Hudson Pacific Properties, Inc. (HPP) Q2 2016 Earnings Report, Transcript and Summary

Greetings. And welcome to the Hudson Pacific Properties Second Quarter 2016 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. It is now my pleasure to introduce your host, Kay Tidwell, Executive VP and General Counsel. Thank you. You may begin.

Good morning, everyone. And welcome to Hudson Pacific Properties second quarter 2016 earnings conference call. With us today are the company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Operating Officer, 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 4, 2016, 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 morning 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. Good morning everyone, and welcome to our second quarter call. We had an excellent second quarter and once again we outperformed the front exceeding even our first quarter results but excluding over 970,000 square feet of new and renewal deals bringing our year-to-date total to impressed 1.8 million square feet. GAAP and cash rent spreads on the second quarter deals, the majority of which were in the Bay Area were 58% and 49% respectively. And with respect to leasing I'm going to touch on a couple of this quarters highlights, all in the Bay Area that represents nice wins for our portfolio. First, I'll remind everyone that Qualcomm renewed their lease for 365,000 square feet of our Metro Plaza in North San Jose through 2022. Our team did what they do best on this renewal, which is addressed our largest 2017 exploration, 16 months ahead of schedule at favorable terms and we're delighted at Qualcomm, and an industry leader, well capitalized public technology company will remain one of our largest tenants. We also signed a new lease, 37,000 square feet with a company called BrightEdge Technologies for the entire floor 99 Hills Avenue, part of our Metro Center complex of at Foster City. You may recall that Metro Center currently 66% percent leased is one of our high priority leased - at least up assets under the EOP Blackstone ownership. Sony vacated over 300,000 square feet of space in the two low rise building swanking a well-known tower. In early success with activity, marketing and repositioning underway which includes a major lobby upgrade exterior relandscaping and commonary improvements has generated additional activity of just over 100,000 square feet of requirements. We expect to have additional good news on Metro Center in the coming months. Our team continues to find creative ways to accelerate lease up our Peninsula and Silicon Valley assets. At our Investor Day in May, we highlighted our vacant space prep or VSP program, which leverages four tenant improvements, spend to capture demand for fast moving tenants, in turn reducing downtime on small vacancies in those markets. The first phase of the VSP spaces came to market in the third quarter of '15 and since that we can attribute roughly 76,000 square feet of deals, either leased or in leases to that program and in turn, we reduced downtime on each of these spaces by five to six months. The programs went so successful that we recently approved a second phase, another 260,000 square feet at our high priority leased assets which were ready for occupancy in the third quarter of this year. In the San Francisco CBD, of our largest tenant's sales force took down an additional 24,000 square feet at Rincon Centre to back for the entire space formally occupied by InTracks. We're delighted that Salesforce continues to grow within our portfolio and view this transaction as a reaffirmation of their continued need for space at Rincon. Our CBD portfolio remains stabilized at 95.8% leased, up 120 basis points for the quarter, and we have just 40,000 square feet expiring in the remainder of '16, all of which is around 40% below market, and we expect to see continued strong demand from larger public and private tech companies for significant blocks of space in the CBD. Amazon's recently announced lease for 185,000 in one of the cities under construction development projects at $62 per square foot triple net rents underscores this point. Now turning to LA, the city's economic continues across all sectors with unemployment reaching a new low at 4.3% in the quarter. Every Los Angeles County sub-market had positive net absorption in the quarter and supply, particularly in the core markets remains very tight. And Hollywood in Los Angeles were seeing single-digit vacancy for comparable product with 1.9 million square feet under construction and roughly 25% of its pre-leased and nearly 850,000 square feet of positive reservation. Year-to-date we expect a current demand supply imbalance to continue. One dialogue with several tenets at our four contraction in Q-project for 50,000 square foot plus requirements, and I'll remind everyone that these are unique offerings. Q on Sunset Bronson [ph] are one of very few Premier office buildings in the emerging arches. Therefore, we expect demand only to increase as we progress with construction which is typical for Los Angeles by the way. We continue to evaluate all our options and interests. In Seattle, as all the ratings currently today for a long-term growth of deep talent pools, strong population growth and lower costs of living. And office fundamentals continue to improve, large tech companies already in the market like Google, Facebook, Microsoft, Amazon are rapidly absorbing big blocks of space; while those with major San Francisco, Silicon Valley presence are increasingly looking to establish a Seattle hub. Vacancy in the Pioneer Square area where software company Avalera signed Seattle's largest lease, this quarter dropped 130 basis points to 7.1%. Class A rents jumped over 3% in the quarter to $36 per foot, and we have interest in several high-quality tech and non-tech tenants for the multi-floor leases on the balance of the forth if you ask away which is 55% pre-leased prior to breaking ground just two months ago. We expect supply in downtown to remain tight as the 8 million square feet of office currently under construction is north of 70% pre-leased. I want to emphasize that the demand pipeline throughout our entire portfolio including the Bay Area remains robust, with no quarter-over-quarter shift in terms of tenant requirements. Let me take you through a breakdown of our lease in the first six months of '16 to underscore the quality and diversity of this activity. Fully 56% of all leasing activity completed in the first of this year which Hospira [ph] and other non-tech tenants including many stand out companies like Salt Chuck and Lockheed Martin. Tech companies, largely in the Bay Area accounted for the remaining 44% year-to-date activity in nearly 70% of that activity was with public companies or private companies that have been in existence for at least 10 years. Off the 30% executed with private tech companies in existence for less than ten years, one-fifth was comprised of - it was 50,000 square foot expansion in the first quarter of this year, and excluding that lease plus an 11% of our year-to-date leasing activity is represented by private tech companies in existence for less than ten years; and as so many of our newer tech companies in our portfolio are - many are extremely well-funded and growing. We remain very bullish on tech which is the world's leading economic engine as a key driver for long-term growth across our markets. Google, Amazon, Facebook all posted stellar second quarter earnings last week. Five of the top seven largest publicly traded companies in United States; Apple, Google, Microsoft, Amazon and Facebook are tech. Financing is shifting slowing but company's tech and non-tech alike are flushed with cash and taking advantage of lower valuations to pursue growth through acquisitions of later stage and highly complementary businesses. Verizon's purchase of Yahoo!, Lakers purchase of Vivio, OrCo's acquisition of NetSuite, Tesla buying Solar City, and Sales Force buying Quip; are perfect examples. In the last 30 days, we've seen more than $20 billion dollars of tech and media related M&A deals announced with very little of it pointing to the contraction in terms of space, and I've said before, there are going to be winners and losers but these acquisitions are an indicator of these sector's overall health, and we'll provide balance to short-term capital driven correction. On final note on capital recycling; we sold two former Blackstone portfolio assets in the quarter. One big Plaza in Burlingame and Patrick [ph] in Santa Clara, which yielded total gross proceeds of $72.4 million; macro conditions coupled with significant demand for large public companies continue to put upward pressure on asset price in the Peninsula and Silicon Valley, and both properties sold to premium to our purchased prices. We viewed them as non-strategic to our portfolio; one way because of its day because of its Burlington location and Patrick Henry because of its R&D use. And right now we're extremely focused on a locking embedded value in our existing portfolio and only very selectively evaluating opportunities, recycled capital into a higher yield, more strategic assets and almost exclusively in the Los Angeles and Seattle markets. The July purchase of our 83% leased corporate headquarters building 11601 Boulevard for the $311 million or about $620 a foot is a good example of that strategy. Our purchase price of 11601 represents a notable discount to comparable trades in the market on a per square foot basis; the Reserve and our 12655 Jefferson assets, both imply this result for $845 and $795 per square foot respectively. Colorado Center in Santa Monica, just recently sold for $865 per square foot. With that I'm going to turn the call over to Mark who is going to touch on some of our second quarter financial highlights.

Thanks, Victor. Funds from operations or FFO excluding specified items for the three months ended June 30, 2016 totaled $62.9 million or $0.43 per diluted share; compared to FFO excluding those items of $68.4 million or $0.47 per share a year ago. Specified items for the second quarter of 2016 consisted of acquisition-related expense of $100,000 or zero cents per diluted share. Specified items for the second quarter of 2015 consisted of acquisition-related expense of $37.5 million or $0.26 per diluted share. FFO including specified items for the three months ended June 30, 2016 totaled $62.9 million or $0.43 per diluted share compared to $30.9 million or $0.21 per diluted share a year ago. As of June 30, 2016 our stabilized an in-service office portfolio was 96.5% and 91.1% respectively, up from 95.8% and 90.7% at the end of the first quarter and 94.7% and 88.8% a year ago. The trailing twelve month occupancy for our media and entertainment properties increased to 85.3% from 76.5% for the same period a year ago. As many of you know, April 1 marked the one-year anniversary of our at acquisition of the EOP Northern California portfolio. On account of that milestone, our financial statements now reflect a more comparable portfolio for quarterly year-over-year comparison purposes. Moreover, effective in this earnings period, we've adjusted our same store reporting to provide a quarterly comparison of all properties owned and included in our stabilized office portfolio as of April 1, 2015 and still owned and included in the stabilized office portfolio as of the end of the quarter. As a result, you will find there quarterly same store comparison, now includes 30 office properties while the year-to-date comparison continues to include 21 office properties. With that said, net operating income with respect to our 30 same store office properties for the second quarter increased 15.5% on a cash basis, and 6.6% on a GAAP basis. Net operating income at our same store media and entertainment properties increased 26.2% on a cash basis and 13.6% on a GAAP basis. During the quarter we continue to proactively manage our balance sheet, further improving our debt maturity schedule and access to capital for future requirements. On May 3, we drew all $175 million of the five-year and $125 million of the seven-year unsecured term loan credit facilities entered into November of last year. We used the loan proceeds to repay floating rate indebtedness including a $30 million loan secured by 901 Market Street, $60 million of outstanding balance under our revolving credit facility, $110 million of the outstanding balance under our loan secured by Sunset Galore, Sunset Branson [ph], and $100 million of our unhedged existing five-year term loan. On June 6, we fully refinanced project level financing associated with 10-year $87 million loan bearing interest at 4.3% per annum. The refinancing success we replaced the loan previously secured by Pinnacle-2 which was bearing the interest of 6.31% per annum, fully 200 basis points higher than the replacement financing. With the repayment of the loan secured by 901 Market Street, and refinancing of the loan secured by Pinnacle-2, we addressed our only loan maturity with this year and next. Indeed, we have only one loan maturity of approximately $100 million at Rincon Center property, all the way through calendar year 2018. On July 6 we completed a $200 million product placement. We applied $150 million of 3.98% 10 year, senior guarantee notes to fund the 11601 Wilshire Boulevard acquisition and expect to access the remaining $50 million consisting of 3.66% 7 year senior guarantee notes honorable for September 15, 2016 to repay amounts under our unsecured revolving credit facility or for general corporate purposes. All this successful financing activity has furthered our efforts to significantly lower our costs fund, extend our loan maturities and provide the company with ample capital to fund projected 2016-2017 leasing development and redevelopment opportunities, expenditures sorry. And now the guidance, we are increasing our full year 2016 FFO guidance from the previously announced range of a $1.68 to $1.76 per diluted share excluding specified items to a revised range of $1.71 to $1.77 per diluted share within the specified items. This reflects our second quarter FFO of $0.43 per diluted share excluding specified items as well as the transactions mentioned in our press release and on this call including the previously announced sale of 12655 Jefferson in the fourth quarter and the anticipated funding of $50 million of 3.66% senior guarantee notes on or before September 15, 2016 to repay amounts outstanding under our unsecured revolving credit facility or for general corporate purposes. This guidance also reflects the elimination of the ineffective portion of the interest rate swaps relating to $650 million of our five and seven year term loans due April 2020 and 2022 respectively. Through an increase in the underlying fixed rate by a weighted average of 12 basis points per annum. This guidance assumes full year 2016 weighted average fully diluted common stock in units of $146,415,000. As always the full year 2016 FFO estimates management skew of current and future market conditions including assumptions with respect to rental rate occupancy levels and the earnings impact of advanced reference in our press release and on this call. But otherwise exclude any impact from future unannounced or speculative acquisitions, dispositions, debt financing to repayments, recapitalization, capital market activity or similar matters. With that I'll turn to call back over to Victor.

Thank you, Mark. Just a reminder for those less familiar with our story or those of you who missed our Investor Day and the webcast of presentation are available on our website for reference. You'll find great information there in about our company's unique positioning and the stock's imbedded value and you should reference Mark's section in particular which outlines our ability to achieve a 12% annualized growth in both 2016 and 2017 and also feel free to reach out to our head of IRR Campbell for any questions. As always I'd like to thank the entire Hudson Pacific team, our talented senior management for their great work for this quarter and the quarters behind us and going forward. And everyone in this call we appreciate your continued support for Hudson Pacific properties and look forward to updating you next quarter. Operator with that I'm going to turn the call over to you for questions.

Thank you, at this time we will be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Nick Yulico with UBS. Please proceed with your question.

Oh thanks. Couple questions, one on the you know over 15% cash same store N.O.I. growth in the quarter, if I look the average occupancy was down for the same store year over year so it seems like a lot of this was driven by the to burn off for free rent for leases, could get some perspective on that?

Yes. You're right we had a good contributor to the difference between their ending least percentage and the lower average occupancy are basically two leases that have commenced, I'm sorry were lease space but not yet commenced. One was NFL at 10,950 filling old SDI space and Salesforce for 24,000 feet, backfilling InTrack. So that's where the difference lies in the lease percentage and the occupancy. In terms of the drivers, one of the two items is a difference between cash and GAAP, mainly at LMNLA, the free rent associated with Right Games in the first - in the second quarter of last year burned off in total cash rent commenced by obviously before then, but certainly by second quarter of this year. So that's one of the contributors. The other big contributor is not a cash GAAP difference. It's just Uber's expansion at 14,055; it contributed another $1.5 million. That's a big driver of the cash pickup but not a difference between the cash and GAAP. The next one down that's - a difference for both GAAP and cash is - I'm sorry for just GAAP difference is at Foothill Research, namely the free rent associated with the Google lease went from GAAP to full cash paying, and that was about 1.8 million contributor to cash as opposed to GAAP. Those are the three main ones, Nick.

Okay, that's helpful.

One other thing, if I could just - I wanted to clarify in your earlier note this morning, you had mentioned the notion that maybe the same store improvement was sort of artificially high, maybe because of uncommenced leased. There's some veracity to that as far as - not so much as commencement but rather cash versus GAAP rent in so far as there was free rent on a couple of the leases. But you attributed it to the EOP Northern California portfolio, but in truth, at least two of the three biggest contributors to the same store improvement on a cash basis were actually not EOP assets at all, they were legacy assets. So that was one thing I wanted to clarify. The other thing probably worth clarifying is just to make sure people are following: the real lease up opportunity in the Northern California portfolio tends to be on the lease up assets, not on the stabilized assets, where if the same store in comparison is only taking up assets that were already stabilized back in April of 2015. So not much of the pickup is happening on the lease up front, if you will, on the Northern California portfolio.

Okay, that's helpful, thanks. Then just going to the Silicon Valley and the EOP portfolio, can you talk about the activity that you're getting on leasing: how much of that is tenants expanding? Why do you think your assets are being competitive in the market? And then maybe you could talk a little bit about how much pricing power you think you have or if you're just sort of benefiting from filling up vacant space at market rent, and maybe just remind us where you've seen market rents for that portfolio in the last year? Thanks.

Sure, I'll start it and then I'll let Mark jump in. the overall portfolio has a lot of legs in it, in that I think Mark just commented on it, that the stabilized portfolio is stabilized and we have allocated our time and resources to specific assets that have lease up that have already been part of the same store and that's sort of where we see the market now. I think a couple of things are apparent, first and foremost. Our rolling mark to market on those assets in that portfolio are still in the high teens to low twenties across the board. And what we're finding is, consistently, we are seeing a flow of activity on virtually all the space. So our inflow of inbound tenants that are looking for space in the Valley is still very consistent and Mark can jump in and talk about that a little bit, but for the most part we're seeing that and I don't think is unique to us in terms of where the market it. The market's strong. We keep telling people that we keep it strong, we still see a number of requests and we're negotiating deals at numbers that are exceeding our initial underwriting and our modified underwriting. In terms of the differentiating, the assets and others, I don't think there really is. I can't sort of point and say, other than we have some available space and some markets don't have it, there is nothing pertaining to that market place today that is unique to our assets versus the marketplace. And the returns on those assets are exactly what we thought they would be. Mark, do you want to jump in?

Yes. So demand - the first part of your question was organic growth. Yes, we're seeing a fair amount of organic growth obviously. But I think where we're making the difference is there still is - we're taking it under the demand and the velocity of the market, there's a lot of space in there that was really not desirable at all. We've gone and we've spent the money - it's the speed of the market, right? So we're taking advantage of the speed of the market, getting tenants to the space, getting them in faster, and that's where we're making up the difference.

Okay, that's helpful, it's just the thought is rent growth for that portfolio, you think, for the market, in the past year: where do you think it's been?

Yes, 2016 and 2017 is like between 20% and 25%, basically.

After our current market, rent growth obviously is going to vary, there's five different submarkets within that Northern California portfolio. So each one of them is going to have its own individual assumption, but I think it's fair to say we see every one of our submarkets experiencing run over growth. Probably approaching high single digits, a little bit more moderated in the low single digit rate.

Thanks everyone.

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

I want to go back to the comment, Victor, you made, and obviously we've been seeing in the press the tech M&A. can you give us some color on what you're seeing on the ground in terms of some of these fields we're hearing about and what that might mean for the acquired company's office space and whether we're going to see some of these come back to market? I know it's deal by deal, but it seems like we've seen several of them, several big ones already.

Okay. So, yes, let me give you a little bit of a broad brush. In my prepared remarks, I referenced six deals, Verizon [ph] and then the other Verizon deal if they do it. Those are all since really the 25th of July. Subsequent to that, as soon as we heard about these deals, our leasing team and the director or markets went out and said what effect does that have? And specific to those deals, we're finding obviously it's a little early to see what Solar City and Tesla are going to do, so we don't really have a crew there. They are - Solar City is in the market today for a couple hundred thousand feet in a peninsula, so it's going to be a positive absorption or flat. Obviously Lieco-Verizon is part and parcel of them expanding Lieco so that's a positive. SalesForce and Quip, we don't know, but these crowd based deals have been positive and enhancing, there's no loss of employees on that drive. I can't really comment on the Verizon-Yahoo deal because they haven't make any comments so we don't have any exposure, but overall, it would impact everybody on the Yahoo side, but it looks like, for what our guys on the ground are saying, that seems to be a push, and maybe some space coming back. The one that's concerning to us obviously the NetSuite deal with Oracle. Typically, every deal that Oracle has done, they've kept the space, and I think as a result that we're pretty comfortable since the majority of our space doesn't expire until I think 2022. But we think that's going to be intact throughout the Oracle side. But if you go back, Jamie, and you look at the bigger deals, the Dell ENC deal, the GM and Cruise Automation deal, the SalesForce Demandware deal, obviously the Semantic Blue Coach deal: zero impact on the launch of those large deals. The one I think people are waiting on and nobody seems to have any bearing yet is the Microsoft-Renkin deal. And what happens there, given that Microsoft is in the Pacific Northwest and Renkin is not, so the larger deals that have been say from the first quarter through June, we're getting some indication that there seems to be no movement at all and no stakes coming back. The newest ones, I think we're pretty comfortable with all of them with maybe the exception of the Oracle-NetSuite because we just don't know what's happening there, but everything else is positive. So it gives you sort of a little bit of smattering of where we see. The last point is the point I've made to you and others along the way, we're going to see this, and this just shows the strength of the marketplace. The interesting thing is we've not seen in M&As and the banter around businesses going out of state. The M&As on the West Coast right now, another one that we didn't mention down in LA is Starz being acquired by LionsGate and LionsGate is increasing their space to accommodate Starz's growth. So that's in LA. So we're seeing it as a positive, a flat at best.

Okay. And you said LinkedIn-Microsoft is still too early to tell?

Yes, we haven't - I mean are you going to comment on that? We haven't seen anything.

No.

We haven't seen any results on the LinkedIn-Microsoft, so I think our guys are on top of it, but we haven't seen any direction.

Okay. And as you look in - where - it looks like you're kind of getting clustered up there for Tech in these markets. Are there certain submarkets in the Bay Area that you think are winners versus losers? Or where more and more of these larger companies want to be clustered?

Hey, listen, I think they're all winners right now. Between San Jose and San Francisco, the amount of transactional business that the big 4 are taking down and looking at right now is just insurmountable and what we're finding now is there seems to be clusters around the Googles, the Apples, and the Facebook today. And to see that there's just not enough space nearby where they are, so they're going to wherever they can find space.

Okay, thanks. Turning to expirations, you took care of Qualcomm; can you just remind us for the rest of 2016 and 2017 your next largest expiration? Did I hear correctly 20% to 25% mark to market?

Yes, well, 2016/2017 expirations are - average out to be - well in Northern California the EOP is like 22%, but if you want to be across the board mark to market on the whole portfolio, it's about 40%. That includes 2017 expirations in San Francisco and that's contributing a lot to that higher mark to market. That's a weighted out average for what's remaining in 2016 and all of 2017. In terms of giving you an idea of the actual bigger expirations that are coming, that are on the horizon over the next two years, rather than try to point you to specific expirations, I would point you to page 29 of the supplemental. What you'll see there is any submarket that has more than 100,000 feet expiring in any quarter. We've identified specifically the three largest contributors to that square footage. And so you can easily trace to the larger expirations. Suffice it to say there are a couple of decent sized expirations on the horizon in 2017, nothing significant in 2016. There's AIG in 2017 and then at the very end of 2017 we've got some expiration with B of A, as you know, as 1455, very low rent space. There's some other smaller expirations that are decent sized, and you see it all summarized in the footnotes on page 29.

Okay. And then just last, I was surprised that today there wasn't any leasing progress in the development pipeline. Maybe if you could tell us what's happening to Icon #2?

So I was surprised at your comment on that. So we're both surprised. We just broke ground three weeks ago at 450 Lastaway, and we're 55% preleased there, and we've got activity in probably, my guess is, somewhere around 300,000 to 400,000 feet of deals we're working on. And Q just broke ground like 60 days ago. We haven't even got out of the ground yet, and we're building out - just started building out July 1 PI4 for Netflix. And so I don't know what's the expectation on that basis, Jamie, but those are the only two deals that we have as development deals right now. And we basically told you exactly what's going on with Q. I mean the demand is half a million feet for 90,000 feet of development.

Okay, so there's no change in the demand pipeline.

No, not at all.

Okay, thank you.

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

I was just hoping you could give us an update on the leasing pipeline. Obviously it's blowing through the million six you talked about two quarters ago. Just curious how big it is now and maybe where the goalposts do for the goals of the year.

We've got about 1.8 now for the - halfway through. I think - or, we didn't give a guidance as to where we thought we would be at the end of the year. Clearly, on the renewal basis, we've exceeded our expectations. And the backfill basis, we've exceeded our expectations. On the new leases, I think we're right on line. As I just mentioned to Jamie, the velocity is as strong as it's been ever for us, so we can't say that we're not seeing and trading paper. We're also negotiating deals to get the best possible rate, and it's proved out that our mark to market and where we're rolling, Craig, on that basis - I think Art and his team are looking at another million plus of feet, maybe, for the rest of the year. It seems like a number that we'll obviously well exceed our expectations. But I think he's probably comfortable with that; do you want to speak to that, Art?

No. I mean, we've - and there will be done deals. The pipeline still remains right about where it was [indiscernible] range is where we sit now after doing like a million eight the first half of the year.

Great. And then nerdwallet - any update on them? I heard they're looking for space in the market.

Yes. So nerdwallet occupies 50,000 feet at our 901 market and the space is the best space in that building. I think they're roughly around $60/foot. The market rents there are close to $70. It's a great story - this is a tenant that's now in San Francisco building their portfolio and they're looking for as much as 200,000 bps. We can't accommodate them, so I think it's an opportunity for us to either keep them in place and have them go sublease a space or take it back if there's a user. And it's early in the phase, but that's what we're seeing right now, and I think we're very comfortable with that space.

That's helpful. Mark, on the Qualcomm lease, I think you had mentioned last quarter something about the free rent periods being a little bit weird. Can you just gives us an update on how that free rent ended in the second quarter?

It's satisfying because we've anticipated that question. If you look at our supplemental, you can see the details on the upfront abatement page of the supplemental - and I'm just trying to give you the exact page, I think it's 28 or 27 maybe. You'll see - well, we've outlined in the supplemental exactly where the free rent periods are for under that lease. It's in the page where we give you what the - it's on page 27. So look in the footnote there and you'll see exactly where the free rent applies under the Qualcomm lease.

Got you. Footnote 3; I see it. And then, just lastly, on the Lieco mortgage loan. Can you let us know where it's priced? And if you can't give that just relative to the 11% you're losing on the downtown LA?

Losing? We won! You mean replacing!

Yes.

You know, the Lieco land loan that we did is right around 10% so it's obviously I can't walk you through the specific details of it, but it's right around 10%.

Okay, do you say that was a contributor on the guidance bump or did you guys already add that in the numbers?

No, that's a third quarter transaction.

Well, no, but it's in the guidance.

Yes, it is part of our full year projection.

Okay, so it was a bit of a bump for you relative to last guidance range.

Yes, it's contributing. I mean, there is ins and outs, it's gray, but I'd say it's fully reflected in the number.

Okay, great. Thanks guys.

Our next question comes from the line of Alex Goldfarb from Sandler O'Neill. Please proceed with your question.

Victor, I appreciate your comments on the leasing and the breakdown of the tenants and the market that you went through, but just sort of curious: as you guys look at the price setters, obviously we react to various news headlines. Are the price setters as far as rent goes in the market more driven by the big users or is it the smaller users on the incremental side as far as rent direction goes?

That's a great question, and I don't have a specific answer one way or the other. Now, clearly, I think that at the end of the day, the large guys are at much higher need - or I would use the phrase desperate, but they're so huge, chances and opportunities for them to find space that the lead indicator for them is the space. And so the market leading indicator for rent and the growth of rent, it's going to be secondary. I've mentioned this before, we still haven't seen in this cycle a pushback on rate. And so that's not how we're winning or losing deals or making or not making deals. It's not based on rate. We're making and losing deals based on the ability to get in and the timeframe by which you could occupy the space and the layout by which we can deliver it. So that the end of the day, clearly the smaller guys are going to be a lot more rate sensitive than the bigger guys because the smaller guys are going to have many more options.

Right, but as you hear chatter from the different brokers, they - their view is as long as the big guys are out there, even if it's just renewable volume, that's enough to hold rate or you really need to see expansion volume and/or growth from the younger startup companies to really drive rate?

The expansion volume by which these guys are looking at it - and they're looking at it from a short term window, not a long term window. People are taking space that they need, not that they think they need. And that's why they're paying the current rates that are out there, versus future.

Okay, and on the second question, the land loan, I think you guys just had one that you paid off, you made a new one. Is this something that's sort of a one-off business or is this something where, as the market gets tighter, we may see you guys involved in more of these?

Listen I wouldn't project it that it's a core business for us. There have been opportunities with - down in Los Angeles and now with this Lieco deal. It's got to be the right type of real estate, it's got to be in the right market for us, and the yield has to be good. We're looking at double digits returns on short term holds and so far these two look pretty good and the basis is very important for us. On the Lieco deal I think there is 50% of value, so we feel pretty good about that. And then when they just turned around and made their announcement recently on Vizio, I think that even enhanced it for us. I wouldn't read into us deploying a lot of dollars one way or the other on that. I think if deals come up, we'll evaluate them, and if they're appropriate, we'll execute.

Okay. And just a final question; Mark, on the same store, do you say that now with 30 properties versus 22 previously but obviously you guys bought more than just 10 properties in the EOP. So what's the delta between the EOP and the same store as of April 1?

Under the same store definition, the properties have to be stabilized to even qualify for same store. The adjustment we made was rather than only including assets that we owned after the beginning of 2015, which is what is running through the year-to-date same store portfolio, mainly there's 21 assets that were stabilized and owned as of January 15 and still owned as of June 20, 2016. For quarterly reporting purposes, we included any stabilized office asset that was owned as of April 1, 2015; so nine additional office assets were added to the 21 that were running through the year-to-date portfolio, if you will. That leaves out a good nine or so assets that were in the in-service portfolio, that is to say that are lease up assets, that are not running to the same store portfolio and the reason why they're not included is they have not been stabilized yet.

Okay and then for changing the same store pool: are you going to do it quarterly or wait again until next year?

No we will continue with the methodology on a quarterly basis that is to say it's an asset, once stabilized at the beginning of the prior year quarter so or example next quarter if an asset became a stabilized asset as of July 1 of 2015 then it will be in the new same store portfolio for the third quarter of this year if you follow me.

Okay. That makes sense. Thank you Mark.

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

Thanks and good morning out there. So Mark those good call, just want to confirm on a same store basis your definition is owned and stabilized in all periods.

That's right.

Okay. In terms of the word velocity was used to describe what's going on in the peninsula in Silicon Valley and I'm curious does that word velocity also apply to the pace at which you're spending CapEx and I'm wondering if that $250 million bogey number is burning off faster than you thought?

Well you know Rich to try to keep people on the same page relative to spend we really are no longer attempting to reconcile back to that $250 million. You know that portfolio, that three year projection which was an all-inclusive spend number was originally attributed to so markedly different than it was a year ago when we first went into that number so as it relates to the spend I can tell you the pace building spend the non-TI and commission spending now was fully updated at our Investor Day and debt amounted as an investor day was about $63 million with the all-in spend for that three initial year hold period of the Northern California portfolio. The F.D on that it's basically the same amount so we have managed to seek out little bit of savings there now it's about $62 million which we've spent $16 million, a little bit in 2015 and $2 million in 2015 and about $14 million so far in 2016 and we've committed another $32 million so it's against the $62 million three year budget on the Northern California portfolio, we've either spent or committed about 77% of it. And one we're right on pace I would say from a timing point of view to you where we continue to follow incremental savings within that budget if we adjust from time to time either for the lease of assets that may have had an earlier spend or other ways of finding savings. That's already on the base building spend. As the relationship commission again as we said in the past it follows entirely from leasing and if we're ahead of schedule on leasing then Tis and commissions will naturally be ahead of schedule too and so far we've been seeing ahead of schedule over that three year period.

Okay. Good stuff and then second question you know we talked about some of the M&A activity in tech world. And I'm just curious if you guys you know so far that penciling out is neutral to positive I guess or maybe more positive from your perspective as a relation to your business. But do you guys take cues from other corners of the business world out there whether it's tech M&A or even other asset classes like lodging or performance or anything like that you try to you know help your strategy and maybe change your strategy if you see thing moving in the wrong direction. Maybe not in office but you know in other parts of the economy and I'm curious if that has happened at all and if it's caused you to be a little bit faster to get things done. Or maybe nothing has changed at all. I'm just curious how much you have you know you have your antennas up around you outside of specifically leasing office space?

So Rich, thanks for the question. I think it's just you know it's important to sort of know that you know like any like any operating business we're going to look at you know not just what's core round us but parameters but that may equal or effective in terms of our day to day decisions. We are effective in terms of our day to day decisions. I don't think anything has changed in terms of our velocity, in terms of getting deals done or rushing to getting deals done based on that but clearly did the external factors that are things that we would look at on an obvious basis is job growth in employment on the first level and then absorption on multifamily right and where that shifts and you know I do think that you know we're very astute as to what's happening in our core markets and for the most part you know we've got a couple of areas that we're we are consistently monitoring. Speaking of it you can just go and regulate movement there and absorption there and where it sits and you know there seems to be a lot more danger around it than there are facts but we're very cognizant of where those numbers are in and where they may go to or from a vacancy factor in that and secondarily with the downtown L.A. with the amount of units that are coming online on and lease option versus the return and how quickly those are going to get absorbed or not which will indicate where the job growth is going to be so those are factors that we're obviously always looking at. I think you know any prudent office company would have to do that in the teams at their end.

And then lastly is there any change not so much in your guidance course but just generally how you feel about dispositions or are you still basically feel the same way you know opportunistically here and there but no elevated to be selling assets?

No I think you know we're pretty consistent. If it's not quarter the holding the portfolio, we're going to look to alternate ways to dispose those assets or if we feel that there's an asset in the portfolio that maxed its potential under the Hudson ownership will do the same. We don't have a specific guidelines based on the economic conditions that we have to dispose of X number of assets.

Do you have reverse inquiries coming in for certain assets that you've been turning down?

Obviously. Yes.

Yes. Okay thank you.

Our final question comes from the line of Blaine Heck with Wells Fargo. Please proceed with your question.

Thanks, good morning. Victor, can you talk a little bit about the future development pipeline and just maybe how would you handicap that list of earls. Which ones you did expect to hurt really or than others and then, is there any color you can give on kind of the earlier development the potential investment you guys would be looking at?

The potential investment for the what?

You guys would be looking at for kind of total investment in the ones that might start earlier than the others.

Yeah, sure. Of course, I mean that the two major, other than the two that Jimmy mentioned where we sit that are coming out of ground now, the two major developments for us what would be our picking 901 asset which we're nearly going to market a name Epic and it's going to be a 3,500 square foot office building on Sunset Boulevard across from Sunset Bronson. It will be a very unique outdoor indoor facility that we are in final planning stages on and improvements and entitlements on our final design. I think that would be, we've had a number of people interested in that asset on a pre-leasing basis. So we will launch that building and break ground on that building depending what kind of final like activity we have but you know I'm sort of thinking sometime in spring of next year would be sort of a logical timeframe given crevassing and the likes of that. The second set that we have got a ground up development is a smaller asset we have in Culver City for 160,000 to 50,000 feet that we're evaluating right now which will also be a pre-leased asset that we could potentially break ground sometime in the last quarter of this year. And then the last would be our redevelopment projects which is our 4050 a tail and forced interaction. We've been at the fort action should be completed by year end of 2016 and we just started full marking there and 4050 tail will be completed year end 2017 and we're just launching our marketing this fall.

Hey Blaine, on that Culver asset just in case there's any confusion, we don't, we've had it under contract for quite a long time and it's very far along in terms of our ability to get to break ground that we don't technically own it yet. And then if you are finding it listed in the development pipeline, it's fully entitled. All the design on it is done and like as Victor was saying it's a near term start. It's not in our pipelines because we don't technically own it yet and it probably wise on our part to add it there and so people can at least track this potential future development.

Okay. What I was looking for. So, I guess Victor what amount of free leasing would you then target to kind of start some of these projects?

You know like I think we're probably now in this is you know in the range of a 30% to 50% pre-leasing and I think 30% is sort of a comfortable number with the activity and it was laying in the pipeline, the interest level. You know 5901 is a big project, our epic building is a big project and the amount of activity we have in Hollywood right now would probably enable us to achieve that. 9300, the deal that Mark was referring to, is a much smaller building. There's a fairly large component of retail. So I think it you know a lease or two would really get us going.

Okay and then lastly on it team slick have pretty similar deal to one of your competitors have down the road. Do you think there is enough demand for both major projects to go forward in that market?

Yes, I mean Hollywood is a hottest market right now in Los Angeles and demand there is very high. I think the reverse increase that we're fielding from media and entertainment companies who need office / studio space and production space is very high and the biggest differentiator is that we offer the media, studio space that our peers and competitors don't. They have created production as well as the production soundstages nobody has access and this is literally across the street almost from both of our studios. So unique opportunity I think that's what sort of differentiate us for large blocks of space tenants are looking at. We really sort of fit the only void for that.

Great, thanks for that.

There are no further questions at this time. I would like to turn the call back over to Mr. Victor Coleman for any closing remarks.

Thank you so much for the participation, and again, thank you to the Hudson team in totality for another great quarter. We'll speak soon.

This concludes today's teleconference. Thank you for your participation and you may now disconnect.