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…

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…

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.