Hudson Pacific Properties, Inc. (HPP) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Hudson Pacific Properties First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Kay Tidwell, Executive Vice President and General Counsel.

Good afternoon, everyone, and welcome to Hudson Pacific Properties First Quarter 2015 Earnings Conference Call. With us today are the Company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas. Before I hand the call over to them, please note that on this call, certain information presented contains forward-looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the Company's business and financial results to differ materially from these forward-looking statements are described in the Company's periodic reports filed with the SEC from time to time. All information discussed on this call is as of today, May 7, 2015, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company's earnings release, which was released this afternoon and is available on the Company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors. And now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Thank you, Kay, and welcome to our first quarter 2015 conference call. Those who follow us closely know the last few months have been very eventful here at Hudson; we sold a non-strategic office asset, entered into a new joint venture on another office asset with Canada Pension Plan Investment Board, or CPPIB and completed successful equity offering with net proceeds from these transactions funding the Blackstone portfolio acquisition which we closed on April 1. In terms of leasing activity, our stabilized office portfolio is now 93.7% leased, we execute new renewal leases with our office portfolio with an average positive leasing spreads of 25.6% on a cash basis and 26% on a GAAP basis. In March, we announced the extension of KTLA's 94,000 square foot lease to 2030 at Sunset Bronson Studios property in Hollywood. One of Los Angeles' largest independent television stations, KTLA has been headquartered at Sunset Bronson for close to 60 years. KTLA plans to renovate space which coincides with the significant capital projects already underway at Sunset Bronson such as our 323,000 square foot ICON office tower adjacent to 90,000 square foot creative office building and 1,600-space parking structure. KTLA's continued presence complements the many next generation media and entertainment companies that leverage our Studio’s unique combination of stages, production facilities and office space. Taking a closer look at the capital transactions for the quarter, in January, we formed the joint venture through which CPPIB purchased 45% interest in our 1455 Market Street property for $219.2 million before closing adjustments, which was equivalent to an asset value of $487 million with net proceeds funding a portion of Blackstone portfolio acquisition via 1031 exchange. We acquired the property in December of 2010 for $93 million and retained the 55% ownership stake along with general partner status as well as management or leasing oversight. The joint venture and sale follows a major renovation and backfilling of over 584,000 square feet of space vacated by Bank of America with tenants including the San Francisco MTA as well as the high growth companies such as Uber and Square. We've unlocked a portion of value creating for shareholders to-date and we'll participate in additional upside for mark-to-market on rents and retail repositioning to be completed in the fourth quarter of 2015. In March, we sold our 222,000 square foot First Financial office property in Encino, California Douglas Emmett for $89.0 million, which after the repayment of property level debt generated approximately $46.7 million of net proceeds used towards the Blackstone portfolio acquisition via 1031 exchange. We purchased the property in connection with our 2010 IPO for approximately $65.8 million and created additional value prior to the sale through lease renewals and backfilling space including 30,000 square foot lease with luxury fitness company Equinox. The investment yielded 9.4% unlevered IRR and 13.8% levered IRR. In January, we completed a successful public offering of 12.65 million shares of common stock at price of $31.75 per share generating $385.2 million of net proceeds which we contributed to the operating partnership to repay amounts outstanding under our security credit facility with a balance applied towards the Blackstone portfolio acquisition. And in April, funds affiliated with Farallon Capital Management completed a public offering of its 6 million shares of our common stock from which we did not receive any proceeds. Subsequent to our April 1 -- quarter, we closed on the 8.2 million square foot 26 properties San Francisco Peninsula and Silicon Valley office portfolio from Blackstone Real Estate Funds for approximately $63.5 million common shares and operating partnership units and $1.75 billion in cash before closing the adjustments. In addition to the net proceeds from our joint venture with CPPIB First Financial sale on the January equity offering, we funded the transaction’s cash component and closing costs with $1.3 billion of unsecured debt, details of which are outlined in our earnings release and our 8-K filed with the SEC in connection with this acquisition. As far as integration, it's gone smoothly on all fronts, including accounting, leasing, property management, operations and IT and we've already executed on the asset-specific business plans. Our leasing team took over immediately following the December announcement and since January 1, we've completed approximately 700,000 square feet of new and renewal leases resulting in Blackstone portfolio being approximately 87.5% leased as of this call. Leasing velocity and rents are ahead of our initial underwriting and we remain extremely optimistic about achieving a leasing percentage approaching 90% at year end. Now, I will just run through a few conditions of our core markets briefly. The San Francisco market strength continues to afford us opportunities to create significant value through renewals and backfilling of office space. Average asking rents rose to $66 per square during the quarter, a 4.2% quarter-over-quarter increase and a 16.3% year-over-year increase. Project net absorption, north of 600,000 square feet of vacancy dropping to 5.5% has put upward pressure on rents, a trend we expect to continue through all of '15 given new deliveries totaling 2.2 million square feet that are currently 90% pre-leased. South of market had one of the most significant gains in absorption and the largest drop in vacancy from 6.8% to 4.2%. At our 1455 Market Street property we’re seeing demand for high profile new tenants as well as those looking to expand and no higher rents in our most recent transactions and expect to have more on this in the near future with prospect tenants. The San Francisco Peninsula Central County which includes Redwood City, San Mateo and Foster City were approximately 2.2 million square feet of Blackstone portfolio assets are located continues to drive growth as demonstrated by a biopharmaceutical company [indiscernible] pre-leased of an entire 360,000 square foot campus in Foster City during the quarter. In Foster City rents are up 4.2% for the quarter and 9.5% year-over-year to $59 per square foot and vacancy remained relatively flat at 12.7% quarter-over-quarter, down 240 basis points year-over-year. Rents in San Mateo increased by 6.3% quarter-over-quarter and 14.2% year-over-year to $48 a square foot and vacancy at 9.5% is down 110 basis points year-over-year despite 80 basis point increase for the quarter that coincided with 90,000 square feet of net absorption. Silicon Valley which contains approximately 4.7 million square feet of Blackstone portfolio mostly in Palo Alto and North San Jose started the year strong with over 500,000 square feet of net absorption while total leasing activity topped 2 million square feet, nearly 40% year-over-year increase. Due to several large vacancies coming online in Santa Clara, vacancy rose 20 basis points in the quarter to 8.2%, still down 240 basis points year-over-year. Rents increased for the 18th straight quarter to $47 per square foot which is a 4% quarter-over-quarter and 12.9% year-over-year which is the largest increases in Palo Alto which is 6.7% quarter-over-quarter and 9.8% year-over-year to $90 per square foot. In North San Jose, rents were up 3% quarter-over-quarter and 15.5% year-over-year to $33 a foot and vacancy remained flat year-over-year, but increased 40 basis points for the quarter to 42.2% due to the expiration of few small leases. A majority of our Los Angeles office assets are located in West Los Angeles where supplemental market conditions continue to improve with rents increasing 2.2% quarter-over-quarter and 9.8% year-over-year to $50 a square foot. Vacancy held steady at 12.7% over the quarter down 150 basis points year-over-year. Los Angeles' unemployment rate fell to 7.7% in the quarter and unemployment levels surpassed pre-recession peaks led by growth from a handful of industries including technology and entertainment. We are seeing strong increase from top tier tenants looking to lease a significant portion of our Hollywood Icon project with total demand to-date in excess of 2 million square feet. Vacancy in the submarket increased 120 basis points quarter-over-quarter to 8%, a decrease of 90 basis points year-over-year. With the near-term vacancy increase partly resulting from the [indiscernible] in order to relocate and consolidate operations in another Hollywood location. Rent stayed relatively flat at $44 per square foot with a minimal absorption but are still up 5.5% year-over-year. In Seattle, we’re seeing an influx of national technology companies resulting in a positive start to 2015. Three of our assets are located in Downtown Seattle’s transforming Pioneer Square, which had its 15th consecutive quarter of positive net absorption. Lowering vacancy 240 basis points to 84.4% for the quarter or 390 basis points year-over-year, rents stayed flat for the quarter and up 8.4% year-over-year to $32 per square foot. Significant deals including TV stations [indiscernible] 58,000 square foot lease at Home Plate Center North and home improvement network, Porch.com 75,000 square foot lease at 2200 First Avenue South. In addition, construction commenced on a 150,000 square foot build-to-suit for Weyerhaeuser, a private owner of Timberland at 200 Occidental Avenue South. We foresee growing demand for high quality office products in Pioneer Square and begun entitling our Merrill Place development site for approximately 140,000 square foot mixed use project with office, ground floor retail and structured parking. We expect to start construction in this project in the first quarter of 2016. All in all, we had an extremely productive first quarter, which laid the groundwork for a successful closing of the Blackstone portfolio of acquisition. This transaction has been transformative for our Company, but we remain focused on the task at hand, realizing value for our stockholders with the expanded portfolio and buy an active pipeline of opportunities across all markets. Now, I’m going to turn the call over to Mark Lammas, our CFO, for details in our first quarter financial performance.

Thank you, Victor. Funds from operations, excluding specified items for the three months ended March 31, 2015 totaled $18.5 million or $0.23 per diluted share compared to FFO excluding specified items of $17.9 million or $0.27 per share a year ago. Specified items for the first quarter of 2015 consisted of acquisition-related expenses of $6 million or $0.08 per diluted share. Specified items for the first quarter of 2014 consisted of costs associated with a one-year consulting arrangement with a former executive of $800,000 or $0.01 per diluted share and expenses associated with the acquisition of Merrill Place property of $100,000 or $0.00 per diluted share. Net income attributable to common shareholders was $19.2 million or $0.25 per diluted share for the three months ended March 31, 2015 compared to net income attributable to common shareholders of $1.3 million or $0.02 per diluted share for the three months ended March 31, 2014. Turning to our combined operating results for the first quarter of 2015. Total revenue from continuing operations increased 13% to $62.8 million from $55.6 million a year ago. The increase was primarily the result of increases in our office property segment of $5.6 million in rental revenue to $47 million, $800,000 in parking and other revenue to $5.3 million and $500,000 in tenant recoveries to $6.1 million, a $500,000 increase in other property related revenue to the $4 million and our media and entertainment properties also contributed to higher total revenue. Several factors contributed to this increases including additional revenue stemming from higher occupancy and rents at our same-store office properties, the impact of interest income earned from the Broadway Trade Center note participation purchased on August 20, 2014, commencement of the lease with Deluxe Entertainment Services at our 3401 Exposition Boulevard property and improved occupancy at our 901 Market Street property, all partially offset by the sale of our First Financial property. We also enjoyed higher production activity at the Sunset Gower media property compared to last year. Total operating expenses from continuing operations increased 11.5% to $49.5 million from $44.4 million for the same quarter a year ago. The increase was primarily the result of higher expenses associated with improved occupancy at our same-store office properties, and to lesser extent the commencement of the lease with Deluxe Entertainment Services at our 3401 Exposition Boulevard property and improved occupancy at our 901 Market Street property, all partially offset by the sale of our First Financial property. As a result, income from operations increased 11.8 -- I mean, 18.8% to $13.3 million in the first quarter of 2015 compared to income from operations of $11.2 million for the same quarter a year ago. Same-store office net operating income in the first quarter, excluding specified items, increased by 10.8% on a GAAP basis and 9.9% on a cash basis. Interest expense during the first quarter decreased 15.8% to $5.5 million from $6.5 million for the same quarter a year ago. At March 31, 2015, the company had $787.2 million of notes payable compared to $827.4 million at March 31, 2014. As of March 31, 2015, our stabilized office portfolio was 93.7% leased. During the quarter, the company executed nine new and renewal leases, totalling 33,223 square feet. As of March 31, 2015, the trailing 12-month occupancy for the company's media and entertainment portfolio increased 71.6% from 69.1% for the trailing 12-month period ended March 31, 2014. Since the Blackstone portfolio transaction closed on April 1, our public filings will not include those assets until second quarter 2015. Turning to the balance sheet, as of March 31, 2015, the company had total assets of $2.8 billion, including unrestricted cash and cash equivalents of $247.9 million. At March 31, 2015, we had $300 million of total capacity under our unsecured revolving credit facility, of which nothing had been drawn. During the quarter, we paid a quarterly dividend on our common stock of $0.125 per share and we paid a quarterly dividend on our Series B cumulative preferred stock equivalent to 8.375% per annum. The company is reaffirming its full-year 2015 FFO guidance last provided on April 2, 2015 in the range of $1.50 to $1.56 per diluted share, excluding specified items. The guidance reflects the company's FFO for the first quarter ended March 31, 2015 of $0.23 per diluted share, excluding specified items. This guidance also reflects all acquisitions, dispositions, offerings, financing and leasing activity referenced on this call and in our press release. It includes approximately $46.6 million of total GAAP adjustments for our combined portfolio, including approximately $24.2 million in GAAP adjustments with respect to the Blackstone portfolio, acquired on April 1, largely stemming from in place rents, which are significantly below corresponding market rents. As Victor noted, with respect to the financing obtained in connection to the Blackstone portfolio acquisition, further details are outlined in our earnings release and in our 8-K filed with the SEC in connection with the acquisition. For purposes of this estimate, we have assumed that the interest rate with respect to $250 million of the five-year term facility and the entire $550 million two-year term facility, both of which remain floating, will be fixed effective as of May 15, 2015 to a combined rate of 4.25% per annum, including estimated amortization and deferred financing costs. As is always the case, the full-year 2015 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and earnings from events referenced on this call and in our earnings release, but otherwise excludes any impact for future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. And now, I'll turn the call back to Victor.

Thanks, Mark. As always, we appreciate your continued support of Hudson Pacific and look forward to updating you in our progress again next quarter. Now, operator, with that, I'm going to turn it over to you for any questions.

[Operator Instructions] Our first question is from Brendan Maiorana with Wells Fargo. Please proceed with your question.

Thanks. Good afternoon. So Victor, it sounds like you're making nice progress, leasing up the EOP Portfolio, I think you mentioned 87.5% leased as of now. To get to around 90 by year-end, is that really just taking down kind of the current vacancy from a lease rate perspective or is there much role and role that you would be concerned as a risk for moving out for the remainder of the year as well?

Hey, --. It’s a combination of both. So to delve into numbers, you can obviously spend time with Mark and the team. You know, we have leased about 700,000 feet, and the combination of leasing 700,000 feet comes to a lease of almost 200,000 feet in new deals and then renewals and backfills other difference of about 500,000 feet on average. On the renewal basis for ’15, I think we have got about 600,000 feet of remaining expirations, so the combinations of rolling those we are in a position that we look pretty good on right now and the additional square footage of vacancy that we’re in, we categorize them in two, threes and fours as towards LOIs and then series negotiations with leases. There is an additional 400,000 plus feet that were in various forms and functions. So to get to the 90 is a combination of both and I think we feel very comfortable with that given the current activity of over 1 million square feet of transactions that we are working on, things look pretty good.

Okay, great. And then to refresh my memory, were you thinking that your mark-to-market on sort of the near-term role of around 20% higher, is that still a pretty good target?

Yeah, it’s actually – it’s about 22% as a mark-to-market and right now I think on average on the rents, we are above market of about 8% of where underwriting is right now, just rental rates alone, and then TIs for new and renewal are way above where we underwrite them as well. So overall it’s a good deal.

Okay, great. And then just of couple of building specific questions. So I think Rocket Fuel has put some sublet space back on the market at 1455 Market, is that an opportunity for you guys, are they below market and might you be able to capture some of them there or is that not something that is an opportunity for you guys to move rents higher?

Yeah, listen, I think it’s suffice to say that their rent right now is 46, and we are in conversations with that space for somewhere with the six in front of it. So there is great upside for us.

Okay. And then Heald College at 875 Howard, I think their stock is down to like a 10 year or something like that. Are they paying you guys rent and if they aren’t, is that an opportunity to take back the space that they have there?

So they saw bankruptcy, we are in close contact to our counsel and their people are in close contact. I think the optimistic aspect from our standpoint is their current rent is well below market and if in the next several weeks, they make a determination as to what they are going to do with the existing space, we would have the ability to evaluate taking that space back and putting it back in the market.

Okay, great. And then just last one, Mark. G&A, it seems like it was a little bit higher than where we are forecast, it was in-line with last year where I thought it was going to move down, was there – were there one-timers in there and should we – where should we expect that to normalize ex sort of all the unusual costs that you’re going to have this year?

Yeah. Well, we started incurring some of the cost in anticipation of the expansion of the portfolio, so it faced in a bit sooner in the quarter that we ultimately anticipated. We think ultimately G&A kind of levels out at the level that we kind of pointed to in the early announcement of the deal. So on a full-year run rate basis, it’s probably cash and non-cash still trending towards right around just shy of 40 million, call it 39.6, just some of it hit a bit similar than we originally had forecasted.

Okay, got it. Thanks.

Our next question is from Craig Mailman with KeyBanc. Please state your question.

Hey, guys. Mark, could you just run quickly through some of the kind of key assumptions in guidance, it sounded like G&A will be around $40 million, but maybe share count, interest expense, maybe what you guys are thinking for NOI on those studios full year.

Sure. You know, this – well, don’t let me forget any of these, because you kind of ran through this. On share count, weighted average full-year share count is, I've got Drew next to me, so he will check me on it, but I think it's 1324 [ph] for the full year. Now you have to be careful with that, right, because that's a weighting over a full year's outstanding share amount and in any quarterly basis, that won't be your share count, right. So for the second quarter for example, your weighted average share count would be like 146, call it, right, but when you take the next lower share count in the inception of the air and that 146 current share amount and you spread it out over the full-year on a weighted basis, it comes up to about 1324. On interest expense, we've got some work to do around the debt as mentioned in our guidance in terms of fixing some floating rate debt and we’ve tried to outline exactly what the underlying assumption is on that, but on a full-year run rate basis, including deferred financing costs, we are looking at about 62.6 million, well, don't suggest me…

Yeah, studio NOI, rough guess?

On the studio, sorry, on the studios on a GAAP basis, and there's not much GAAP adjustment although we did sign that lease of KTLA and that includes there is a GAAP adjustment on that, on a GAAP basis, the studios is coming in right around 14, on a cash basis, closer to 12. What was the other one?

That was the major ones, that's helpful. Then, bigger picture, still curious with Salesforce in the news and them being one of your bigger tenants, just thoughts on the core San Francisco market in general, if there were M&A there, they may ramp kind of, with some of the bigger takers of the space over the last couple of years, what do you guys foresee for demand, somewhat spaced, et cetera and then also just remind us, does Salesforce have any outs at all at Rincon?

So, the answer is no. They don't have any outs. I think they've got 156 months remaining on their term and Craig, there are about 235,000 obviously with the weather affected the – on a full service basis, it’s about $6 and the deals that we are doing in the building are sort of in the mid to high-60s, so there is very few, but lots of space, good news from our standpoint is their space is virtually all built out with the exception of one floor and so we like the space, we like the quality of the space and obviously it's very premature to see what happens here, given what effectively they occupied our space relative to other space in the market.

Great, great. And then just classy, I know Brendon was asking about rocket fuel, but to your comments specifically on 1455, you guys are seeing some good demand there, how much space could you get back at that building from BOA and are there other spaces that maybe you're pretty marketing in that building, with anticipation of credit problems or is that just people wanting to get in to that building, just trying to get to the commentary around there?

So there are no credit issues there other than what we are looking at with the rocket fuel space, which is not creditors giving it back, so there is no credit issues there. We have some space coming with BOA, coming to the end of this year and then in ‘17 and that's going to be a combination space which is the basement space as well as some of the upper floors and suffice to say everything that is potentially available or coming available through ‘17 and existing space that we currently have right now is under negotiations, the same numbers that I talked about.

All right, great. Thanks, Victor.

Pleasure.

The next question is from Jamie Feldman with Bank of America with Bank of America Merrill Lynch. Please state your question.

Thank you. I guess just starting out with the Peninsula portfolio and you think about the fact that you think you will be at 90% by year-end, the leasing pipeline behind that 90% or kind of once you get the 90%, is that when it starts to really get challenging, not that it hasn't been hard to get to 90%, but just is this kind of the lowest hanging fruit that I'll get you there and how does your leasing pipeline look beyond that or just what's your sense on getting it beyond that 90%?

So Jamie, we are not going to forecast beyond the initial 90, because it’s up 9% from when we took it over and we initially had talked about that 90 [ph] being the end of 2016, we brought it back to the end of 2015 given the fact that the activity will be seen. To say the least, [indiscernible] the last 3%, 4%, 5% stabilize is not the case. I just think that the activity we're seeing now is across the board and we could eclipse that but I'm not comfortable with making any statements around that currently today. I feel very comfortable that the 90% number, I mean we've got a number of spaces across the board being in tours and conversions, and I think at the end of the day, we've got a number of assets, which we've talked about there, we're going to reposition, so we're going to take a little longer in leasing up because we’re putting substantial capital on those assets.

And which submarkets would you say the bulk of those leases will get signed?

It's across the board, I'm looking here it’s in Palo Alto, Redwood Shores, the Peninsula and the Airport and Silicon Valley equally have anywhere from -- on that score, 90% anywhere from 10% to 12% across the board and I think the biggest one is that Peninsula has got -- is got the most square footage that we're seeing transactions on right now. But they're all equally across the board, a lot of activity.

Okay, and then, what about leasing demands for ICON, how does that pipeline look and I know you'd mentioned you have a lot of interest but talk a little bit more about the types of tenants, when we might see something gets signed there?

We just finished pouring there, now they’re starting to go up, we've had over 2 million feet of tours, I think all the tours are pretty much upwards of 75,000 feet or greater. We've got two tenants looking at over 200,000 square feet now. I think we got several in the 100,000 to 125,000 square foot range. I'm optimistic that we're working on a couple of transactions that are looking fairly dynamic and something that we'll consider moving to the next level. Many of them brand name guys, several global technology and the entertainment companies and they are either looking to locate as new or some are actually looking to expand or consolidate their operations in Hollywood.

And where would they be coming from if they're new to the submarket?

Some are coming from the west side, some are new to LA, they're coming from Northern California.

Okay. And then, finally, you credit watch list, I know you'd mentioned before one tenant that went bankrupt. How would you say you're credit watch list looks today versus last quarter?

I mean, I think on a credit watch list basis, I can't think of anybody else with significance that we would even put into that category. We've been monitoring one tenant along the way for the last year or so, we've got some issues with them, Hilda is the second candidate I think of that sort of significant amount. As I mentioned earlier, Hilda is coming out of space that's looking at effectively sub $30 foot space going to high 40s on initial effective rents. So, I think you know and that's been a building that we got two large tenants with very low rent, then being one that we look to get out. I don't think the credit watch on that basis is unique to us or anybody else in the portfolio business, one tenant, I don't think there is anybody else that I could think of is material in that fact.

Okay, all right, thank you.

Thanks Jamie.

Our next question is from Alexander Goldfarb with Sandler O’Neill; please proceed with your question.

Yes, good afternoon out there. Just a few questions, sort of big picture, Victor, when you put it all together the fact that you guys are ahead of schedule on your occupancy, how should we think about the yield versus the initial yield that you guys bought EOP at and what you're targeting once you got sort of everything stabilized. How would that original pro forma yield compare to where you're trending now, so we put it all together?

So as we look at year one, we were at 5.1 [ph], I think currently now, we're probably closer to 5.5, 5.6 and I think our stabilized number was a seven, and that would have bought us to 90 -- I think it was sort of a 90%, 91% occupancy number, maybe closer to 92%. So that sort of I think on line with that, I think it’s just quicker, I think we've looked at stabilization fee, and we're probably looking at stabilization closer to year two, so that's sort of how we're looking them from the yield standpoint and the shift.

Yeah. And Alex on that note, when we talk about sort of our forecasted yield, we reference back to the underlying valuation at the point of the announcement of the deal of approximately $3.5 billion.

Okay. And then to that point, if you guys are on track to achieve stabilization sooner, does that mean that the original, I think it was like 100 million or something like that of CapEx spend, does that mean that that portion of that no longer have to be spent?

So CapEx is, that's a great question. The CapEx was GI's CapEx, fees and commissions and the likes, we have $250 million allocated to the portfolio. We have some activity and space that we didn't think we would have activity for and we’re redirecting those dollars. Right now we are not looking at lowering those dollar amounts. We position them to other assets, but it may take longer and there is some assets that we actually think we can put money in sooner on the time frames and get higher capitalization, deploy capital to those assets and lease them up faster. So that's a moving target. We are not coming off of the term of $50 million at this time.

Okay. And then just finally, Victor, when you all think bigger picture about the portfolio, obviously it's great things that are happening in San Francisco. We hear it from the apartment guys and obviously on the office side, but that said, there is certain sub markets that historically haven't been as strong. So as you guys think about leasing up assets, stabilizing et cetera, is there a thought to maybe starting to prune or sell some of the assets sooner than stabilization or you want to get everything stabilized and then think about pruning.

So we are carefully underwriting the assets. We've had several reverse increase that we will always take a look at if this even makes sense on a present day pruning versus stabilization. As I said, given the activity initially on the leasing and what we are seeing, the intent is to try to get higher revenues stream on the current assets and then maybe prune some assets. We will always look to prune, there are -- I always said even from the beginning, there is at least a couple of assets that we would like to broadly sell off. And I don't think that changed and maybe that's numbers two or three initially and over the next 6 to 12 after ownership we will be looking at that little more seriously.

Okay, thank you very much.

Thank you.

Our next question is from Vance Edelson with Morgan Stanley. Please proceed with your question.

So back on Icon, it sounds like the strong demand is coming from multiple potential tenants. Does it look like rents are likely to be better than what it had been originally underwritten and do you think that free rent is still going to be involved there?

So the answer is yes and yes. I mean we've always underwritten to have free rents. We are looking at the initial larger tenants are 10 plus year deals, some are 12. Average free rents on those deals, I’m looking at the order, [ph] it’s like 9 or 10 months on free rent on those deals, but the flip side is our renovates have increased beyond our initial underwriting on those assets -- on those transactions.

Okay, that's helpful. And then also, Victor, I wanted to give you a chance to talk about the steps you've been taking to improve the performance of EOP. It sounds like you've probably found some quick fixes since things are going very well. Anything in particular that you think is driving the faster than expected progress?

So, I mean, initially we've got a great team in place and it really revolves around the operations and leasing. So the management team on the ground we've filled the buildings with personnel. We've got a great operational rhythm with the leasing team and our existing leasing head here and I think that's been the key to success. The other thing that we are seeing from – in this response which we didn’t think would in fact come as soon as it did. We are taking some of this vacant space and we are prepping it now with building and that was part of the game plan we had looked at doing sometime in summer or fall. We've already started that in the response to the space being built out to the plug and play tenants in the marketplace has been much better for us. And it doesn't surprise the responsive number of tenants we are looking at that, so expanding that program to other assets in the portfolio.

Okay, that's great. And then lastly, could you just comment on how active the acquisition pipeline is and how would you rank your current markets in terms of being the most fertile ground for finding acquisitions. Would it be Seattle, and then San Fran and then LA is sort of a distant third if we were to exclude the potential EOP opportunity there. Is that the right way to think about it?

So, we’re looking at a consistent portfolio of transactions but we have a pipeline always sort of conservatively around $750 million to $1 billion. I would classify it, right now, we’re seeing some pretty interesting transactions in Los Angeles, probably is our first marketplace, Seattle, second. We’re doing our Merrill development play there. We’re seeing great activity in office and so, I’d say Seattle second and I would say [indiscernible] third in terms of ranking from our standpoint.

Okay, thanks very much.

Thanks, Vance.

[Operator Instructions] Our next question comes from the line of Rich Anderson with Mizuho Securities. Please proceed with your question.

Thanks. Good afternoon. The 90% lease by year end, if you are saying your timeline now of the year shorter, would we say 90% occupied by year end 2016?

Rich, it’s a good question. I would say that the occupancy is clearly trailing, but I don’t think it’s 12 months trailing, I think it’s probably less than that. I think it’s probably four to six months trailing. So, if you’re talking leased up by year end, you’re probably talking end of second quarter versus year end 2016.

Okay. And then you said, stabilized occupancy of 91%, 92%. I think you said that. So, it would just be another 100 some odd basis points to get you to full stabilization by -- at year end 2016. Is that all it would take?

We’re looking to -- so, when I refer to the stabilization, I was referring to based on the yield that, our stabilized yield of 7 and so that was sort of a 92%, 93% and so, it’s not necessarily, that’s where we’re going to say, [indiscernible] but that’s how our underwriting looked at when we’ve underwritten a deal. So – and as I said earlier Rich, we’re not projecting what year end ‘16 is, yet, we’re still too far away to look at that.

Okay. Regarding the activity that you are able to do from January 1 to today in terms of the leasing activity pre-closing of the deal, did that require some sort of special permission or how did that work and did you get compensated for doing that work, you the firm?

So, the answer is when we read on a transaction, we also read on basically overseeing all major decisions from that point forward, which included leasing an operation and any capital deployment. And so, that was factored into the transaction on a pro rata basis. So, in terms of getting compensation for, the answer is no, but they have to – we have to improve the deals and they have to improve the deals and obviously, if we had to close the transaction, they would have had to improve the costs, the costs that were incurred on us.

Got you. Okay. And then, on the $33,000 that was signed during the quarter that wasn’t EOP Blackstone, was that in line with your expectations or do you think it’s reasonable to think that you’re distracted by this enormous activity and so, maybe fell short of your expectations or just comment on that small level relative to what you’ve done in the past.

Well, Rich, we have next to no aspirations in the calendar 2015 year. So, we’re not going to have a whole lot on the legacy, whole lot of emphasis. I have a whole lot of opportunity to do a lot of leasing activity on the existing legacy. So, was it in line with our expectations, perfectly in line with our expectations.

Okay, perfect. And then, lastly, Victor, your legacy with Arden several years ago and timing the market well. You’re turning this around faster than expected. Is there any voice in the back of your mind that another market timing scenario or is this all just stay on point and not think about that right now? I’m just curious where your mind is about that given what you’ve done in the past.

My mind is laser-focused on leasing and operating the current portfolio plus the new Blackstone portfolio. We’ve got a lot of opportunity there, we’ve got four, five projects in development and redevelopment stages and I think there is a tremendous amount of value add going forward for growth in the existing portfolio.

Okay, fair enough. Thank you.

Thanks, Rich.

Our next question is from Brendan Maiorana with Wells Fargo. Please proceed with your question.

Hey, guys. Just a quick follow-up. It looked like occupancy dropped at Pinnacle and I’ve been thinking at any expiration or any meaningful ones happening this quarter. So, I was just wondering what the change was there?

We have 40,000 foot wall expected to roll there Brendan, on NBC, we are already working on the backfill there, I think you’ve got 7 -- 17 of it backfilled. So it was an expected expiration.

It was, okay. And then just Clear Channel, which is not until I think late next year, how do you fill that one?

I think, we are – it’s kind of wait and see on it. It’s a little too early to notice it.

Okay. All right, thanks.

Thanks, Brendan.

There are no further questions. At this time, I would like to turn the call back over to management for any closing remarks.

Well, as always, I want to thank you for the support and actually [indiscernible] out to the management team of the Hudson in the last five months, the amount of effort and energy put into not just in the existing legacy portfolio, but into the Blackstone has paid off, and I want to congratulate all of them and thank them for all their hard work. Thanks very much and we will see you and speak to you all next quarter.

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.