reliable and predictable and because of the position we have in many of these markets, we have opportunities that literally nobody else has. And so we started this construction and redevelop ground-up construction, the redevelopment platform all of that. And I have to say -- I feel, if you look out the next five years, six years, seven years, whatever would be your timeframe is, that our growth that we can drive that we control, right. Because before it was kind of -- I hope, some for sale, may hope we get it, I don't know, that will be for sale. Now this is all stuff -- it's within our control. It actually feels more predictable, more reliable than it has been for what you're looking at over the last 12 years.

Blaine Heck -- Wells Fargo Equity Research -- Analyst

Great, that's helpful, thanks.

Operator

Our next question comes from Manny Korchman with Citi. Please go ahead.

Emmanuel Korchman -- Citigroup Inc -- Analyst

Hi, Kevin. House hold (ph), when we've talked about Hawaii in the past, you've guys talked about potentially buying another office building to either convert or to have those sort of overflow space for the tenants that are going to get relocated, can you talk about what change in that plan or is that still on the table?

Kevin A. Crummy -- Chief Investment Officer

What really change in that plan was when we first set out, we didn't have the results in our Moanalua development yet. And so, we were thinking that when we did the resi-development, we weren't sure -- what the returns would be. And so that we would need incremental office space and vacancy to make the deal work. And then as we finish that first phase and we'll want little, saw the rental rates that we're achieving, we looked at it and said, hey, maybe this works on a stand-alone basis.

And as we look at the properties within the downtown we figured out that the one that was most suitable for redevelopment was actually one that we control. And so, we just took a look at it and said, hey, what if we do this on a stand-alone basis, what's the impact to our overall portfolio. And what would be the potential return on cost. That's not to say, that if one or the other office buildings came available that we wouldn't deal ph it, because we'll see how this impacts the downtown market, but we didn't need that additional office building to make the development work. So we decided to go forward .

Emmanuel Korchman -- Citigroup Inc -- Analyst

Thanks and Mona, Just following up on lease accounting changes. Maybe I just understand what changed from the $0.02 and the $0.04 you mentioned changes in compensation. Is that all sort of counting driven or is there going to actually be a cash impact any of that.

Mona M. Gisler -- Chief Financial Officer

Well, and probably a little bit of a combination on that. Let me explain. So when we had given the original $0.04 guidance that was based on the 2018 and leasing costs and looking ahead, with an assumption that and most of that was going to be expensed that. And we've always had a linkage to our leasing and our compensation, what we did is we went back and we formalized that compensation structure. And -- are linking that directly to paying by transaction. We've actually been able to -- we will be able to capitalize more than we had initially thought and that's into the (inaudible).

Jordan L. Kaplan -- President & Chief Executive Officer

I don't think it's a cash side, if that was really. It's just we took what we did in the past and by putting a amount and saying, OK, we're formerly doing this base that already can capitalized $0.02 to $0.04 that's all I have.

Emmanuel Korchman -- Citigroup Inc -- Analyst

Thanks guys.

Operator

Our next question comes from Craig Mailman with KeyBanc Capital Markets. Please go ahead.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Maybe just to follow up on the downtown conversion, kind of what are you guys thinking is the return on the incremental spend there and maybe as you guys kind of looked on the stand-alone basis, what kind of rent uplift that you kind of flow through to the rest of your office portfolio there with the pullback in stock?

Jordan L. Kaplan -- President & Chief Executive Officer

Well, originally as Kevin said I was worried that the return on the residential side would be below development returns. I think, now we're probably at the low end of development returns which is acceptable because we have a larger goal, we want to achieve downtown, but it's going to be at the low end of development returns.

Now you know, as we start plan it out just like we were surprised at MHA. We hope to get a positive surprise on that, but that's where we're at today. In terms of the rest of the market, I'm sure there will be some impact on the rest of the market, there's other things going on, there is another big tenants that moved it and took a 100,000 feet in the market, there is a very large tenants thus looking to consolidate downtown . So there's -- and then there is what we're doing. So there's a number of positive things happening in the market, rents are moving. I think it would be fair to say it is double-digit movement in rents in downtown, Honolulu. Where that goes and how that goes is the function of all those things. So it's going to be a little -- it's going to take a little bit of time to put a real prediction on it.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And then just on the occupancy guidance. I know there's some puts and takes. I guess, just looking at the expiration schedule for '19, to little bit lower than the next couple of years out. You guys just kind of held new leasing pretty steady. I mean, is there something that a tenant -- larger tenant maybe that's coming out later in the year that's keeping it, seemingly more conservative. Or do you guys just -- I would think there'd be a decent amount of net absorption over the next couple of quarters, just given the lower lease hold?

Jordan L. Kaplan -- President & Chief Executive Officer

Well, there's churn, there is a -- and churn and renewal and the whole thing. I think, that until we get, well I don't know. I think, we made a reasonable, we gave you a reasonable estimate, the estimate is a range. And frankly on a portfolio, our size, if you go to the higher end of the range you didn't have will pretty good amount of absorption, right.

So we gave a range the it's likely you'll see some good absorption in Honolulu. We're already seeing absorption in Warner Center . And as we churn through the new product that we purchased in the Westside we ought to see some there too, but you know what, that's a matter on the Westside particular because that's the dark (ph). I mean, the other ones are the tail. And as we churn through and maybe you're seeing how strong our rent roll-up is. And when you have a lot of really significant roll-up on rents and you've just bought 3 million feet some of those tenants maybe aren't as ready for that roll up. Right.

So you have a little more churn in that portfolio than you would otherwise have. And that's been kind of gating to the Westside being that kind of the rock that's held our occupancy up more of the -- to the '95 some plus and dragging up the others. And until we kind of settle that in, I don't think, the Westside will be able to do that now, maybe we'll get a lot of that settled this year but there might even still be some left over the next year.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

That's helpful, thanks.

Operator

Our next question comes from Daniel Ismail with Green Street Advisors. Please go ahead.

Daniel Ismail -- Green Street Advisors -- Analyst

Great, thanks, good morning guys. Just a follow-up on the rent roll up. So it's been fairly consistent, in the low teens, over the past two years, that have still pretty good batting-line for the overall rents roll up embedded currently in the portfolio.

Jordan L. Kaplan -- President & Chief Executive Officer

Hey, Daniel, we don't provide any guidance on the rent spreads, it's very hard to predict and as you know that's choppy quarter-to -quarter, but we have seen very good trends there. We don't see any signs of those trends softening. So we expect still good spreads, going forward, but we're not going to give any specific guidance.

Daniel Ismail -- Green Street Advisors -- Analyst

Okay. Fair enough. And maybe just going back to an earlier comment on Santa Monica Reggie. I think you mentioned 15 units recaptured from the pre-99.9, apartments, can you remind us how many of those apartments are still left and sort of the pace of recapture annually.

Jordan L. Kaplan -- President & Chief Executive Officer

Yeah, this is about 200 left in Santa Monica. Last couple of years, we've gotten about 15 back each year. And no expectations for changing phase and that over '19 or '20? Yeah, very hard to predict. The tenant has an incredible deal. Right . But at the same time, they've been in the space for a super long time. So, whether they be would older there is more opportunity for their life circumstances to change, whether it would be getting married or when the kids are live there. Whatever the case maybe. So in one sense the longer the program goes, the more you think it turned in another sense of longer program goes, the better the deal we have in the more motivation I have not to move out. So those two should downs in our favor, eventually but it's hard to predict.

Daniel Ismail -- Green Street Advisors -- Analyst

Fair enough. Thanks guys.

Operator

Our next question comes from Jason Green with Evercore. Please go ahead.

Jason Green -- Evercore -- Analyst

Good morning. Can you guys talk about what changes there may have been, same store question to the same-store pool. And if there were increases or decreases, what the comparable occupancy was in fiscal year '18?

Jordan L. Kaplan -- President & Chief Executive Officer

Yeah, sure. So for the pool for 2019. We are adding properties to the pool for 2019. What we wanted to do is make have that pool will represent, as many other properties in the portfolio is possible. So really represent the whole portfolio. So for '19, we're going to be adding the recent consolidated JVs acquisitions, as those have matured. And also some of the parallel to conservative and taking some of the repositioning projects out last year. Those are really have been creating less noise in vacancy than we've had expected. So, some of those are coming in the pool. So the pool has gone from about a 11.8 million feet up to about 15.3 million feet next year and it much better represent our overall portfolio.

Jason Green -- Evercore -- Analyst

Got it. And are you able to say what the occupancy was on that new pool for fiscal year '18?

Stuart McElhinney -- Vice President of Investor Relations

No I don't know, specifically on that pool, the difference in occupancy now.

Kevin A. Crummy -- Chief Investment Officer

I mean you know that we are putting in all the stuff that we bought two years ago, right. And which we bought at very low occupancy. So that's been just slowly working its way up and I just thought last year we get ourselves a real disservice in terms of representing the growth in the portfolio and the growth in our markets. And I said but we pushing this year about getting as much into pool as we can. And that was a very big shift for us.

Jason Green -- Evercore -- Analyst

Got it. And then maybe broadly, if you could just talk about the effect the repositioning of 1132 Bishop is going to have not on the multifamily market but on the vacancy and the office market in Honolulu?

Jordan L. Kaplan -- President & Chief Executive Officer

Well, the building itself represents about 10% of the market and the market is in the mid-to-low '80s. So the math never works that way, people move in and out of the market, changed to manage (inaudible) drop people in and who knows. But it will have a-- It will create for sure a more balanced market between kind of landlords and tenants where the market has historically had you might say, one billing to many. So that's another good goal of this project, but it's positive for the whole market.

Jason Green -- Evercore -- Analyst

Got it . Thanks very much.

Operator

(Operator Instructions) Our next question is a follow-up from Jamie Feldman with Bank of America. Please go ahead.

Jamie Feldman -- Bank of America -- Analyst

Great, thanks. What's the percent leased, currently at Mauna Loa?

Stuart McElhinney -- Vice President of Investor Relations

It's about half the units.

Jamie Feldman -- Bank of America -- Analyst

About half? And then in your guidance what do you assume for leasing up the rest? Is it occupied -- you're contributing the half?

Jordan L. Kaplan -- President & Chief Executive Officer

Correct, correct. Occupied, we haven't provided any kind of lease-up guidance or timing on what we're leasing up, or leasing up at a good clip and we hope that continues throughout the year.

Stuart McElhinney -- Vice President of Investor Relations

But haven't broken out any guidance for that.

Jamie Feldman -- Bank of America -- Analyst

Okay. And what do you across the portfolio, what would you say your average rent bumps are right now? And what are you thinking for rent growth this year, market rent growth?

Jordan L. Kaplan -- President & Chief Executive Officer

Average rent bumps on the office side you on them. Right.

Jamie Feldman -- Bank of America -- Analyst

Yeah.

Jordan L. Kaplan -- President & Chief Executive Officer

So the average in place is somewhere between 3% and 3.5%, I'd say, for the last two years, we've been getting very good rent bumps all the deals on the Westside are going out over 3%. It's a lot of 4%, a lot of 3.5%. We're getting a lot of 3.5% in Sherman Oaks/Encino as well. Honolulu and Warner Center are kind of still down at the 3% range. So it down to that all out, I think in place, it's somewhere between 3% and 3.5%. On the rent -- you want to comment on market rent growth?

Stuart McElhinney -- Vice President of Investor Relations

Well, if you look at occupancy across the markets you would think that we would continue to have pretty good rent growth into the next year. And I don't know, I mean I think that will not -- there is only two sides of that equation, which is the supply and is not really new supply coming and on the demand side, the industries that are in our markets and there it would be impacted by something national. They're not being impacted by anything here. I mean, here there are generally just growing. So that would just add pressure and continue to move rents where they've been moving.

Jamie Feldman -- Bank of America -- Analyst

Okay. All right. There is any new leases, you say 3% to 3.5% average to on the rent bumps across the portfolio?

Jordan L. Kaplan -- President & Chief Executive Officer

On new leases we're doing better than that, we're are applying 3.5% to 4%.

Stuart McElhinney -- Vice President of Investor Relations

The Westside, a lot of force and then we're doing 3.5% and 4% in Sherman Oaks/Encino as well. So, on new, weight is to the upper end.

Yeah, the way (ph) to the upper end on the new, but the overall in place would be probably between 3% and 3.5%.

Jamie Feldman -- Bank of America -- Analyst

Okay, all right, thank you.

Jordan L. Kaplan -- President & Chief Executive Officer

Thanks.

Operator

This now concludes our question-and-answer session. I would like to turn the conference back over to Jordan Kaplan for any closing remarks.

Jordan L. Kaplan -- President & Chief Executive Officer

Well, thank you ev3eryone for joining us and we look forward to speaking with you again next quarter.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Duration: 51 minutes

Call participants:

Stuart McElhinney -- Vice President of Investor Relations

Jordan L. Kaplan -- President & Chief Executive Officer

Kevin A. Crummy -- Chief Investment Officer

Mona M. Gisler -- Chief Financial Officer

Alexander Goldfarb -- Sandler O'Neill -- Analyst

David Rodgers -- Robert W. Baird & Co -- Analyst

Nick Yulico -- Scotiabank -- Analyst

Jamie Feldman -- Bank of America -- Analyst

John Guinee -- Stifel -- Analyst

Blaine Heck -- Wells Fargo Equity Research -- Analyst

Emmanuel Korchman -- Citigroup Inc -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Jason Green -- Evercore -- Analyst

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