Hudson Pacific Properties, Inc. (HPP) Q3 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to the Hudson Pacific Properties Inc. Third 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 today, Kay Tidwell, Executive Vice President and General Counsel for Hudson Pacific Properties. Thank you, Ms. Tidwell. You may begin.

Good afternoon, everyone. And welcome to Hudson Pacific Properties third 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, November 5, 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?

Thanks, Kay. Welcome everyone to our third quarter 2015 conference call. We had another solid quarter marked by significant leasing activity and a series of capital transactions which adding to our pipeline of value creation projects and strengthens our balance sheet. We completed nearly 680,000 square feet of new and renewal leases in a quarter, it estimates how quickly our team is moving and strong activity across all of our markets. We close on our secondary development asset in Downtown Los Angeles Arts District and Pruno office portfolio with a sale of a non-strategic asset which combine with refinancing of our Edmond LA property generates significant net proceeds to repay a portion of a floating rate debt. Taking a closer look at our leasing activity at the end of the quarter, our in-service ops portfolio which includes leased up as well stabilize properties was 89.5% lease representing a 70 basis point quarter-over-quarter increase. We continue to achieve significant positive cash and GAAP rents, spreads on new and renewal leases portfolio wide and impressive 43.5% and 62.8% respectively for the quarter. Newly in August we executed 200,000 square feet lease with NetFlix at our under construction ICON office tower resulting in the property for 60% previous nearly a year prior delivery. We’re now treating paper with several tenants with the balance of that building as well as adjacent 90,000 square foot creative office building currently in predevelopment and expected to be delivered in mid-2017. As previously noted the Netflix deal is a largest leased signed to-date in Hollywood and proves out a key part of our investment pieces in that sub market that top tier next generation media emerging companies will see value in premier creative office immediately adjacent for stage in production space. Touching briefly on the leasing specific to our in-service Peninsula and Silicon Valley assets. As of this call, these properties were approximately 88% leased including deals and leases. A majority of our leasing activity for the fourth quarter over 400,000 square feet took place at these assets including a new 40,000 plus square foot lease with Stanford University of Page Mill in Palo Alto and a 20,000 plus square feet lease with Uber Technologies at Skyway Landing and Redwood Shores adjacent to St. Carlos. We continue to outperform initial underwriting in terms of new and renewal tenants and leases and deal pipeline representing over 1 million square feet of demand in tech and non-tech users, we remain on track to achieve a 9% lease sometime around the start of 2016. Regarding acquisitions, in August we closing our second redevelopment asset with three existing buildings totaling 83,000 square feet in Downtown Los Angeles Arts District for $40 million noticed 405 Mateo, this property is currently vacant and we’re design review to determine the optimal program. Early concepts include a mix of creative office, retail and parking achieved by redeveloping the existing square footage as well as building new. And to-date, we have a pipeline and representing over 1 million square feet of demand from quality fashion tech, new media and other creative office users for both 405 Mateo and four contraction projects. In terms of dispositions, in September, we sold Bay Park Plaza, a two building, 260,000 square foot property in Burlingame to an Asian private equity firm H&Q Asia Pacific for $90.0 million. The sales benefits were twofold. First, we dispose non-core asset at a premium to our purchase price allocation just five months after acquiring it as part of the EOP Northern California portfolio; and second, we’re using net proceeds to pay down portion of our two year floating rate term. We constantly evaluate our portfolio for opportunities recycle capital be at higher value investments or repayment of debt of corporate purposes and expect to have additional updates on this part in the coming quarters. Now let’s just discuss some conditions of our core market starting with a Bay area which is been a headlines recently. Market condition in the CBD of San Francisco continue to type class a rents $74 a foot up 3% for the quarter and 12.7% year-over-year and as a result vacancy fell to 5.5% down 20 basis points for the quarter and 120 basis points year-over-year. We see no significant fluctuations in subway [indiscernible] which remain just over 1 million square feet or roughly 1% of the overall market and has primarily result of non tech tenants downsizing rather than barometer for tech sector weaknesses. Our 2.4 million square foot San Francisco CBD portfolio stabilized at 92% lease and we have just 87,000 square feet rolling for remainder of 15. We continue to work on backfilling BVA and Rocket Fuel at 1455 market and are conversations with tech and non-tech tenants at leasing rates representing mark to market of more than 40% of our aim placed rents. Fundamental among the tenants will remain strong as well. Market wide rent rates for class A space are up 2.9% for the quarter and 10.5% year over year to $63 a foot. Overall vacancy along with [indiscernible] ticked up 27 basis points in the quarter to 9% due to new construction deliveries but still is down 205 basis points for the year. Demand for Silicon Valley continues to outpace supply with a record 1.6 million square feet of positive absorption in the quarter making it fourth time in a last four quarters [indiscernible] over a 1 million square feet. Likewise, vacancy fell 80 basis points in the quarter down 260 basis points year over year to 6.4%. Silicon Valley class A rates increased 3.9% for the quarter and 16.8% year over year to $60 a foot with rates in Palo Alto which comprises 1.3 million square feet of our portfolio reaching at impressive $112 per square foot. In North St. Jose, Apple has begun [indiscernible] 43 acres work to build up 2.8 million square feet just down the street from where we own 2.6 million square feet. Apple currently owns a total 86 acres containing two office and R&D buildings and leases roughly 365,000 square feet and mostly R&D and industrial space in that [indiscernible]. Well, the precise impact of Apple’s interest is difficult to quantify given the new developments use remains unknown there is no debt with the company’s growing presence is elevated [indiscernible] profile for top tier tech companies and will drive future demand. North St. Jose had another strong quarter with rents up 2.9% for the quarter and 17.7% year over year to $38 per square foot, a net absorption of 28,000 square feet contributed a 60 basis points drop in vacancy for the quarter and 230 basis point drop year over year to 14.1%. Now touching briefly in Southern California, the Greater Los Angeles market remains in an expansion mode with all year to-date matrix moving in positive directions. We had over 700,000 square feet of tours and increase at 12.655 less Jefferson development project [indiscernible] leases with two tenants to occupy the entire building. We expect to have more news on this front in next quarter. And finally, the greatest [indiscernible] market had another strong quarter with demand outplacing supply particularly for large blocks of contiguous space, a trend expected to continue well under 16. Market conditions in Pioneer Square are even tighter with Class A rents folding at $35 per foot for the quarter up 12.9% year over year, while vacancy just rose 70 basis points in the quarter to 8.2%. It’s still down 260 basis points year over year and we’re preparing break around 165,000 square foot office tower early next year and are negotiations with a well-guarded non tech pre tenant to previously significant portion of this building. Further highlighting, the Pioneer Square become a location of choice for tenants across industries and sectors. Now before, I turn the call over to Mark I just want to take a minute to share our perspective in the overall health of tech sector as well as how we think about it and are addressing the associated risks. First and foremost, the technology industry is fundamentally is different today than it was in 2000. Technology use is ubiquities. As mass market for relating goods and services are far more developed, while cloud computing e-commerce, internet search and digital media all existed during the [indiscernible] consumers and businesses had not incorporated these technologies into everyday life. Today the problems of mobile hardware and the overall decline in cost to produce and consume digital projects products and services has allowed the tech industry to flourish. Tech is now fully integrated to all sectors of the economy in our lives and this [indiscernible] utility will sustain sector over the long term. There is little doubt the public companies are rationally valued and well capitalized. Earnings, not PE multiples, are growing and tech contributions [indiscernible] flat. Large well-funded companies many of them public represent more than half of our tech exposure and we continue to see strong interest from this group for [indiscernible] in near term space requirements and tech companies across the board particularly those contributing significantly through [indiscernible] absorptions are very different today. Their established firms with proven revenue streams in profitability and the alliance between tech and non tech are increasingly being blurred. In many instances, the services provided are completely tangible but powered by technology. Global retailer Wal-Mart expanded their bay area presence with us to grow e-commerce. Our tenant Uber is hardly just an app. It’s massively disruptive transportation company exists as it is as it exists today. There are endless examples such as Google’s home automation system Ness which is also our tenant. This diversification, the combination of tech and traditional elements of a business should also strengthen the sector’s resilience in future downturns. With regard to Venture capital funding there has been no real surge as a percentage of GDP. It’s a fraction to what it was in 2000. And while there has been an increase in seat funding for very own company’s absolute dollars remain small. Today, some 80% of funding goes to three plus year old companies versus more than half going to two year old companies in the last cycle. And we don’t anticipate any dramatic full back in this capital source. They understand the shifts of the tech better than anyone else and are likely to be more patient in terms of an excess. Greater uncertainty exists around future capital outlays with non-traditional tech investors. The mutual funds, insurance companies, [indiscernible] well funds that have stepped up into and fund larger later stage rounds. There is an argument that this group is overvalued to 100 and so private tech companies referred to as unicorns and the contributing to the so-called bubble. But renowned venture capital Mark [indiscernible] and industry experts like him see things differently. But a combined valuation for these companies are about half of Microsoft’s market cap. In terms of exits, the jury is still out as to how they’ll impact funding from this newer category of tech investor in particular. But in light of the IPO full back in 15 not just in the tech sector we’ll be keeping a close eye on 16 and it’s important to remember though that an IPO is not the only part of an exit. There is also liquidity in secondary markets and as well many companies will ultimately get bought. We’ll be watching the broader markets [indiscernible] which they remain healthy should motivate nontraditional investors continue to look for higher risk adjusted return in tech. All are very mindful of all of this. It’s also important to note that the way we run our business day to day has not changed at all, which will to lease to hugely successful high growth companies and owned properties in the best performing markets in the country if not the world. We remain committed to grow in a diverse tenant base and rigorously evaluate tenant credit and space needs before executing any leases. And as I think you’ll see by Mark’s comments to follow our underwriting mark to market on rents is extremely conservative providing an additional cushion in terms of a performance should market condition shifts. To summarize for the quarter, our markets are performing exceptionally well and the outlook to remainder of 15 and 16 is very positive. We’re on track with regard to lease up in our Peninsula and Silicon Valley assets as well as our pipeline of value creation projects and are outperforming our underwriting in terms of lease deal economics. In the coming quarters, we’ll continue to look for opportunities dispose of non-core assets like our Bay Park Plaza at favorable pricings, using proceeds to fund strategic growth and strength our balance sheet. With that, I’m going to turn the call over to Mark Lammas, our CFO for details on our third quarter financial performance.

Thanks, Victor. Funds from operations, excluding specified items, for the three months ended September 30, 2015, totaled $63 million or $0.43 per diluted share compared to FFO, excluding specified items of $20.8 million or $0.30 per share a year ago. The specified items for the third quarter of 2015 consisted of acquisitions related expense reimbursement of $100,000 or $0 per diluted share. The specified items for the third quarter of 2014 consisted of acquisitions related expenses of $200,000 or $0 per diluted share costs associated with a one-year consulting arrangement with a former executive of $900,000 or $0.01 per diluted share and a one-time supplement of net property tax expense for periods prior to the third quarter of 2014 of $1.1 million or $0.02 per diluted shares. FFO, including the specified items, totaled $63.1 million or $0.43 per diluted share for the three months ended September 30, 2015, compared to $18.6 million or $0.27 per share a year ago. Net loss attributable to common shareholders was $3.9 million or $0.04 per diluted share for the three months ended September 30, 2015, compared to net income attributable to common shareholders of $7.6 million or $0.11 per diluted share for the three months ended September 30, 2014. Turning to our combined operating results for the third quarter of 2015. Total revenue from continuing operations increased to 122.4% to $151.6 million from $68.2 million a year ago. The increase was primarily the result of the increases in our office property segment of $75.2 million in rental revenue to $114.7 million and $8 million in tenant recoveries to $20 million, and $1.5 million in parking and other revenue to $6.6 million offset by a $1.2 million decrease in total revenue at our Media and Entertainment Properties to $10.2 million. The increase in rental revenue and tenant recoveries was largely the result of the EOP Northern California portfolio acquisition on April 1, 2015 the revenue associated with leases at Element LA and 3401 Exposition Boulevard also contributed. The increase in parking and other revenue was largely the result of higher parking revenues at several of our same store office properties. Decreases in media and entertainment property revenue stand from our decision to take a stage offline to facilitate the extension of our lease with KTLA at our Sunset Bronson property along with a production high area of two television shows one at Sunset Bronson Studios and other at Sunset Gower Studios. Total operating expenses from continuing operations increased 165.4% to $147.4 million from $55.5 million for the same quarter a year ago. The increase was primarily the result of operating expenses associated with the EOP Northern California portfolio acquisition. As a result, income from operations decreased 67% to $4.2 million for the third quarter of 2015, compared to the income from operations of $12.6 million for the same quarter a year ago. Net operating income with respect to our 19 same store office properties for the third quarter increased 9.8% on a cash basis and decreased 0.3% on a GAAP basis as free rent associated with non-recurring upfront payments on several leases expire. Interest expense during the third quarter increased 120.8% to 14.5 million from 6.6 million for the same period quarter a year ago. At September 30, 2015, we had $2.1 billion of notes payable, compared to $920.9 million at September 30, 2014. As of September 30, 2015, our stabilized and in-service office portfolio was 94.5% and 89.5% leased, respectively. During the quarter, we executed 83 new and renewal leases totaling 679,443 square feet with 65 of these leases totaling 411,563 square feet executed at our recently acquired EOP Northern California Assets. As of September 30, 2015, the trailing 12-month occupancy for our media and entertainment portfolio increased to 71.9% from 71.6% for the trailing 12-month period ended September 30, 2014. Turning to the balance sheet at September 30, 2015, we had total assets of $6.3 billion, including unrestricted cash and cash equivalents of $46.7 million. At September 30, 2015, we had $400 million of total capacity under our unsecured revolving credit facility, of which $105 million had been drawn. Our $550 million five year term loan and $350 million seven year term loan were each fully drawn. During the quarter, we repaid $90 million of our two year term loan resulting in a $460 million balance under that facility as of September 2015 subsequent to the end of the quarter that we repaid an additional 85 million of our two year term loan resulting in a current $375 million balance under that facility. During the quarter, we paid a quarterly dividend on our common stock equivalent to $0.125 per share and a quarterly dividend on our series B cumulative preferred stock equivalent to 8 3/8% per annum. In addition to Victor’s comments about what we’re seeing on the ground regarding tech sector health, we thought it might be worthwhile the more clearly quantified the tech exposure within our Peninsula and Silicon Valley office portfolio to help everyone better understand the risk reward profile of this asset. Tech sector tenants comprise roughly 40% of the square footage in the sub markets while buyer sector and other non-tech tenants occupy the balance of space. These properties are currently 88.2% leased including deals and leases therefore, with respect to current vacancy will need to execute roughly 300,000 square feet of new deals in order to reach a 92% stabilized lease rate. As of today, our overall new deal pipeline not including deals and leases renewal or backfill activity totals nearly a 155,000 square feet of demand which if these deals closed puts this portfolio at 90.2% leased. From that level in order to reach 92% stabilization just 145,000 square feet of incremental new deals on existing vacancy would have to be executed. This represents approximately one-fourth of the new deal activity were on track to successfully complete in the current calendar year. Regarding 2016 and 2017 explorations, we’re in early discussion with Qualcomm to revenue its lease which is scheduled to expire in mid-2017 at our Skyport Plaza project in St. Jose. After relocating from Santa Clara in 2010 they appear committed to the sub market employees for early renewal talks. Excluding Qualcomm approximately 2.2 million square feet of tenancy is scheduled to expire over the next two year period beginning in 2016. Assuming we achieved 70% renewal of these tenants in line with our 2015 renewal rate of 73% then we’ll need to backfill approximately 325,000 square feet of space in each of 2016 and ‘17 in order to maintain a 92% stabilized rate during that period. To put that in perspective, we’re on track to successfully complete about 420,000 square feet of backfill deals within the current calendar year or roughly 30% more backfill activity then necessary over the next years to achieve stabilization. In other words, in order to achieve and maintain a 92% stabilized lease rate through 2017 even at a lease renewal rate 300 basis points below our current level we’ll need to execute an estimated 475,000 square feet of new and backfill leases per annum over the next two years. A level that is less than half of new and backfill activity we’re on track to successfully complete in the current calendar year. Finally, as Victor referenced, our underwritten mark to market for new and renewal leases is around 29% in 2016 and 24% in 2017, well below this quarter’s cash and GAAP rents, spreads for this assets at 48.9% and 70.8% respectively. In short, all indicators continue to support our stabilization in rent growth goal for in-service Peninsula and Silicon Valley portfolio with substantial margin to succeed even in the advent of a tech sector slowdown. Turning back to guidance. We’re increasing our full year 2015 FFO guidance from our previously announced range of a $1.56 to $1.62 per diluted share excluding specified items to a wide range of $1.60 to $1.64 per diluted share excluding specified item. This guidance reflects our FFO for the third quarter ended September 30, 2015 of $0.43 per diluted share excluding specified items as well as all acquisitions, dispositions, offerings, financing and leasing activity referenced on this call. As its always the case the full year 2015 FFO estimate reflects management’s view of current and future market commissions including assumptions with respect to rental rates, occupancy levels and earnings from events referenced on this call but otherwise excludes any impact from future unannounced or speculative acquisitions dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. This guidance assumes full year 2015 weighted average fully diluted common stock and units of 129,575,000. And that the remaining 375 million balance due under our two year term facility is fully repaid on or around December 15, 2015 with fix rate financing bearing or 0.613% per annum. Our other unhedged floating rent [indiscernible] including the 215 million five year term financing which remains unhedged as assume to remain at as current floating rate of interest through the balance of this year calendar year. And now, I’ll turn the call back to Victor.

Thank you, Mark. Once again I want to thank the entire Hudson team, particularly our Senior Management team for their excellent work this quarter. 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 quarter. And with that operator, I'm going to turn the call over to you for any questions.

Thank you. [Operator Instructions] Our first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Please proceed with your question.

Hey guys. Mark, just on the guidance. The 375 million being repaid to kind of, what’s the size of the financing that you’re targeting as of 4.6%?

425 million, so it’ll be approximately 50 of net proceeds after repayment of the two year and depending on where we are on deal activity will that may come into play, but assuming there is no other use of proceeds will apply that again whatever revolving balance there is at that time.

Okay. And then the comments were helpful on the leasing side, maybe just nothing 155,000 square feet of demand kind of new deal pipeline. Any of that under contract or LOI?

I just want to clarify our terms in – sort of careful distinction I want to drop. We did not include what we call our force which are deals in leases in that number so that includes deals which are – and there are internal number twos and threes so I don’t know if you want to expand on that?

Yes, all on LOI.

So not under leases but under LOI, Craig.

Okay. The whole 155.

Yeah.

Okay. Is there anything that you guys have done post quarter end on the new side that would kind of go towards the absorption goal or the 90% lease goal.

We picked up, so nothing – [indiscernible] is out there, but certainly there is probably another – I’d call it 50 days proceeds I think if we have the leases right now, certain close.

Okay. So just we wanted the numbers, it seems like that 92% goal is pretty easy at this point. I’m assuming condition stage where they are – if given what you guys kind of have under pipeline of visibility you have is 90% sort of by year end ’15 or we at 92 by second or third quarter of ‘16?

So Craig, let me just jump in. First of all, I’m having two guys pick [indiscernible] when you said it was easy to get to 92.

It seems that way from the commentary.

Obviously, nothing is easy. What we’re doing is – we went from 85 to 90 through 15 and we’re comfortable with that number and I think how Mark should have outlined to get to the 92 is really sort of second quarter of ‘16 is sort of the objective there. And if become then sooner, we’ll know by these are the first quarter, but we’re still holding firmer than 90 and then moving to 92.

Yeah.

Craig, one thing just to make sure not from this track of those commentary is. We have role that continue throughout ‘16 and ’17. What we are trying to do and we’ve always said that our goal is to stabilize within this kind of get to and hopefully hold on to that stabilized level of 92 through ’17. Well, there is certain event flow to that and all we’re trying to do is give some perspective around what level of activity we need to achieve as it relates to get a renewal or backfill in order to get into that 92 range and maintain that. And I think, you can see how that it compares very favorably to the amount of activity we already seen in ‘15. So I think well Victor’s comment I think whole – I just want to be careful to point out to you that if something to gauge over – to say that two year window, right, because of the renewal and backfill activity.

Alright. That’s helpful. Thanks guys.

Thanks, Craig.

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

Great. Thanks. Can you talk a little bit more about the leasing pipeline? You said to backfill [indiscernible] and Rocket Fuel at 1405 market.

Sure. Hey, Jamie. How are you?

Good.

So we’ve got right now two tenants to backfill 100% of that space and I think the mark to market move on that is about 40% higher than the emplace rents today.

Yeah, north of 40%. So it’s really their assets to non-tech tenants.

Yeah. Kind I just clarify, Jamie, right now we’ve got 75,000 feet available because Rocket Fuel doesn’t roll out on one of its floors until the end of the year. So what Victor’s 100% -- right about the 100% on the 75,000 feet, right.

Right.

So we still – I don’t know that we have someone yet to that other 25.

So we have – two tenants right – four deal [indiscernible] deal with rents. One rent above 40% -- well above 40% mark to market.

Okay. I’m sorry. So you’re thinking – 70,000 taken care by …

So Rocket Fuel had two floors and [indiscernible] had two floors that equated to 100,000 feet but Rocket Fuel doesn’t give back one of their floors until the end of the year. Right now we have two tenants for 75,000 feet of that total.

No, Rocket Fuel doesn’t roll out to the end of the year on one floors.

Wait, so sorry, Jamie.

You have tenant for that other 25,000 feet.

There were three floors and one in year we have ten floors 100%.

Okay. Sorry, so I’ve got just updated Jamie. Looks like we have demand for all 100,000 feet.

Okay. Things are happening fast I guess.

Yeah.

So if it is?

Alright. And then, same question for ICON. I think you mentioned the second project build to see you might be working on. Can you give more color there?

So part of ICON, ICON is initially 300,000 and in queue which is production office building next [indiscernible] which is all part of the master development is about 90,000 feet. So the combined almost is 400,000. We’ve leased two. We’ve got activity in the remainder of ICON and we’re starting tour – pretty good volume on activity on the queue building which break around first quarter of ‘17.

Do you think [indiscernible]?

I mean – no, we’ve already designed the building. And we’re building the building but the question is, it maybe single user for the whole thing. That’s what we’ve seen right now.

Okay. So there is activity for the whole – there are users interested in the entire building.

Correct, and the remainder of ICON.

Right. Alright. And then can you talk more about the Downtown LA investment. I know you’ve got several projects there now – what is the leasing activity look like. Tenant that was supposed to move into the fourth factory decided not to go forward with that. So what’s an update on that sub market.

So from our standpoint the sub market is looking very good. As I said in my prepared remarks, I think we’ve got about 1 million square feet of increase we’ve got. One tenant credit quality tenant for one of the entire projects that [indiscernible] and his team are talking to. The reality is on both of the projects we have substantial amount of development and capital improvements work to get done. The occupancy level on both of those building won’t be until at the earliest end of 16, early part of 17. And so we’re pretty confident that the activity that we have right now -- is going to correlate to us getting occupancy well ahead of our – sorry least well ahead of our scheduled timeframes.

Okay. And then finally, can you just update us on your expected CapEx spend? I guess throughout for the whole portfolio I guess more specifically EOP assets.

Well, I can certainly give you an update on all of the EOP assets. I mean maybe we can figure out a time to talk about spend as it relates to rest of the portfolio [indiscernible] little bit difficult to cover and sound by on this call. But on the EOP assets your call that we had given $250 million estimate for the first three years of ownership and now that we’ve got couple of quarters under our belt we can give you an idea kind of where we stand on that. So the current estimate is still right around the 250. It’s ticked up tiny bit. It’s 255 for first three years. It reflects little bit higher TI forecast mostly on what it’s proven to be longer term deals then we had originally underwritten. As where we are on the spend as of 9/30 2015, we had incurred 14.5 million that’s actual out of pocket and we’ve committed another 18.3 million which we expect to spend before the end of the year and then we’ve got some LCEs some leasing commission projected through the balance of the year 1.1 million. So by the time of the year is over we think we’ll be about $38 million into the 255 million of spend the remainder of the 2016 and ‘17 that gets us to the 255. We’re currently estimating 133 million in 2016 and 84 – call it 84.5 million in 2017. As you can imagine the bulk of the stand in 16 really captures most of the CapEx spend. You remember original 75 or so millions of CapEx that we non-TI non-LC spend. We had – about much of that sort of behind us by the time you get to 17 and then 17 mostly reflect TIs and commission.

Okay. And then along those lines, you guys had $0.31 in a quarter, what’s the run rate heading into the fourth quarter based on your guidance?

It’s looks like that’s whole lower than we expected – I mean higher than we expected. We expected more than $0.17 FFO. Although, it’s a very lumpy depending on timing of our lease signings and spending of our CapEx, but we’re expecting $0.17 next quarter.

Okay. Thank you.

Our next question comes from the line of Nick Pulido from UBS. Please proceed with your question.

Thanks. Just looking at the ICON project and the Jefferson, looks like the cost went up for both, but the yield – project yield also went up. Could you just talk about what’s going on there?

Yeah. So Victor mentioned, that 90,000 foot adjacent building that next to the ICON Tower. That lease what we redesigned. We upgraded certain aspects of it, rooftop amenities, other exterior upgrades and that accounts for the change from last quarter. It’s roughly $8.5 million prior than last quarter. But we also on account of both upgrades and the activity we were seeing, we’re expecting to see better rents on that 90,000 feet and so the combined effect of the higher rents relative of higher basis actually drove an improvement in yield of about 20 basis points. So that’s what driving that. We picked up a little parking revenue too. On Jefferson, I think we mentioned in the prepared remarks that we’re talking – we’re actually in leases with tenants there. The increase which is about $6.8 million from last quarter represents largely higher TIs associated with that leasing activity, but not surprisingly – I’m sorry, and Chris points out to. You’ll also notice that the square footage went up by about 6,125 feet and the combination of the incremental rentable square footage which is going to be leased to these two tenants we’re talking to, plus rent higher than originally forecasted rents on those tenants actually drove the yield by 60 basis points notwithstanding the incremental higher cost.

Okay. That’s helpful. And then going back to you gave some good sort of info on how you get up to 92% lease for EOP. But can you just remind us for that original 7% yield on that acquisition. What you guys under wrote for rent growth through the 2015, 2016 and 2017 in those markets because I’m assuming that was some rent growth do you guys are assuming as well?

Yeah. It’s help of some market, so the rent growth we apply to each sub market varies. But it was no higher than 7% in some market than as low as inflation in other markets. Some are between 3% and 7% over the first year or two and then pretty much inflation after that. So fairly diminish rent growth in our assumptions.

Okay. So I imagine year to date the rent growth is tracking above your expectation?

Correct.

Okay. Alright. Thanks guys.

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

Thanks. Good afternoon. Hey, Mark, so to start with you guidance, is that the increase of that higher NOI? Is it lower interest expense combination of the two [indiscernible] increase?

It’s largely driven off of this quarter, third quarter result. Let me just give you a kind of quick rundown of the main contributors. It was about 1 million G&A savings which was accommodate that itself made up of somewhat higher capitalized payroll associated with higher leasing activity that we ended up capitalizing bit more payroll, plus less travel so we had better than expected travel expenses. We have lower professional fees and we had a little lower cost associated with new higher. So that resulted in about a 1 million of better G&A for the quarter. We had interest savings as you’ve already anticipated. About 0.5 million of interest savings that really stand from just timing on the closing of the element loan compared to what we thought the timing might have ended up. And then about 350,000 higher capitalized interest which just relates to timing of the development spend. And then the last two main contributors where we get better studios by about 300k for the quarter that was just a good production activity basically. And then lastly, Bay Park sale timing was a bit later than we had initially anticipated and that asset was accretive to earnings and so we picked up about 400,000 give or take. So the combined amount of that basically drove more or less two pennies if you will better than expected in the second quarter -- in the third quarter, sorry. And then, sort of to get from the all midpoint of $1.59 which was actually a pretty high $1.59 to the current $1.62. There is a little bit of other contributors [indiscernible] above the third quarter results, but there is no one single main contributors that accounts for the difference.

Okay. That’s helpful color. And then just another one on kind of the numbers. So its look like FAS 141 or amortization of the above market leases really drops sequentially from June 30 to this quarter. I thought last quarter most of that was attributable to the FAS 141 on that EOP acquisition, but I wouldn’t think it would drop off from 10.3 million to 3.7, so what drove that change?

Yeah. So, we -- I think last quarter we tried to highlight everyone that we expected to see a significant drop. I mean as you know the -- that's dependent on the composition of the leases and expiration of those leases, right. So, we had anticipated a drop. It was a sizable drop. I would mentioned though Brendan for you and everyone else benefiting this call, if you look just in terms of trying to handle on run rate on the non-cash component of office rent, the combined amount of straight in FASB 141 for the third quarter was about $12.6 million. As we look to the non-cash office rent component for the fourth quarter, straight line and FASB combined, we're forecasting a number very close to that number, that $12.6 million.

That's not, because I would have thought it would have dropped a little more on the straight line because you guys have -- I think elements starts cash paying and it's like October 1.

It will drop -- the straight line will drop and -- but the FASB 141 number is actually higher than third quarter, a bit higher.

Just to add a little color to that. So, the FASB 141 is comprised of both above and below market leases. So, as leases burn off, some which are above market leases and so therefore showing an increase in our below market, right. So, that's part of the equation there.

Yeah. Okay. Sure. Fair enough. And then Victor -- so you guys sold Bay Park, nice execution on that. Anything else sort of planned in terms of dispositions that you guys might about over the next couple of quarters.

So, we got a couple of reserve increase and a few non-core assets that we're looking at. Nothing is imminent, but I think if we were to execute something over the next couple of quarters, it could up to almost $250 million to $300 million.

Okay, great. And then so you put this is in the press release, I think you might have mentioned it in your prepared remarks too. You were evaluating acquisitions, dispositions, refinancing, and then other opportunities to capture additional value. What -- is that something beyond? Is there something else that we should be thinking about in terms of that commentary?

No, no, just development and in development related aspects.

Got you. Okay, all right. Thanks guys.

Thanks Brendan.

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

Thanks. Good afternoon. Victor you said, we're watching closely when you went through your discussion about technology, in particular the exits in the IPO market. What -- so you see significant slowdown there, what are your strategic options and what might you do with the company?

I was referring to the technology company's exit, not our company's exit, Rich,

No, I know that. But I mean let's say that -- say it gets worse and there's some sort of impact on the fundamentals of your business. What are some of the reactions you might have as a company to address that?

Well, I think -- listen, like anything else on an ongoing basis, we're underwriting each tenant not matter what the classification of their businesses are on the same terms and conditions which is a complete over-evaluation of their balance sheet, their businesses, and likes of that. In terms of our positioning, we're hopeful that every time we build out space, the space is not just definitive for a specific tenant, but there has a substantial portion of userability at that space. On the exit strategy, we're also hopeful that one of large tenant is trying to go public right now. It will validate their balance sheet even greater than what we think their underwriting be and I think that's going to be indicative of several others of our tenant in that marketplace in the peninsula. Also on the aspects of just normal course of business, we're going to monitor on a regular basis the M&A business because that's going to occur. We've talked about that quarter-over-quarter. We believe that's going to be a fundamental aspect in consolidations part of it and as a result, you'll have -- some space will be come in the market and some space we'll maintain with a new company at better credit.

Okay, fair enough. I don't think you have any exposure to WeWork and first of all, if you can confirm that? And second of all what your thoughts are about that business model and if you'd be willing to do business with WeWork?

So, the answer is no. We do not have any current exposure to WeWork. I think it’s a right opportunity, the executive type space is -- can do super certain assets in certain properties. I don't think that it is for everybody and every type of asset and I don't think it should be also obsolete. I think there are places in market that its conducive and they are going to do well. And I believe from what I've seen and what I've read they do have a business plan that is being copied and mirrored by various other people. So, there has to be at least something right with it. Not necessarily the best business plan that I've ever seen but quite frankly it's just another form of regions or whatever decade you want to go back to and dig myself as to who's done this in the past.

Okay. And Mark you went through good detail about how you've maintained your 92% occupancy in 2016 and 2017 and you identified that 70% retention. But if there is slowdown in tech, it's possible that that 70% retention would be something lower. Have you stress-tested your analysis and looked into what would happen if retention wasn’t 70% but 40% or something like that?

Yeah, we didn’t drop it to 40. I think -- I don't know that there would be -- stress seems little bit extreme. We did strike the 60 and 65 and we -- but we resisted the urge to make the script longer to give even those facts. But let me point out that there's some to the connection between the level of activity that we need at the 70% renewal probability and how that compares to 2015 activity and so far as. If even out of stress renewal probability of 60%, you have -- you still have a lot of headroom between the comparison of 2015 actual activities to what you would need on a backfill even at a 60% renewal probability.

Fair enough. And while I have you, do you have an idea what the -- that deal expected midway or three quarters away through the fourth quarter. What your interest expense number and G&A might look like for the fourth quarter in the guidance?

Yeah. So, first of all, why don't I just give you a bigger picture for the benefit of you and everyone else? We mentioned in our prepared remarks that that rate would be 516 -- I mean 4,613 per annum. So, that's the interest rate [indiscernible]. As it relates to interest in the quarter, our own expectations are that the combine of the new element financing that close basically at the beginning of the fourth quarter and this new financing will ultimately drive the quarterly interest expense to approximately $15.7 million for the quarter. And to be clear about that that does not include -- I just want to be clear that it does not include early extinguishment of debt. So, we may end up having early extinguishment of debt and that's just the interest expense itself.

Okay. And just G&A?

G&A, so -- I -- we mentioned that this quarter we saw from savings from our own expectations to give you a point of reference though. In the second quarter, you'll recall that we had $10.4 million of tax and non-cash G&A. And as we look ahead to the fourth quarter, we see it -- we actually see G&A taking up relative to the second and third quarter. Right now cash and non-cash, we think it will approach somewhere in the neighborhood of $12 million for the quarter.

Okay. And then -- I'm sorry my question, media kind of similar kind of taxed from the second quarter about some of the shutdown for KTLA and all that. When do you expect that to kind of get back into better stead from a year-over-year growth perspective?

So, I mean right now we're pretty much fully occupied both facilities and all stages will be somewhat of a seasonality at the end of December -- at the beginning of December. And it looks like we're going to be back up and running probably under the same pool stabilize basis with one stage. So, we're looking at February basically everything will be up and running with the exception, but new case we always said.

Great. Thanks very much.

Thank you.

There are no other questions in the queue. I'd like to hand the call back over to Victor for closing comments.

Thank you so much for participating and we look forward to chatting with you next quarter.

Ladies and gentlemen this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.