Hudson Pacific Properties, Inc. (HPP) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Hudson Pacific Properties’ Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. [Operator Instructions] And as a reminder, this conference is being recorded. I’d now like to turn the conference over to your host Kay Tidwell, Executive VP and General Counsel. Thank you, Mr. Tidwell. You have the floor.

Good morning, everyone, and welcome to Hudson Pacific Properties third 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, November 3, 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 third quarter call. We wrapped up another very strong quarter marked by our continued outperformance on the leasing front and by the ongoing evolution of our markets in ways to validate several of our early-mover investments. I’m going to talk about more of that in a moment. We executed over 560,000 square feet of new and renewal deals this quarter at 30% GAAP and 20% cash rent spreads. The delta between this and the second quarter spreads, which were 58% and 49%, respectively, is largely due to our renewal of new tenants, which comprised nearly of a third of this quarter’s activity. This particular deal had a significant lower mark-to-market because of the pre-existing leases recent start dates and subsequent rent bumps. Mark is going to provide a little bit more detail in a few moments. We closed a total of 2.4 million square feet of new and renewal deals in the first nine months of 2016, surpassing the 2 million square foot benchmark we discussed on one of our earnings call earlier this year. GAAP and cash rent spreads for the first nine months are equally remarkable at 52% and 44%, respectively. We still have excellent leasing momentum throughout the Bay Area portfolio. We are keeping a close eye on the market conditions in San Francisco regardless to the fact that our portfolio there remains stabilized at 95% occupied and 97% leased. We view it as a positive that resilient demand is counterbalancing an uptick in supply and in turn keeping already record rent stable at $73 per square foot and vacancy at a low at 6.9%. And while there are few larger deals this quarter, we like others expect to see significant transactions by year-end, including large public tech companies opening offices or expanding significantly in the city. Even so, it should be noted that year-to-date positive net re-absorption of 1 million square feet has already exceeded last year’s total by about 100,000 square feet. Not surprisingly, the vast majority of our leasing activity this quarter was in our Silicon Valley assets, which included the significant lease extension and expansion of the Nutanix, which I mentioned earlier. No longer unicorn Nutanix completed a highly successful IPO in the end of September with analysts covering the stock saying the company’s tremendous long-term potential. After renewing 165,000 square feet and signing a must-take agreement on additional 39,000 square feet, Nutanix will ultimately occupy a total of 204,000 square feet at our 1740 Technology and Metro Plaza assets in North San Jose. Our portfolio in that submarket, which consists of approximately 2.6 million square feet of properties directly adjacent to one another continues to be ideal for accommodating tenants like Nutanix, as they grow and mature. Subsequent to the quarter, we signed a 10-year lease with established public tech company Qualys for 75,000 square feet in two full floors at our 919 Hillsdale building at Metro Center in Foster City. This space will serve as our new corporate headquarters. The lease delayed rent commencement is attributable to the company’s existing Redwood City lease terminating at the end of 2017, plus standard free rent concessions, although for accounting purposes will see an impact of GAAP rents as of February of 2017. Big picture, on the heels of the BrightEdge Technologies lease last quarter, the Qualys deal signaled strong momentum with high-quality tenants that perhaps are most challenging lease-up assets acquired from Blackstone. We’re seeing nice activity on the balance of vacancy, despite only just beginning our more significant capital improvements. Even after signaling nearly 440,000 square feet of leases in our Silicon Valley assets this quarter, our pipeline of deals for those markets, that is real activity or trading paper on LOIs or leases is very consistent. Overall fundamentals across the Silicon Valley remain very strong, characterized by vacancy hovering around 7%, which is at or near its historic lows, stable or rising rents and positive net new absorption. Further, new construction supply continues to fill up nicely. As at the end of the third quarter, projects, under construction that are expected to deliver in the next six to eight months are approximately 75% preleased. We view trends in the VC funding market as a net positive in the quarter and believe the sector is positioning itself nicely for a rebound over the next 12 months to 18 months. Funding for companies was down this quarter, as the U.S. election and potential interest rate hike are creating market uncertainly that is carrying over into Q4. But in parallel, VC firms are building their war chest with Founders Fund, Excel and recently Hollywood and most recently Greylock raising billions of dollars and funds at the IPO market as well as opening it up with the successful exits by several companies including Twilio, Apptio, and our Nutanix. Bottom line is, over the next year, we believe that the environment is shaping up nicely for increased venture investments. On the disposition front, we expect to close our previously announced sale of 12655 Jefferson, imply this in the coming days at a 30% premium draw basis. We continue to evaluate disposition opportunities and we’re still finding unique value-add acquisition targets in our strongest markets. We’ve been particularly focused on opportunities in Seattle and Los Angeles over the last few months, where more gradual recoveries have generally kept pricing attractive longer than, say, the Bay Area. We announced purchases at our headquarters building at 11601 Wilshire in Los Angeles and Hill7 in Seattle prior to this call. Around 80% leased both are leased up twice, whereas Hill7 is a premier quality new construction, 11601 affords us the opportunity to command higher rents, encourage tenant retention through capital investment. In Seattle, we remain focused on Downtown, where the market conditions continued to tighten as high-quality tenants expand. Vacancy dropped to 8.1%, which is the lowest record vacancy since Q3 of 2008 accompanied by more than 370,000 square feet of positive net absorption. Weyerhaeuser has moved to Pioneer Square made it the fastest growing submarket this quarter, as vacancy dropped to just over 5%. Still about a year from completion, we’re seeing consistent interest on the balance of 55% preleased 450 Alaskan Way project and remain comfortable with the city’s current development pipeline, which at the end of this quarter is over 60% preleased. And even more impressive, an adjustment to the market’s robust demand, the 4.4 million square feet delivered in the last 12 months is over 95% leased. In Los Angeles, office using employment is expected to continue to expand in 2017. And in West LA, Class A rates increased slightly to $57 per square foot, up 1.5% in the quarter and 6.5% year-over-year. Vacancy did tick up 50 basis points to 10%, but it’s still down 200 basis points year-over-year. Hollywood and Burbank were two of the biggest contributors to positive net absorption, posting 150,000 square feet and 100,000 square feet, respectively. And rents in Hollywood remained around $52 a foot and we continue to evaluate several lease opportunities for our Q development, which is only expected to deliver sometime in late 2017, we see demand equal to 6 times the total building’s square footage. Our relationship with Netflix, the company that’s leading the media and entertainment industry has only expanded, most recently resulting in a 10-year agreement to occupy stages and production offices at Sunset Bronson. Netflix is now set to occupy more than 420,000 square feet within our portfolio and the latest commitment is supplemental to any future interest in Q, or other projects that we may have. All of our various deals with Netflix highlight the massive shift in content, which is created and distributed and recently announced the acquisition of Time Warner by AT&T signals furthers industry realignment. As a growing number of media companies spend billions to produce a pipeline of original content for streaming anytime anywhere, our studio ownership affords us unparalleled facilities and capabilities to participate in that growth. This is something we’ve spoken about for several years now. We can provide locations for and expertise in content production to companies like Google or Amazon and support companies like ABC, CBS, HBO and Showtime, as they build out their digital infrastructure, global branding and distribution. And by capitalizing on these industry shifts, we expect studio cash flow to continue to become increasingly predictable and stage adjacent office space even more valuable. This confirms our original investment thesis regarding the Studios, and there is an element of our business with significant potential to grow. Further these trends, while currently more concentrated on Hollywood will ultimately spill over to and benefit other Los Angeles markets. Although smaller in scale, our Arts District investment has similar characteristics to our Hollywood entree 10 years ago, and that, we were among a handful of early movers to identify the seeds for future office demand from leading creative companies. The neighborhood’s growing appeal for these types of users have been well documented recently by several national publications. Warner Music’s move was a long-anticipated one by us and others and most certainly legitimizes the Arts District in a way that increases the value of our holdings. Even so, pre-Warner Music deal with our Fourth & Traction delivery in early 2017 and 405 delivery in early 2018, we’ve added demand equal to more than two times the combined building square footage for these two assets from a variety of service and creative firms. And I suspect our investments in the Arts District will ultimately prove out as another example of what our company does best, identifying and realizing opportunities that others don’t get access to overlook. As for Warner Music leading Pinnacle, they have already gotten a subtenant for about a third of their space, who is looking to expand both in terms of square footage and orders leased runs through the end 2019, which combined with LA’s very limited supply of big blocks of space gives us plenty of options. With that, now I’m going to turn the call over to Mark who is going to speak to our third quarter financial highlights.

Thanks, Victor. Funds from operations or FFO excluding specified items for the three months ended September 30, 2016, totaled $67.4 million, or $0.46 per diluted share compared to FFO excluding specified items of $63 million, or $0.43 per share a year ago. Specified items for the third quarter of 2016 consisted of acquisition-related expense of $300,000, or $0.00 per diluted share. Specified items for the third quarter of 2015 consisted of acquisition-related expense of $100,000, or $0.00 per diluted share. FFO including specified items for the three months ended September 30, 2016, totaled $67.1 million, or $0.46 per diluted share compared to $63.1 million, or $0.43 per diluted share a year ago. As of September 30, 2016, our stabilized and in-service office portfolio was 96.5% and 90.7% leased, respectively, compared to 96.5% and 91.1% at the end of the second quarter and 94.5% and 89.5% a year ago. The 40 basis point decrease in our in-service portfolio lease percentage this quarter is largely due to the inclusion of our newly acquired lease of asset 11601 Wilshire, which was 84.8% leased as of the end of the quarter. We may see a similar result next quarter upon incorporating Hill7, which is currently 80.4% leased. Turning back briefly to Victor’s point on this quarter’s rent spreads, Nutanix’s preexisting lease was signed in tranches from 2014 to 2016, with rent subject to annual increases. In addition, we renewed the lease nearly two years early pushing out the original 2018 termination date to 2021. As such, the renewal rate represented only 3% growth of the expiring rate. To give you a better sense of the deal’s overall impact, excluding the Nutanix renewal, third quarter GAAP and cash rent spreads would have been 44% and 32%, respectively, versus the reported 30% and 20%. Net operating income with respect to our 31 same-store office properties for the third quarter increased 9.3% on a cash basis and 9.5% on a GAAP basis. The trailing 12-month occupancies for our media and entertainment properties increased to 87.1% from 76.8% for the same period a year ago and net operating income increased during the third quarter by 63.9% on a cash basis and 51.7% on a GAAP basis. As Victor mentioned, we’re seeing heightened demand at both studios, which contributed to higher occupancy and net operating income along with our returning to service certain stages and production offices we had previously taken offline for improvements at Sunset Bronson. Our completion of parking structures at both studios at the end of last year also contributed to this quarter’s substantial net operating income increase. The strength of our balance sheet continues to afford us excellent access to capital. With regard to financings, in July, we completed a $200 million private placement from which we applied net proceeds from $150 million of 10-year 3.98% senior guaranteed notes to repay amounts drawn on our credit facility to fund our 11601 Wilshire acquisition. Subsequently, we accessed the additional $50 million of seven-year 3.66% senior guaranteed notes also to repay amounts outstanding under our credit facility. Concurrent with the closing of our second joint venture with CPPIB to acquire Hill7, we closed a secured non-recourse $101 million loan at a fixed rate of 3.38% due in 2028. This quarter, we are pleased to expand our partnership with CPPIB, one of the largest global pension funds on our Hill7 acquisition. This deal was a follow-on to our sale of a partial interest in 1455 Market to CPPIB in early 2015. We’re currently CPPIB’s exclusive West Coast partner and we’ll continue to evaluate each opportunity to determine if it’s a fit our joint venture structure. With regard to other funding sources to execute our business plan, be it acquisition or otherwise, we have plenty of dry powder, including at least $325 million undrawn on our credit facility upon the closing of 12655 Jefferson. In general, our capital structure and credit metrics continue to afford us exceptional liquidity and access to the highest quality capital providers, debt and equity alike. Turning to guidance. We are increasing our full-year 2016 FFO guidance from the previously announced range of $1.71 to $1.77 per diluted share, excluding specified items to a revised range of $1.74 to $1.78 per diluted share, excluding specified items. This reflects our third quarter FFO of $0.46 per diluted share, excluding specified items, as well as the transactions mentioned in our press release and on this call, including the sale of 12655 Jefferson in the fourth quarter. This guidance assumes full-year 2016 weighted average fully diluted common stocking units of 147,740,000. As always, the full-year 2016 FFO estimate reflects management’s view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in our press release and 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. And now, I’ll turn it back to Victor.

Thanks, Mark. Well done. In closing, I would like to reiterate, as we head into 2017, we continue to see consistent strong demand and excellent leasing momentum throughout our entire portfolio and across our markets. And as always, I would like to thank the entire Hudson Pacific team, especially our terrific senior management team for all their hard work this quarter and the quarters to come. And to everybody on this call, we appreciate your continued support for Hudson Pacific and look forward to updating you next quarter. Operator, with that we are going to turn the call over to you for questions.

Thank you. Ladies and gentlemen, 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 go ahead, sir.

Thanks. Hi, everyone. So, I know, Mark, you explained some of the change in the leased rate, what drove that? I guess, though if we look at some of the submarkets for the lease-up portfolio, it looks like various markets came down a bit on the leased rate. So can you just talk about what drove that third quarter versus second quarter, some of the lease rate change and particularly, some of the EOP asset – the former EOP assets?

Sure, Nick. I actually – why don’t I let Mark address that. Maybe he can give you a good color around that.

Yes. So we’re talking about the lease-up portfolio with the exclusion of the 11601, you are really talking about 20 basis points, which represents only about 24 – only about 24,000 square feet and that’s made up of – from two assets, one is Park, the other is Gateway. In both cases, we carried through to about 14,000 to 15,000 square feet. We’ve added this to our VSP program, which has been very successful in leasing up. In one case with Gateway, because of the demand in the market for smaller [ready to those] [ph] space, that can be divided down and we’ll – that’s already underway – the plans are already underway. And at Park, because of the demand in the mid-size range, in that market kind of 10,000 square feet to 20,000 square feet, we’re going to [indiscernible]. We feel we have a better opportunity to lease it up in that size range. And so there is certainly demand in both markets for the space as we speak now. We are really dealing with a snapshot, where we used the 20 basis points, we are dealing with the snapshot in time at the end of the quarter. Traditionally, we do the quality a couple days after instead of 20 – losing 20 basis points, we are picking up about 190 basis points on that same lease-up portfolio in the same span of time. So and since then – since the Qualys deal, we certainly picked up some additional net new absorption. So we’re not – I’m certainly not concerned at all on that that will down tick because of the activity we have in the pipeline, in leases and so forth. So I think that kind of takes it through it.

Yes, that’s helpful. And then just one other question is on Cisco. I know the early termination, I think, at end of 2017, at Campus Center for over 400,000 square feet. We’ve heard from some brokers in the market that the expectation is that Cisco probably doesn’t stay in that space. Can you just talk about what you are expecting there and ultimately, I think, that’s also a mark-to-market opportunity for you guys?

Nick, it’s Victor. So I will tell you, we’ve engaged our brokers team with their brokers team and just to be factually correct, they expire at the end of 2019, they don’t expire at the end of 2017. They have an option to terminate at March of 2017. They need to let us know by March 1, 2017 to move out by the end of 2017. We’ve always said that we were reaching out, we are going through conversations. Candidly, they’ve been fairly quiet and as a result I think it’s a bit challenging for them to get out by 2017, since they haven’t really come to us yet. My guess is they will be there through 2019 and then at that point between 2017 to 2019, we’ll see what happens. But we’re on top of it. And in terms of the mark-to-market with that asset, I mean, it’s a slight increase, but it’s nowhere near competitive to what – of being compared to what we have in lot of the mark-to-markets on our portfolio.

Okay, right. But it is newer space, I believe, is that right?

Yes, exactly, it’s newer space. I think the value-add from our standpoint in terms of real capital dollars are going to be a lot less than we normally do for in our Creative Office portfolio.

All right. Thanks, Victor.

You got it, buddy.

And our next question comes from the line of Mr. Craig Mailman with KeyBanc. Please go ahead.

Hey, guys. Just on the Metro Center, you guys had some good activity there, and Victor you were saying that the pipeline looks pretty good. I mean, what’s kind of percolating the activity that you are seeing and what are you guys doing on the rent side there?

You want to take that. Yes. so the activity – on the activity, we’re seeing an uptick in the that market, we’re seeing an uptick in midsized to larger deals over the last couple of quarters. Certainly, what we have is probably from a 20 to – for what’s left over 20,000 to 50,000 square foot, and so, we’ve got multiple offers going out on that. We’re really going to talk about Metro, we really talk about the Hillsdale, kind of the large blocks that are available there.

And I think we’ve got about 180,000 feet vacant right now and we’ve got about 80,000 square feet in negotiations in various forms of leases in the sort of the common area portfolio that we have.

And are you guys adjusting rents all there to kind of get this activity going, or is it just things are just picking up?

Yes, I think things are picking up, we’ve also done some capital work, some interior and exterior work making it more appealing. So no, we have, in fact, the last kind of the last couple of deals have been ahead of underwriting.

Okay. And then on the Nutanix deal, I mean, it sounds like you guys basically just gave them an escalator bump to get them to stay and push it out. I’m just curious, I mean, I would have thought market rents in that market would have been a little bit higher here, seen some growth since 2014. I mean, are you guys worried that they were going to leave or…?

No, no. So let me sort of give you the top line and then Mark can get into the details. But hey are at 1740 at Metro, they were 165,000 feet. They had a must-take for almost 40,0000 – 39,000 feet, which they had based upon the deal that was negotiated on the original deal. So all we did was push out the lease for two years to accommodate the must-take. So the market rent that they were at was based on – they’re agreed upon must-take. So it wasn’t that the market conditions were different. It was based upon their demand needs, and there was never any conversation around them leaving that space. I think they’re growing and I expect to hear more from them on that.

The bulk of the 165 renewal was footage [ph] that was actually executed in 2015 and even 2016. So that 3% mark-to-market on that renewal is not a reflection of some sort of pull back in any respect of where market has been trending to in terms of rents. But rather the fact that we said we were renewing was a very – it was a very recent lease that – and rents reflecting more like 2015 and 2016 rents, right. There just hasn’t been that much passage of time in order to get a large mark-to-market on that renewal that pushed out the incremental two years.

And did you guys given them any TI or free rent on the renewal?

A little TI, no free rent, I think, right? Well, just a little TI, just given the space 40,000 feet.

On this, yes. On the additional space, obviously, but not on the renewal.

Okay. All right, great. Thank you.

And our next question comes from the line of Blaine Heck with Wells Fargo. Please go ahead.

Thanks, good morning out there. Victor, obviously, you guys are ahead of expectations on leasing. You talked about, I think, 2 million square foot full-year figure earlier this year and exceeded that with this quarter. So, I guess, can you put your finger on anything specific that’s been driving better than expected demand in your portfolio?

So obviously, you gave me the opportunity to commend our leasing team and our knowledge guys. So, thanks for that.

Okay.

So without them, we wouldn’t been able to accomplish what we wanted to accomplish. I think what we’ve done overall is a master portfolio specifically, this is the transition around the Blackstone portfolio. We always said, it needed to be repositioned. I think we did it a lot quicker than we thought. Our initial budgetary timeframe was a three-year to four-year period. And as a result, we turned it around in a 12 to 24-month period. And that’s put more space in the marketplace, got a lot of tenants, quite frankly, never looked at. If I’m looking at our activity, what we do is, we sort of chart, two’s, three’s and four’s sort of anywhere from LOIs to – into leases and for our leasing activity, the preponderance of what’s going on right now either new leases, renewals or backfills for tenants that are over 10,000 feet right now in that portfolio is pretty much is good as we’ve ever had in terms of the flow of tenant activity and the consistency of the demand there. The numbers are very impressive across the board. So I think we’ve repositioned those assets. We’ve put a lot of capital dollars in quickly to the ones that really needed it right away and there is a problematic line going forward And I think the market sort of understands that we are long-term holders, we are not short-term guys.

Yes, so that’s helpful. I guess, following up on that. You’ve seen very good activity in that kind of lease-up portfolio. I guess, are you seeing any big differences in tenant demand or behavior in the Peninsula versus what you are seeing in CBD business?

I think the only thing I would comment or jump in on this. But I think the only thing I would comment is the lease term seems to be longer. The desire to have a long lease term, the 5-year to 7-year is more like 7-year to 10-year, isn’t that right?

That’s right.

And lease – listen, also at the end the day, Blaine, I think, if you would have asked us this question, we are seeing no pushback on rent consistent with first two quarters of the year prior to this quarter and concessions are flat to – well, I’ll just say flat.

There is no pressure.

There is no pressure on concessions right now. So we are not seeing anything of any magnitude.

Okay, great. And then, just another follow-up on that. So you talked about the lease-up coming a little bit quicker than you guys would have expected. So I guess, can you just give us your updated thoughts on the timing of repositioning of those assets that are still in that portfolio? And when do you think stabilization could be kind of achievable for that group?

Well, it’s an asset by asset answer. And so, offline, I’m sure Mark can walk you through that on that basis. But overall, I don’t think anything in the portfolio is looking – in terms of that specific portfolio is looking to reposition greater than 2017. I think the anticipation with the activity and the capital dollars applied, by the end of 2017, all those assets should be online, if not sooner with specific assets in play right now. Now, we’ve got – I’m just sort of looking at amassing of some of the assets that are being backfilled and the expirations through 2017 on that, we’ve got a tremendous amount of activity. And obviously, as you know, the mark-to-market dollars on the rent differential is going to be pretty impressive.

Great. And then last one Alex, what are you guys seeing on the acquisition market at this point? Are there any markets that are – they have more attractive opportunities than others? And are you guys looking to continue to focus on kind of value add, or would you consider any stabilized acquisitions?

Sure. I think our strategy hasn’t changed. We remain committed to our core markets. As you know, we don’t do allocations by submarket. If we see an attractive opportunity in the market, we will pursue it if we think it makes sense. And we are constantly evaluating both more value add, more opportunistic opportunities being balanced with more stabilized investment.

All right. Great. Thanks, guys.

And our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please go ahead.

Great, thank you. I guess starting, Victor, you commented that you expect to see significant TBD, San Francisco leasing activity at the year-end, especially larger tenant. Can you provide more color on what you people see?

Yes, I mean, listen, as you know, I think we’re 97% leased in the city right now. Is that right? 96%, 96.5% or something like that. So we’ve got a couple of large spaces that we have tremendous activity on, and one in particular, we’ve got over two specific tenants looking for the same space, which is pretty – at pretty impressive numbers overall. And so we’re seeing that that large space in the market today, there seems to be a demand for that. And I think as a result, we are going to see some pretty impressive numbers from a mark-to-market standpoint in our portfolio. And I got to believe that if it’s happening with us, the spaces also on the marketplace – is going to happen with others. We are not going to be unique to the market. So it’s a positive sign in the city and the demand is still the same kind of mix and quality of tenant that you would think is in the works right now. So there are high-quality tenants with great credit.

Okay. And then you commented that rents are still rising in Silicon Valley. What percentage of growth are you guys seeing and how much can you push in your existing assets?

Well, so I’ll sort of make two comments around that. One more generic and then one more specific. So in Valley specifically, we are looking at a high single-digit year-end number in terms of where the markets should exceed year-over-year. But when you look at our portfolio and it’s a blend and you’ve seen those numbers for the most part, we are looking at our 2017 expirations and we are looking at just our tenants over 10,000 square feet that we’re in conversations with either on renewals or new deals or backfills and it’s almost 1 million feet of transactions right now. And we’re seeing a – 40% of conversations are going on in that 1 million feet right now, which are pretty consistent to renew our backfill and we are seeing over a 50% increase in mark-to-market rents.

Okay. And that’s – and then I guess, while you are talking about 2017, I mean, any known move-outs and then specifically, any discussions with AIG in July?

So there are two big known move-outs, I should say well, what – we had the two big known move-outs are obviously AIG. They come to us to stay for partial space. We are not going to entertain that, because we’ve got enough activity for the whole space and – well, I was just going to give sort of the rough number on that. There…

23,000 feet.

Yes, rolling at…

$47.

Going to?

$75.

There you go. And then there is BofA, which is not a known move-out, because we have not heard from them. But the reality is, they are blended $11 roughly going to – I don’t know Jamie, $50 something like that. So my guess is, the choice will be theirs to stay. But the activity, I think, Mark, I mean our deal is on 4055 [ph] for those guys is pretty strong, specifically in the tower and he has already got people interested in the podium.

Okay. I’m showing AIG – your supplemental says AIG is 132,000?

Yes, it’s right.

I think we picked up a little bit of that footage potentially after the quarter. They might by 123,000 right now, Jamie..

12,000.

But – yes, it might be 123,000 right now.

All right, it’s 123,000. And then beyond that, you think there is really no chunky move-outs?

No, those are the big ones. And the other decent sized one is Bosch in Palo Alto, they’ve got 58,000 feet. That one, we are in discussions with either way there – we either renew or we backed over there at $66 in a market that is probably 80% plus right now.

Okay. And then finally, Victor, going back to your comment on VC and with the IPO market getting better, it sounds like you are feeling more optimistic. Do you think 2017 shapes up to be a healthier year than 2016? I guess the investors are having a hard time, including myself, just trying to figure out what these changes in the IPO market might mean and just how much better things really feel. So maybe if you could provide more color on your conversations.

So, let’s not overexaggerate what the IPO market may or may not be for next year, because we all know that this year it was pretty anemic at best. Fortuitously for our standpoint, we had a couple of wins with tenants of ours that got through that window. I think more importantly, much around the IPO market, but more about the recapitalization and distribution of capital. We’re talking about the DC market, we’re talking about the amount of money that they’ve raised, they have to – they have a finite period of investment to get out and we think the opportunities will start at 2017 and continue throughout. I can’t proportionally say that those dollars are going to be allocated in the first-half of their investment term versus the second. But I can tell you when you’re talking about the billions that have been raised, those dollars are going to go out in 2017, 2018, 2019, and some will exit. There are obviously some very large potential IPOs on the horizon that may crack the window for others to follow, but we’ll have to sort of wait and see. I’m more optimistic on the distribution of capital on the VC side and the ability for them to invest in some of these companies that are not early stage guys, but more middle and upper.

Okay. I was thinking more specifically about the real estate market, like the impact on a real estate market. Do you think 2017 is shaping up to be a better year than 2016 already just based on what you are seeing?

I mean, listen, if you look at sort of the pipeline of guys that are looking at our space, the quality of tenant is very, very secure. We sort of talk about from the real estate standpoint, the deals that we signed basically through the first three quarters of the year, it’s still at 60%, 40% public companies versus private company; 60%, 40% tech versus non-tech. And Mark’s great statistics about companies that are less than 10 years in existence that have signed our portfolio and are looking at portfolio right around 10%. So the quality of tenants that are going to real estate markets that we’re in is still very high.

Okay. All right, great. Thank you.

Thanks, Jamie.

And our next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Please go ahead.

Hey, good morning out there.

Hey, Al.

Hey, how are you? Just a few questions here. I guess, first, maybe just switching to the Studios for a minute. I realize that they are not fully occupied, but not totally sure how the lease structure works. But given the increased demand for content, is there a way for you guys to sort of get more out of the space, but out of the studio space you have as far as leasing it to more users or the way the leases are structured, people have that locked up, whether or not they are using it. So in a sense, maybe it’s maximized as much as you can?

So I’m going to start and then I’ll have Bill jump in for a second here. We’re referring to Netflix at ICON and then the new deal we just did with Netflix both for office and sound stages, which is an additional almost 100,000 feet combined. The activity around that new lease is sort of indicative of what the content play with all the other players that are looking at our [indiscernible] and the remaining stages that we currently have as well as the office space. I think the interesting thing Alex is, you’re looking at a market where the space is going to be accounted for and leased. And as to date, the stages that Netflix has had an opportunity to take down for their long-term lease and they are going to take down, they will fully occupy them. They are going to have a consistent flow of production and that’s where the need for our back office space is and the demand on that. And that’s why, as Mark mentioned, they expedited their occupancy on ICON from two years to a year earlier than anticipated, 13 months earlier. I think that messaging for the other guys in the business is going to be consistent and those spending off that right now with not just the guys I mentioned, the HBOs and Showtimes and ABCs and CBSs and Fox, but others as well. You want to comment on that Bill?

Yes, I think what’s happening is that the streaming media companies, they don’t really own their own physical facilities as digital studios. So they need to figure out a way to or use the terminal warehouse space. They also don’t follow the additional pattern of network television. So they basically produce in bundles and they stream that content on a global basis in bundles as well around the clock kind of way of doing it. They are – Netflix recently – just announced that they are going to have 50% of their content, the original content in the next 24 months. So they are going to have to up the ante. What’s happening, all the other places around them are going to do the same. So the demand is going to continue to increase. The mass supply on the – this side in LA they’re pretty stable, so we’ll still be in a very, very strong position.

Okay, so that’s helpful. And then on the acquisition side, Alex, you guys mentioned you are more focused on LA and Seattle, which is consistent with the Investor Day. But just given where pricing has gone in LA, it seemed like the secret is out. So one is, between the two markets should we expect more Hill7s, more Seattle deals, or do you see that the rent growth in LA is such that even where pricing is today in, sort of going in three handles that you still see some pretty good opportunity on the next few years even buying at today’s prices in LA?

Sure. I think you can expect that we are going to continue to look at opportunities in both markets. We still think for the right opportunities, we can find good value. We haven’t been as you know, the buyers of property that three handles, looking to get to a five. We tend to look at things that we can get to the real estate sooner and get outside deals. So we’re going to continue to stick to our investment thesis and look for those opportunities. I do think, we still think there are good opportunities just where we are in the cycle, where we see rents going in both markets and find opportunities that will be attractive.

But as far as the rent growth that you see in Seattle and in LA, would you say there are similar trajectories, or is one market seeing faster rent growth as you underwrite acquisitions that you’re looking at in either LA or Seattle?

I think they are both fairly balanced especially within the specific submarket that we look to invest in.

Okay. Thanks, Alex.

Of course.

[Operator Instructions] Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please go ahead.

Thank you. Just sticking on acquisitions for a sec, you referred to or mentioned that being currently, at least, the exclusive partner with CPPIB. Can you maybe just elaborate what sort of properties or what sort of assets would you look at to partner with them or similar partners going forward?

Sure. So, I mean, currently today our relationship with CPP is one that we look to – quality of real estate in the markets that we are in. So they’ve not differentiated from in terms of the alliance of our regional and marketplaces and the class of real estate that we are in. I think clearly, going forward, if there were other opportunities like 1455 and the existing portfolio to bring in something existing or something like a Hill7, which is a brand new construction with lease-up opportunity, they would be an absolute identified potential partner for us. Not to say that we need to use them our balance sheet the way Mark has managed, it is such that we have capacity. In terms of other partners going forward, clearly we’ve been approached by a number of them. We like our relationship. It takes a long time to negotiate sort of a JV agreement. And so, if you have one that works and we’re comfortable with the partner, that seems to be our desire. Not to say we were looking to have a partner down the road. But we’re focused on that relationship to the extent that the assets match our sort of game plan going forward with them.

Okay, that’s helpful. And just a follow-up on the studios, given sort of the trends you’ve described and the changes that have occurred on those properties, any data points or thoughts on underlying value of those assets, just given it’s tough to see or to look at comps and see what they are just from an NAV standpoint?

So that’s a great question. Listen, historically, we’ve always looked at 100 to 150 basis points wide of where we trade our Class A stuff in our similar markets. That’s going to be a pretty tough comp today to validate, given the fact that, there are very few of them out there that have one, traded and two, are valued. Also when you look at our competitive set of our Class A real estate there, it’s hard to argue that ICON, as an example, would be anything less than a five cap, it would have a fore handle in front it. So my guess is, if you’re looking to value these relative to stabilized office that’s not an ICON type asset, we’re probably talking around somewhere around 6, 6.5 sort of in that range.

Yes. And I think if the trend continues where we would be able to execute these longer-term leases for our stage and production office space like we did with Netflix at Bronson, you will see further compression because you’ll just have longer-term leases that people will be able to balance.

Yes, it certainly seems like the combination is tough to replicate. So that would make sense. Thank you very much.

Thank you.

Our next question comes from the line of Rich Anderson with Mizuho Securities. Please go ahead.

Good morning. Last question, I guess, but – so before you got started in Silicon Valley and Peninsula, you were just kind of – I can’t remember the chain of events exactly, but you just kind of finished up in San Francisco and then you took on that made your effort and it’s obviously worked out great for you. So now, I’m curious what you think about the future for HPP beyond Seattle, Northern California and Los Angeles. Do you have designs on taking another rifle shot at a nearby area or do you think that you will just now build upon what you have here from a market individual region perspective that you have in the portfolio today?

Yes, thanks for the question. I think we’ve been pretty consistent in our thought process. We think our markets are some, if not the best in the country. And we think that there’s opportunities with the [indiscernible] area and in LA, in our current market and in the surrounding markets that are around those that we see opportunities and that we are going to want to expand in. We have no desires in going to other markets at this time, we’re not even sort of evaluating those other markets. I think there’s just enough opportunity. And I think apart from that, we positioned with our management team around those markets is rock solid and as a result, those are the ones we are going to focus our energy on.

Okay, perfect. That’s what I want to hear. Thanks.

Thank you.

There are no further questions at this time, I’ll turn the call back over to management for any closing remarks.

Thank you so much for participating in our third quarter call. We hope everybody has a great holiday season and we look forward to talking to you first of the year.

Thank you, ladies and gentlemen. This does conclude our teleconference for today. We thank you for your time and participation and you may disconnect your lines at this time. Have a wonderful rest of the day.