Hudson Pacific Properties, Inc. (HPP) Q2 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to the Hudson Pacific Properties Incorporated Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief 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 today, Ms. Kay Tidwell, Executive Vice President and General Counsel. Thank you. You may begin.

Good afternoon, everyone. And welcome to Hudson Pacific Properties second 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, August 6, 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 second quarter 2015 conference call. We had a strong second quarter in part due to months of preparation to acquire the EOP Northern California Portfolio, which closed on April 1st. During the quarter we completed over 470,000 square feet of new and renewal leases, with the majority of activity roughly 365,000 square feet at our newly acquired San Francisco Peninsula and Silicon Valley assets. We added to our pipeline a value creation projects purchasing a property and entry into contract to acquire another property both for redevelopment in the same Downtown Los Angeles’ Arts District, and we enhanced our access to capital, earning investment grade credit ratings from all three major U.S. rating agencies. Taking a closer look at the leasing at the end of quarter our stabilized office portfolio was 94.7% leased, which represents 100 basis point quarter-over-quarter increase. Our in-service portfolio, which includes leased-up properties part of the EOP Northern California Portfolio was 88.8% leased, cash and GAAP rents, spreads for new renewal leases throughout the portfolio were 35.3% and 48.5% and 48.5%, respectively. A testament to the success of our leasing team, as well as our markets continue to -- continues to strengthen. Same-store office NOI for the second quarter increased 18.1% on a cash basis extremely associate with nonrecurring upfront commencements on several leases expired. Specific to the EOP Northern California Portfolio as of this call these assets were approximately 88% leased, including deals and leases. We continue to significantly outperform our initial underwriting in terms of new and renewal deal economics. We have also made notable progress at properties with some of the large vacancies in near-term role, such as our Peninsula Office Park property in San Mateo, California. In May, we renewed and expanded our lease with business software services company NetSuite by approximately 49,000 square feet, bringing their total footprint at the property to over 166,000 square feet. We have a robust deal pipeline representing approximately 1.2 million square feet of demand across the EOP Northern California Portfolio assets and are in active discussions on LOIs and leases with several blue chip companies their household names. Turning to the acquisitions, in May, we purchased an approximately 120,000 square foot former Coca-Cola bottling facility at the intersection of East 4th and Merrick Streets in Downtown Los Angeles’ Arts District for approximately $49.3 million, roughly $410 a foot. Built in 1915, the building is currently vacant and entail for creative office conversion to include ground-floor retail, a roof deck and a new 300 plus parking structure. We are preparing to break ground by year-end with delivery in 2017. We are also under contract to acquire another building with three existing buildings roughly 80,000 square feet for redevelopment as creative office, retail and parking by one block away. Upon closing we have assembled a significant foothold with two of the best properties at [“Main Lane”] [ph] in this demand supply constraint micromarket ideal for creative tenants. We have not formerly marketed either project but already have a pipeline of potential tenants representing over a 1 million square feet. These are well-known fashion, media and technology companies that value the neighborhoods urban amenity rich environment as an alternative to Hollywood or West Los Angeles. And finally, in May, we earned investment grade ratings from all three U.S. credit rating agencies. We received a Baa3 rating from Moody’s Investor Service and a BBB- rating from Standard and Poor’s Ratings Services and Fitch Ratings. All three credit ratings have a stable outlook, which is improves our access to the capital markets and enhances our competitive position and financial flexibility as we continue to grow. With that I am going to take a moment to discuss conditions of our core markets. And first, in Los Angeles, the market fundamentals continue to improve, primarily driven by demand creative space in submarkets like West Los Angeles and Hollywood. In West Los Angeles vacancy rates fell by 40 basis points to 12.3% per quarter -- in the quarter, down 170 basis points year-over-year. The commencement of our Riot Games 284,000 square-foot leased at our Element LA property in May contribute to nearly 600,000 square feet of positive absorption and Class A rents are up 2.4% to $52 a foot, 10.5% year-over-year increase. In Hollywood vacancy rate fell 40 basis points to 8.7% in the quarter, down 80 basis points year-over-year and Class A rents were almost up 2% for the quarter to $45 per square foot, a 5.7% year-over-year increase. We have a solid pipeline of tenants for our icon project representing approximately 2 million square feet of demand at rates in excess of both Class A market average and our initial underwriting. We look forward to providing additional details as deals are finalized. Turning to San Francisco, we continue to see robust demand. In Class A rents climbed 2.4% over the quarter to $72 per square foot, up 13.3% year-over-year. Despite positive net absorption for the quarter of around 144,000 square feet vacancy increased just 20 basis points to 5.7% as a result of non-tech tenants both downsizing and leaving the market. We expect market conditions to be very favorable for the existing owners for the remainder of the year as the 1.5 million square feet of new construction for delivery in 2015 is 93% pre-leased. Our San Francisco CBD portfolio is currently 93.2% leased, approximately 55,000 square feet of our role in 2015, as well as the ongoing [indiscernible] space at our 1455 Market Street property will allow us to continue to mark-to-market rents at significant positive trends. We have yet to see the data that indicates San Francisco sublease spaces a sign of market or tech sector weaknesses. There's been no real fluctuation in sublease square footage on the market over the last 12 months and the largest 20 tenants sublease space is currently on the market belong to non-tech downsizing and leaving the market entire. Tech firms on the other hand are subleasing primarily to see continued growth, marketing space too small or banqueting for short-term of future use. The case in point, our tenant square has roughly 50,000 square feet in the market for short-term sublease at our 1455 Market Street property has already secured a sub-tenant for more than half the space. Along the Peninsula, the Central County including Foster City, San Mateo, and Redwood City contributed to over half the regions 400,000 square of positive net absorption. Class A rents increased 1.8% to $68 for the quarter, up 10.2% year-over-year. Vacancies fell 150 basis points during the quarter to 8%, down 200 basis points year-over-year. Very little vacant space is projected to come to market as a result of the new product or large scale move outs for the remainder of ’15. Renewals and expansions resulting from the organic growth among large, local and midcap companies, such as our recent deal with NetSuite and pricing acceleration to the South will continue to drive demand. In Silicon Valley, recent activity search for million square feet of positive net absorption making the region’s nine straight quarter of occupancy gains, north of 500,000 square feet. Vacancy fell 100 basis points in the quarter to 7.2%, down 310 basis points year-over-year while Class A rents were up 4.8% for the quarter to $58 per square foot, a 15.3% year-over-year increase. Overall Silicon Valley’s office market fundamentals remain strong in 2015, particularly since 9.6 million square feet under construction is more than 60% preleased or owner user. We’re the largest landlord in North San Jose with over 2.6 million square feet located just down the street from where Apple recently purchased a 43 acre site titled or 2.8 million square feet on the hills of the leasing approximately 3000 square feet at the existing building, which includes rights to build an additional 650,000 square feet. Apple’s arrival represents new absorption and marks a significant milestone for the submarket, which is already home to leading companies like eBay, Samsung and our tenant, Qualcomm. Apple’s presence strengthens the demand for our assets in both near and longer term as they are ideal for the mid-size and small companies looking to locate close to the tech giant. Rising tech center employment continues to drive this CRO marketplace as a competition for talent remains central to workplace strategies. Blue-chip companies like Twitter, Oracle, Amazon, Alibaba and Dropbox are expanding their presence in that region. And even so most of the quarter’s significant leases actually involves non-tech firms in the travel, insurance, biotech and retail sectors to name a few. We’re seeing similar trend with regards to the tenant interest in our plan for approximately 165,000 square feet office development in our Merrill Place Property in Pioneer Square. We’re on track to break ground in early ‘16. Well we’ve yet to kick off our marketing. We've been approached by two tenants to prelease the significant portion of building. Market conditions in Pioneer’s grew particularly with regard to the limited supply of true Class A office space continued to heighten. Vacancy fell 220 basis points to 7.5% which is 360 basis points year-over-year decrease while Class A rents increase 1.1% to $34 per square foot, up 9.4% year-over-year. In summary, we continue to assemble and execute on exceptional pipeline of lease-up reposition in development opportunities in some of our companies’ best performing markets. Our shareholders stand a benefit from significant rent growth and occupancy gains in the EOP Northern California Portfolio assets stabilized and as projects are delivered and new leases are signed. Now, I’m going to turn the call over to Mark, our CFO, for details for our second quarter financial performance.

Thank you, Victor. Funds from operations, excluding specified items, for the three months ended June 30, 2015, totaled $68.4 million or $0.47 per diluted share compared to FFO, excluding specified items of $19.8 million or $0.28 per share a year ago. The specified items for the second quarter of 2015 consisted of acquisitions related expenses of $37.5 million or $0.26 per diluted share. The specified items for the second quarter of 2014 consisted of costs associated with a one-year consulting arrangement with a former executive of $1.1 million or $0.02 per diluted share and an early lease termination payment from Fox Interactive Media Inc. relating to our 625 Second Street property of $1.6 million or $0.02 per diluted share. FFO, including the specified items, totaled $30.9 million or $0.21 per diluted share for the three months ended June 30, 2015, compared to $20.2 million or $0.29 per share a year ago. Net loss attributable to common shareholders was $25.2 million or $0.28 per diluted share for the three months ended June 30, 2015, compared to net income attributable to common stockholders of $3.4 million or $0.05 per diluted share for the three months ended June 30, 2014. Turning to our combined operating results for the second quarter of 2015. Total revenue from continuing operations increased 144.4% to $151.8 million from $62.1 million a year ago. The increase was primarily the result of the increases in our office property segment of $80.1 million in rental revenue to $120.1 million and an $11.8 million increase in tenant recoveries to $17.8 million, offset by a $1.3 million increase -- I mean, decrease in parking and other revenue to $5.7 million and $1 million decrease in total revenue at our Media and Entertainment Properties to $8.3 million. Additional rental revenue and tenant recoveries resulting from the EOP Northern California portfolio acquisition, largely account for the increases in office rental revenue and tenant recoveries with higher occupancy in rents and our same-store office properties and lease commencements at our Element LA and 3401 Exposition Boulevard properties also contributed to these increases. Decreases in parking and other revenue are attributable to an early lease termination payment from Fox Interactive Media at our 625 Second Street property in the second quarter of last year with no comparable activity in the second quarter of 2015. Decreases in media and entertainment property revenue are the result of taking certain buildings and stages off-line to facilitate our ICON development and extension of our lease with KTLA at our Sunset Bronson property. Total operating expenses from continuing operations increased 177.4% to $135.7 million from $48.9 million for the same quarter a year ago. The increase was primarily the result of operations expenses associated with the EOP Northern California portfolio acquisition. As a result, income from operations increased 22% to $16.1 million for the second quarter of 2015, compared to the income from operations of $13.2 million for the same quarter a year ago. Same-store office net operating income in the second quarter, excluding specified items increased by 0.1% on a GAAP basis and 18.1% on a cash basis as free rent associated with nonrecurring upfront abatements of several leases expired. Interest expense to the second quarter increased to 119% to $14.1 million from $6.4 million for the same quarter a year ago. At June 30, 2015, the company had $2.1 billion of notes payable, compared to $852.5 million at June 30, 2014. As of June 30, 2015, our stabilized and in-service office portfolio was 94.7% and 88.8% leased, respectively. During the quarter, we executed 52 new and renewal leases totaling 473,449 square feet with 41 of these leases totaling 364,946 square feet executed at properties within the newly acquired EOP Northern California Portfolio. As of June 30, 2015, the trailing 12-month occupancy for our media and entertainment portfolio increased to 71.6% and 69.9% for the trailing 12-month period ended June 30, 2014. Turning to the balance sheet at June 30, 2015, the company had total assets of $6.3 billion, including unrestricted cash and cash equivalents of $40.3 million. At June 30, 2015, we had $400 million of total capacity under our unsecured revolving credit facility, of which $45 million 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 3/8% per annum. The company is increasing its full-year 2015 FFO guidance from its previously announced range of a $1.50 to $1.56 per diluted share, excluding specified items, to a revised range of a $1.56 to a $1.62 per diluted share, excluding specified items. The guidance reflects the company’s FFO for the second quarter ended June 30, 2015, up $0.47 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. 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 in the release, but otherwise excludes any impact for future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. This guidance also assumes full year 2015 weighted average fully diluted common stock and units of 129,575,000. For purposes of this estimate, the company has updated its assumptions with respect to the $250 million of its five-year term facility and its $550 million two-year term facility, the interest rates under which were floating as of its last guidance estimate and currently remain floating. Over the course of evaluating its near-term financing strategy, the company has identified the opportunity to sell an asset expected to generate approximately $90 million in proceeds, to be applied toward a partial repayment of its $550 million two-year term facility. The company’s updated guidance assumes this will occur prior to the end of the third quarter. The company is also pursuing the refinancing of the construction loan secured by its Element LA project with long-term financing. The company’s updated guidance assumes that prior to the end of the third quarter, the existing approximately $83 million Element LA loan balance will be repaid with a $168 million, 10-year fixed rate loan bearing 4.50% per annum. The remaining approximately $85 million in net proceeds from this refinancing are assumed to be applied toward a partial repayment of its $550 million two-year term facility. With respect to the remaining, approximately $375 million of its two-year term facility and the $250 million of five-year term financing which remains floating. The Company continues to explore various alternatives to refinance some or all of these facilities, but this guidance assumes that those amounts remain outstanding at their current floating rates of interest through the remainder of this calendar year. And now I will turn the call back over to Victor.

Thanks, Mark. Before we wrap up, I’d really like to acknowledge the entire Hudson team, especially our terrific Senior Management for their exceptional hard work this past quarter. Congratulations. And to everyone on this call, we appreciate your continued support of Hudson Pacific Properties and I look forward to updating you on our next quarterly call. Operator, with that, I'm going to turn it over for questions.

Thank you. [Operator Instructions] Our first question comes from Vance Edelson with Morgan Stanley. Please proceed with your question.

Hi. Good afternoon. Hi, guys. Could you discuss the extent of the work required at 4th & Traction? How much of the original structure will remain, if you could just walk us through the conversion process? And as long as you're starting to work now, what are your thoughts on demolishing and construction costs? How they’ve trended recently and whether you plan to lock anything in to avoid surprises over the next year and a half?

Hey, Vance. It’s Alex. So, 4th & Traction, we are finalizing our entitlement. We anticipate breaking ground on a structured parking deck sometime in the coming months and delivered the overall project ended 2016. The existing building is fully vacant but we are doing complete gov renovation, building out the infrastructure, repositioning it for retail and office and then we are building a structured parking deck on what now is just surface parking. So it’s a fairly large scale project.

Okay. And on the costs and how they are trending, anything there?

Chris Barton, our Head of Developments is right here.

Yeah. I would say the construction costs are still relatively stable with commercials. I would say we are looking at escalation probably this year of 3% to 4%. Southern California is still pretty reasonable.

Okay. And then up at Merrill Place, Victor, I think you mentioned you’ve been approached by a couple potential tenants. Is that a significant portion of the building you are looking at? Are you likely to go ahead and pre-lease to them or do you feel, that if you wait longer you might get even better pricing? How are you handling that situation?

Yeah, Vance. Thanks. Over there right now, I think Art and his team are looking at preliminary interest between a half and three quarters of the building. And the tenants they are looking at right now are just in early conversation. So, I think our plan really comes up and our marking is completed early this fall. We are beginning to get more attraction to it. The quality of the tenant right now in the market banter is exceptional. So, we are pretty happy with the status of where we are right now.

Okay. Great. That’s helpful. And then just maybe a quick question for Mark. Could you update us on the dividend policy of the EOP, cash flow kicks in, could we see a decent sized increased some point over the next year?

Yeah. Maybe not quite this year. It’s going to partly depend on just timing of the CapEx largely associated with the EOP portfolio. That will depend on just timing of TIs leasing commissions. But I do think it’s fair to expect that towards the end of this year we will have greater clarity of our coverage. And as we start to see our coverage, our AFFO starts to exceed the existing dividend on a projected basis, we will begin to towards what our sort of base, target distribution policy, which is to ultimately get to towards 90% of our stabilized AFFO. So, I would think we will be in a positive to give some clarity around that either towards the end of the year or first of next year.

Okay. That’s great. Thanks, guys.

Thanks, Vance.

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

Hey. Thanks. Good afternoon, guys. Mark, so the change in guidance, is that driven by just the changes on the financing side of things, or is there better NOI that you guys are getting or is it a combination of the two?

Yeah. You are on it. It’s a combination of the two. There is interest maybe associated with the financing alternatives that we are looking at, as opposed to the prior guidance where you thought we were sort of heading right towards doing a sizeable public offering. That’s contributing but the bigger contributor this quarter and certainly a sizeable contributor in Q3 and Q4 is associated with better office fundamentals. And in that regard, it breaks out in two ways. In the current quarter about a penny and a half relative to our expectations, came through in just better leasing activity on the Redwood portfolio in terms of cash contributions. The other contributor for about, call it a little less than $0.03 was better office fundamentals in a GAAP sense in terms of higher below market rents and mostly associated with leases that have near-term expirations. And the purchase price accounting got done after the acquisition and obviously before this call and we have our own estimates running through our numbers. But once the final mark-to-market got done, it actually showed that we were conservative on our below market expectations on the in-place rents. And so that was about little bit more than a penny in the current -- in the second quarter of interest savings, basically made up the second quarter improvement, and then that translated into the full year number, makes up the $0.06 adjustment.

Okay. So that actually kind of leads me into my next question, which to page 22 of your supplemental that you guys have $20 million of non-cash rent between the non-same-store office portfolio and the lease-up properties. The vast majority of that relates to the Redwood portfolio, right. And then you got I think the element in 3402 PICO and maybe one other in there. So is most of that driven by FAS 141 because it’s $20 million in the quarter versus $85 million of GAAP rents? Or is that kind of free rent or how should we think about that big delta between cash and GAAP rents?

There is not a lot of free rent in and there is large FASB 141 below market rents.

Okay. But you think that burned off?

Yes. That will be burned off over the life of the underlying tenancy on per lease basis.

But I think you mentioned Mark, you have a couple of big guys that are -- that have more near-term expirations or realized mark-to-market on a cash basis?

Yes. So all I wanted to do Brendan was draw a comparison between the aggregate mark-to-market of the Redwood or the EOP portfolio in terms of what we’ve always been -- we’ve been saying now for quite a while in terms of being about 15% below market. Against, our current underwriting, it still is about that now, maybe it’s a tick above that now. But we’ve also indicated in earlier calls that year 2015 expirations and 2016 expiration mark-to-market our 20% plus below market. What we learned when we ran our first half accounting is that 20% or 21% estimate as it related to 2015 expirations was probably conservative, it’s probably more like in the mid 20s. And so you what seen a greater impact of the below market rents in the -- as it relates to, but it’s more attributable to leases that have a shorter remaining term on it. That’s all I was trying to.

Got you. Now that’s helpful. Okay. So then just one, it looks like say your net absorption in the quarter was about negative 40,000 square feet. It seems like you have very good traction on the Redwood portfolio. So does Redwood, was that in the net absorption stats for Q2, or does that not go in because technically it wasn’t closed as of 3/31?

That’s why. So Redwood, this is the first quarter that the Redwood portfolio factors into our lease and occupied percentage. I would say Brendan and maybe for the benefit of your listeners, we introduced a new category because we have more expanded portfolio. And historically, if we had a property that fit into our lease-up category, we carry that categorically on its own and reported a stabilized same-store, non-same-store number. You can still find our stabilized same-store, non-same-store number but we’ve included now our lease-up properties because it’s quite a bit larger, it’s a big portion of the Redwood portfolio. And we categorized those collectively as in-service. So that’s a new sort of statistics that we are now providing.

Okay. So the net absorption and that was in the quarter that included Redwood?

No.

Oh, that did not include Redwood, okay. I am sorry. Got it. Okay. All right. Thanks, guys.

Thank you.

Our next question comes from Jamie Feldman with Bank of America. Please proceed with your question.

Thank you. I guess just starting out, you talked about 1.2 million square feet of demand for the EOP assets. Can you talk more about whether those are new to the portfolio or renewal and where are they coming from?

Yes, but 0.5 million feet are new and about 700,000 -- almost 800,000 because it’s a little over 1.2 million are renewals or backfills.

Okay. And that they don’t thin was that kind of 25% below market, the 700,000?

Yes, I mean, listen, right now we are probably a little in excess of that. I mean, we look back to the last series of deals that were done, the average that was in the mid to low 30% mark-to-market. In some instances, they were high, as high as high 50s.

Okay. And then bigger picture on downtown LA, can you just talk about your thesis there? You guys did a great job in Hollywood. And just kind of what you’re thinking there over the next couple years and why the investments now and what kind of demand you’re seeing?

So it was and I think we mentioned this in the past and sort of how we believe in the market. Downtown LA is three markets. And we can get into more of an offline conversation and education on that best process, but there is Bunker Hill, there is South Park, and there is the Arts District. And the Bunker Hill is your sort of mainline downtown Los Angeles corporate finance world where you see only move around and run rate movement has been de minimis. Your South Park marketplace is really right around Staples and that’s why you have tremendous amount of residential, multifamily growth, very little office, majority of that office is entertainment related around ESPN, and what sort of taking place with AEG down there. The Arts District is where our assets are and it’s a completely different marketplace. I mean, there is scarcity there of large sort of authentic vintage type greater space buildings. I think at the end of the day, you’re looking at the demand we’re having for that space right now as was mentioned in our prepared remarks. We have in certain market either projects. And we’ve got over a million feet of interest for both retail and office in that area. At rental rates, that are -- I mean look Arts District is approaching almost Beverly Hills type rental rates. And so the square footage demand and the returns are going to be completely different than what we consider as a downtown Los Angeles marketplace. I mean to give you an ideal, rental rates on a retail basis are going to be somewhere in the $5 plus triple net range and office rents are in the $3 to $4 triple net as well.

And the tenants that are interested, are they going to be bringing people in from other places or they -- is it more live and work play at this point which is actually from a tenant perspective?

Yes. The tenant demand there right now is media, entertainment centric first, and the live-work is there as well, but the tenant mix is also coming from the users are having place come from all over LA. So it’s centrally located.

Okay. And then turning to the media asset, what should we assume is going to be the kind of a normalized run rate once you take in everything out of service because I know that was the decline in same-store? Is that it or is there more to come?

No, we are back online for all intensive purposes on the three stages that we had to temporarily take out of service. In fact, the stages 1, 2, and 3 at Bronson are committed for the balance of the year. And those teams did a great job in committing a tenant to that front historic building Jamie that you know at the front of Bronson. So we are for all intensive purpose that those two quarters are temporary downtime are now behind us and we expect for the third and fourth quarter, things to normalize again. So that Jamie nothing is ever that normal on a quarter by quarter basis for the Studios, but relative to historic performance we got that temporary downtime behind us.

Okay. And then finally, what’s left to spend in CapEx, the weighted related estimates for CapEx for the EOP asset?

We are still tracking, I mean it’s only been a quarter or so and a full in-depth analysis of the portfolio is now complete. Josh and the team and everyone bow down on that. It’s still about 250 over the three years starting as of April 1, which is the number we’ve been talking about since the outset. And yes, so Josh just gave me a note. Without -- this is an interesting way to look at it Jamie, without tenant improvements and leasing commissions, the spend over the three years, the component at 250 related to CapEx with LTI and NLC is about $75 million.

$75 million and the rest is LTI leasing related?

Yes.

Okay. And then I assume that’s still the number, you didn’t spend that much in the quarter?

Yes. We don’t spend that much really in the quarter. There were always some very near-term items that some back of the house and other items that were flagged very early on that we started to spend on, but it’s not that much yet.

Okay. All right. Thanks, guys.

Thanks, Jamie.

Our next question comes from Craig Mailman with KeyBanc. Please proceed with your question.

Hey, guys. Just a follow-up on force interaction and the other assets you have under contract. Targeted yield and total all-in spend there, is kind of what?

Okay. Craig, it’s Alex. So we’re going to be -- so both buildings are being acquired for roughly $400 a foot and stabilized. We’re going to be into it for low to mid $600 a foot.

Okay. What was ground up development in that part downtown LA? Are you guys all-in at $600 below replacement costs on a brand new building?

Well, with land cost and everything else, yes, right around there.

Okay. And so that’s like a mid 6 return, given kind of the rents that you put out there.

We’re bogging close to call it 7% return on cost.

Okay. Is there anything else down there that you guys are looking at in that neighborhood? Or I know you guys said this is the main two best assets, but is there anything else in your radar?

Right. I mean, there is -- we think there is more to come. Right now, we’re obviously focused on executing our business plan on these two assets. We’ll have about 200,000 square feet, which will give us critical mask because it really is a micro market and we’ll be the dominant office landlord in that space. But there are other opportunities that we’re evaluating, so you could easily see us doing more down there for the right opportunity.

What do you think your that kind of submarket cap would be in terms of investment, dollars investment?

I think it’s too early to tell. Craig, I think, right now as Alex indicated, we will be a little over 200,000 feet and maybe growing that -- maybe incrementally more office sort of see, the opportunities are there. I mean there is some comps that are coming out on land comps that are pretty astronomical. So on the existing stuff is really where we’re looking at and I think we have the opportunity to pickup maybe a couple more.

Okay. That’s helpful. And then, Mark, just on the decision to let the debt float a little bit longer here versus fix it in? Is that just kind your view on rates here over the next 12 months or was something else going on there?

Yeah. We really -- it’s really not trying to farm out smart interest rate at all. We -- in May, we had just finished rating process and on -- had a view around entering a public debt market. And in a very short order we got this opportunity I mentioned in the prepared remarks. To sell an asset we also identified the CMBS market is in a very healthy spot right now and we occur to asset, its advantages to put some longer term debt on Element because it’s got a 15-year lease and we think we can get really attractive financing there. And that coupled with -- what we’re seeing is attractive opportunities in the private debt market, actually pricing a little bit more favorably right now than public debt. That sort of informed our view that we ought to be looking at different alternatives towards to takeout of some of that floating RIET and that’s the absence of it.

Okay. That make sense. And then the building you guys, someone came to you, is that San Francisco legacy or is that EOP?

The building that the disposition?

Yeah. Is it 222 Kearny or is it a different asset in the EOP Portfolio?

It’s -- we’re not -- we don’t want to disclose the specific asset right now, but it’s an asset those part of the EOP Portfolio that we received an unsolicited offer on at a very favorable price.

Okay. And then, just lastly on NetSuite, is that the mark-to-market and is that consistent with the kind of overall for the quarter or was there discrepancy there?

No. The NetSuite mark-to-market was almost 40%.

Okay. Great. Thanks, guys.

[Operator Instructions] Our next question comes from Ryan Peterson with Sandler O'Neill. Please proceed with your question.

Yeah. Thank you, guys. Just couple of questions from me. So the two acquisitions that you talked about, perspective acquisitions, can you just discussed little bit what your funding plans are for those?

Ryan, sorry. Can you repeat the question?

Yeah. How do you guys plan to fund the two acquisitions that you discussed?

So, we’ve already funded one of them, right and it came from a draw on the line. The second we’ve mentioned would likely come up the line. And we have $30 plus million of cash on the hand but we tend to keep that on hand. But we have $400 million revolving facility, so we have tons of capacity left on that.

Okay. Great. And then should we expect any further transaction costs related to EOP?

There might be a trickle but really no. I mean, as you see in our numbers, we spend roughly $38 million I think in our acquisition cost for the quarter. We had incurred, I don’t know, $6 million between the fourth and first quarter, that’s really all the cost. There might be a small amount that trickles in that will be very little.

Okay. Great. And then last question just more broadly speaking, the potential of the new EOP assets coming to market. Do you guys expect that that will kind of change the way assets are reviewed in L.A.? Or do you think there are enough comps where the markets kind of already been driven upward?

I mean listen, I think those assets are going to -- move to where the marketplace is already shown on some pretty substantial cost. There is a comp just recently a 900 a foot in Beverly Hills. There was another comp in West L.A. at $875 a foot. I think there is a comp that’s projected in West Coast right now that’s close to $800 a foot. So, I think it’s going to be in line with what you’re seeing. I don’t think it’s going to be any different that where the market is showing right now.

Okay. Great. That’s really helpful. Thanks, guys.

Thank you, Ryan.

Thank you. At this time, I will like to turn the call back over to Mr. Victor Coleman for closing comments.

Thank you so much for the support and the vote of confidence and we look forward to chatting with you on next quarter.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a great day.