Hudson Pacific Properties, Inc. (HPP) Q2 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Hudson Pacific Properties Second Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, to Kay Tidwell, Executive Vice President and General Counsel. You may begin.

Good morning, everyone, and welcome to Hudson Pacific Properties second quarter 2017 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 3, 2017, 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?

Thank you, Kay. Good morning, everyone, and welcome to our second quarter call. We wrapped up yet another strong quarter. Other than the Sunset Las Palmas Studios acquisition, which we announced last quarter and closed on May 1, the majority of the second quarter activities centered around robust leasing. So today I'm going to focus my remarks on our leasing activity and market conditions. And Mark, in addition to touching on the financial highlights will dig into our lease percentage for our stabilized, in-service and lease up assets. Many of you likely noticed a small dip this quarter in our stabilized and in-service lease percentages. Mark's comments will lay to rest any concerns that this is indicative of a slowdown or a longer term trend. Also, since we've just passed our 2-year anniversary of our EOP portfolio acquisition, we thought it would be worthwhile to discuss where we are in leasing and NOI growth on those assets, and Mark is going to review those numbers as well. As noted in our press release and filings, we completed over 580,000 square feet of deals in the second quarter and that surpasses our Q1 numbers and gets us to 1.1 million square feet year-to-date. We've now had six straight quarters of leasing activity in excess of 500,000 square feet. We've averaged nearly 620,000 square feet per quarter since Q2 of 2015. Cash and GAAP rent spreads also ticked up quarter-over-quarter at 48% and 67%, respectively. Our demand pipeline remains consistent, if not elevated. Right now, we have 1.5 million square feet of real activity that deals in negotiations, LOIs or leases. This is across our markets and proportionate to availability. Larger deals signed in the quarter demonstrate the tremendous mark-to-market we've been achieving on backfills and renewals. Our 95,000-square foot renewal of Bank of America at 1455 in San Francisco had a 300% mark. We signed another four deals over 30,000 square feet, three of those, one in San Francisco, one in Seattle and one in Silicon Valley, were backfills with an average of 32% mark-to-market, and the balance of new and renewal deals are smaller, less than 5,000 square feet on average, and nearly 80% were completed in our Silicon Valley assets. I'd like to start off with the valley this quarter as we run through the markets. And there's no doubt that year-to-date fear of a slowdown in the valley has weighed on our stock. It's been two plus years since talk of tech rac [ph] began, and it's disappointing to see investors still waiting for the other shoe to drop. Those who've bet against us in the valley over the last two to three years have been, quite frankly, wrong. Quarter after quarter, we've been posting fantastic numbers, and sadly, it seems fear of being on the wrong side of a supposedly inevitable tech meltdown has, in many instances negated our stellar performance. Reality is there's an abundance of positive news and trends regarding the Valley. Companies driving growth in the Valley like -- tenants like Google and Nutanix, also Facebook and Apple, are posting strong quarterly numbers. Day after day, we see reports of big names like Google, Adobe, Apple taking hundreds, if not thousands, of square feet in our Valley markets to accommodate major growth. Our properties in Milpitas, San Jose and Santa Clara now have greatly enhanced public transit access as a result of BART's 16-mile extension. And just last week, the Wall Street Journal ran two relevant articles, the first on record breaking fundraising. In the first half of this year alone, 8VC in megafunds raised an aggregate of $9.3 billion from leading institutional investors. The second article highlighted that there's been no real dispersion of specialized fast growing tech occupations. In conclusion, San Jose and the Valley, as the epicenter of the advanced industries, poised for outside growth, AI, Robotics, Machine Learning, Virtual Reality will remain the clear leaders for these types of employment opportunities for the foreseeable future. A recent Silicon Valley business journal article also noted how autonomous car companies are flocking into the Peninsula, where they plan to grow significantly. They view the South Bay, which is talent based proximity to Stanford and inflows of VC funds as superior to San Francisco or the East Bay. Leasing activity along the Peninsula remains very strong. There are 56 active tenants in the market representing just under 3 million square feet of demand. Another quarter of positive net absorption brought year-to-date totals to 480,000 square feet and vacancy was down 10 basis points in the quarter to 6.8%, and asking rates were flat at $69 per square foot. Further south, new supply specifically, two projects delivered, one in Santa Clara, the other in San Jose, contributed to just over 500,000 square feet of negative net absorption in the quarter. And market-wide they ticked up 220 basis points to 9.7%, while lease rates stayed flat at $57 per square foot. Subleased space in [Indiscernible] Peninsula and Valley markets increased by just over 2% in the quarter, driven almost exclusively by additional availabilities in Santa Clara. Again, the preponderance of the subleased space is larger blocks with 8 of the 10 largest sublease availabilities in Santa Clara. Even so, demand is quite strong. There are 153 active tenants in the market and we expect to soon see a few large deals that will absorb some of these excess spaces, specifically in Santa Clara. North San Jose, where our airport place assets are located, did not have a tough feel in terms of size signed in the quarter. It did, however have the largest gross absorption with 63 of the 305 leases, a testament to a robust demand for smaller spaces. Our lease up and other Valley assets are well positioned in the marketplace as we reach the end of the capital program to upgrade common areas and fully represent -- reposition select properties, like Gateway. Taking a look at this, playing out in terms of our leasing momentum over the last 120 days, we've executed 19 deals of Gateway, totaling 76,000 square feet. We have another 140,000 square feet of deals in the pipeline. That's in leases, negotiations or LOIs plus another 100,000 square feet of increasing tours. Note that at the end of the second quarter, Gateway had just over 100,000 square feet of vacancy. While Gateway is a representative of our larger repositions in the region, common area improvements and the VSP program are driving momentum at our other assets. Aside from Gateway, we've executed another 25 leases totaling 95,400 square feet in North San Jose over the last 120 days, and we have approximately 82,000 square feet of deals and leases, negotiations or LOIs and more than 185,000 square feet of increasing tours. That's relative to about 155,000 square feet of availability to those assets as of the end of Q2. Suffice to say, we're very pleased with our team's efforts in that marketplace. What's happening in downtown San Francisco? The robust demand for bigger blocks of space from high quality tenants seems to be more regularly understood. We're seeing it play out in our portfolio again this quarter. VAB signed on the heels of Google, Glu Mobile signed for 57,000 square feet and DoorDash for 50,000 square feet. Broader market statistics stayed relatively constant with Class A vacancy up just over 6% and asking rates stable at $76 per square foot. 5.5 million square feet of tenant demand in San Francisco is the highest since the fourth quarter '14, and sublease availability fell to just under 2% in the quarter, which is the lowest since the third quarter of '15. We expect to see upward pressure on rents in the second half of '17 and the blended mark-to-market in the remaining 458,000 square feet of our '17 and '18 expirations in San Francisco is just over 50%. In Los Angeles, media-related markets are leading growth in activity. Hollywood had nearly 375,000 square feet of positive net absorption this year. And in the quarter, vacancy dropped 100 basis points to 11.4%, while Class A rates held steady at $54 per square foot. As underscored by our recent deal with Netflix for another 48,000 square feet at Sunset Bronson, we're seeing significant demand for content creators for premier studio-adjacent office space, and following our Sunset Las Palmas Studio acquisition and the delivery of ICON and CUE with approximately 1.2 million square feet of development opportunities with studio access. We're in early conversations with multiple users that have requirements ranging from 125,000 to 300,000 square feet for our EPIC development, which we intend to break ground on this fall. And overall, we're seeing a great activity throughout our L.A. portfolio. We're in leases or negotiations for almost 70,000 square feet Fourth & Traction, and we're in leases on a deal for the entirety of our 604 Arizona with a substantial mark-to-market rent increase. We expect to have further updates on both of those projects over the next quarter. Seattle seems to top another list every single day. The city offers a lower cost of living without sacrificing career opportunities or lifestyle. A recent LinkedIn article cited more workers from core urban markets coming to Seattle than any other city, and the pace of hiring is up more than 10% from the beginning of '16 to the beginning of '17. In turn, Seattle companies are rapidly absorbing space. In the first six months of this year, Seattle had 1.4 million square feet of positive net absorption, which is almost three times that amount for the same period last year. And under construction projects are currently 50% plus pre-leased. Pioneer Square, where the preponderance of our portfolio is located, is the tightest submarket. Total vacancy was down 50 basis points in the quarter to 5.1%, while Class A rents stayed flat at $35 per square foot in addition to the 50,000 square foot deal that we signed with RealSelf at 83 King to backfill the CapitalOne space, forward leases for the two remaining floors at Hill7. Upon execution, that property will be 100% leased. We're also in leases with a single user for nearly all of 95 Jackson and 450 Alaskan Way. That deal totals over 46,000 square feet, and we expect to have more to report on those transactions next quarter as well. With that, I'm going to turn the call over to Mark, who's going to talk about our second quarter financial highlights.

Thanks, Victor. Funds from operations, or FFO, excluding specified items for the three months ended June 30, 2017, totaled $75.3 million or $0.48 per diluted share compared to FFO, excluding specified items, of $62.9 million or $0.43 per share a year ago. There were no specified items for the second quarter of 2017, while specified items for the second quarter of 2016 consisted of acquisition-related expense of $100,000 or $0.00 per diluted share. As of June 30, 2017, our stabilized and in service office portfolio was 95.6% and 90.8% leased, respectively. All, but one region within the stabilized and lease-up portfolio witnessed a steady or sequential improvement in lease percentage. Lease expirations at three of our Bay Area assets for a combined negative net absorption of approximately 77,000 square feet essentially account for the slight quarter-over-quarter roll down in the combined stabilized and in-service lease percentages of 80 basis points and 40 basis points, respectively. These include Carat U.S.A. moving out of 33,000 square feet at 875 Howard, which we are very close to backfilling; Uber vacating approximately 20,000 square feet of short-term space at Skyway Landing; and a handful of small tenant move-outs at Concourse, several of which have already been backfilled. I will provide further detail on the performance and projections for our Silicon Valley assets in a moment. Net operating income with respect to our 34 same-store Office Properties for the second quarter increased 8.5% on a cash basis and 8.5% on a GAAP basis. For the sake of clarity, the cash basis increase for the second quarter is not in any way bolstered by Cisco's early lease termination payment, all of which was recognized for cash purposes in the previous quarter. Moreover, the cash basis net operating income continues to be muted by the previously discussed September 2016 commencement of a lease amendment with Weil, Gotshal at Towers at Shores Center. We estimate that second quarter same-store office property cash net operating income would have increased approximately 14.4%, ignoring the impact of Weil, Gotshal. The trailing 12 month lease percentage for our same-store Media and Entertainment Properties ended the second quarter at 89.9%, up 460 basis points year-over-year. The year-over-year increase is the result of the increased demand for stages and production offices at both studios. Same-store media and entertainment net operating income during the second quarter increased by 49% on a cash basis and 47.2% on a GAAP basis. This was due to higher occupancy and production, again, at both Sunset Gower and Sunset Bronson. This quarter marks the two year anniversary of reporting on the former EOP Northern California portfolio, which inclusive of dispositions and acquisitions, still comprises the bulk of our Silicon Valley holding. We thought it timely to provide everyone with a closer look at the progress we've made and the value we've unlocked thus far as a result of acquiring that portfolio. From the second quarter of 2015 to the second quarter of 2017, we have realized 21% cash net operating income growth at our 22 same-store former EOP portfolio asset. We achieved such significant cash flow growth because of, and in spite of the fact that 57% of the leased square footage at those assets expired during that same period. Even so, we managed to increase the lease percentage at those assets by nearly 130 basis points bringing the lease percentage to 87% as of the end of the second quarter. We expect these 22 assets could be approximately 90% leased by the end of 2017. You may recall that when we began reporting on the 22 same-store former EOP assets, 14 of those assets were not yet stabilized. As of the quarter just ended, only 8 of the 22 assets remain in lease-up and even those assets have steadily contributed to cash flow growth. From the second quarter of 2015 to the second quarter of 2017, we realized 17% cash net operating income growth, while 49% of the leased square footage at those assets expired during that same period. As with the entire same store former EOP portfolio, we still managed to increase the lease percentage at these eight assets by over 130 basis points, bringing the lease percentage to 79% as of the end of the second quarter. We anticipate these eight assets could be approximately 85% leased by the end of this year. It's also worth pointing out that even as we've improved rents and occupancy at our Bay Area assets, including those throughout Silicon Valley, the underlying composition of our entire portfolio, where they're measured in square footage or revenue, continues to evolve. From the second quarter of 2015 to the second quarter of 2017 our Bay Area holdings decreased from nearly 76% to 68% of annual base rent. Our Silicon Valley portfolio went from 58% to less than 52% of annual base rent, and our Los Angeles portfolio grew from 20% to more than 26% of annual base rent. These numbers showcase our success in rebalancing our portfolio, which remains a key component of our longer term strategy. Since acquiring our Silicon Valley assets, we've been a net buyer in Seattle and Los Angeles and a net seller in the Bay Area. Development projects coming online, such as ICON and CUE and shortly 450 Alaskan and Fourth & Traction will also continue to be a major driver of this shift. Turning to guidance. We are narrowing our full year 2017 FFO guidance to a range of $1.93 to $2.01 per diluted share excluding specified items, maintaining the previous midpoint of $1.97 per diluted share excluding specified items. This guidance reflects transactional activity referenced on this call, in our earnings release and prior announcements. It also includes Cisco's $10.4 million early lease termination payment, reduced for GAAP purposes by the write-off of approximately $5.9 million of noncash items, including straight-line rent receivable and above and below market rent lease adjustment. This is amortizing beginning in the second quarter at approximately $1.5 million per quarter. As always our full year 2017 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 that Vence [ph] referenced on this call, in our earnings release and in prior announcements. It excludes the impact of future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. There can be no assurance that the actual results will not differ materially from this estimate. And with that, I'll turn the call back to Victor.

Thank you, Mark. Heading to the second half of '17, conditions across our markets remain very favorable as does our position in each market. We can deliver big blocks of studio-adjacent office space in Los Angeles. We're focused on smaller tenant deals in the Valley. We still have significant embedded mark-to-market in San Francisco and have assembled a unique portfolio and a foothold in downtown Seattle. All these aspects reinforce our ability to continue to deliver positive results for our shareholders. Once again, I'd like to thank the entire Hudson Pacific team, particularly our terrific senior management group for their hard work for this quarter. And to all of you on this call, we appreciate your continued support for Hudson Pacific Properties, and we look forward to updating you next quarter. Operator, with that, let's open the call to questions.

Thank you. [Operator Instructions] Our first question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

Good morning, morning out there. So, two questions. The first, Mark, I think you said in the discussion about the 22 same-store EOP assets in Northern California that currently they're like 87% and you're hoping to get them to 90% by year end. But just sort of curious, given all the demand and obviously, the pretty healthy mark-to-market that you're receiving on the spread, why wouldn't that be north of 90% two years after you closed on the transaction?

There might be. I mean, when we do our lease walk, these show somewhere north of, call it, 600,000 of total new and renewal activity for the second half of the year. After reviewing that with our rest of the leasing team up there, our view was the 22 assets could get to 90%, if not higher than 90%. But remember, there's a decent amount of expiration over that same window. I think, its 314,000 feet expiring in that same period. So it's -- like as we've said from the outset when we first bought this portfolio, there was -- there is a fair amount of -- there was always a fair amount of near term expiration in the overall portfolio. So as the goal of reaching stabilization was always going to require both a heavy amount of lifting on new -- on renewals and backfills as well as net absorption so it just takes a little while to get it towards stabilization.

Okay. And then Victor, your comments about sort of the frustration with you guys leasing and obviously achieving on the performance in Northern California in that sort of past two years is sort of been a headwind from a stock market perspective. Clearly, in the past, you sold a company. What about considering just taking advantage of the private market bid and selling a good chunk to reduce the exposure up there, capture the private market value and either redeploy the capital to Seattle or L.A. or maybe buyback stock?

Well, listen, I think, Alex, you're absolutely right in reading through my direct comments on the frustration. Clearly, this whole conversation came out two years ago spring that the tech market's going to blow up, and we've been given zero credit for the yeoman's work that our leasing and our management team have done through the entire Bay Area from San Francisco all the way down to San Jose. And I'm just sick and tired of hearing the fact that the whole world is coming to an end up there. When you're seeing mark-to-market rents 30%, 40%, 50%, we've done -- in March reference to the portfolio -- the EOP portfolio, we've rolled 57% of that portfolio in the last less than two years. And still you can sense that the frustration is there. I'm not prepared to directly answer your question on dumping the portfolio to private market bidders to redeploy the capital in other marketplaces. I think those adds to quality assets. I think, what the misperception is because leasing may not be to the expectations of some third party analysts or reviewer who is not in that marketplace to look at what they believe is not real-time, but what they believe it should be. I think the [Indiscernible] is the cash flow has been spectacular. The growth on cash has been spectacular and anybody who looks at it would say, look, they love to have the yields that we're having on those assets. So I'm not prepared to do that. The team's not prepared to do that. The quality of real estate that we hold in all those markets, and I think we've been very clear from day one, there are a few assets, and I mean a few assets, Alex, that we would sell, but we're not selling the portfolio up there.

Okay, thanks Victor.

You’re welcome.

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

Thank you. Sticking with the prior question from Alex. I mean, I think part of the challenge here is it's a very large market, Peninsula and Silicon Valley, and people maybe don't understand the details of each submarket. We're definitely seeing some large supply deliveries and there's talk of sublease backing those up. So can you just talk through maybe your largest exposure by submarket in those markets? And maybe give a little bit more color just in terms of the fundamentals and why maybe you can -- you will perform -- outperform those markets versus maybe just a broader market that seems to have relatively muted rent growth?

No, I think, Jamie, that's an excellent point. If you look at -- as we commented on now, I think this could be our second, maybe call -- maybe it's our third on Santa Clara. The exposure in Santa Clara, which we had no exposure in, is on -- for the most part is a huge amount of asset exposure with our tech mark asset there. But the seven or eight largest subleased locations are in that marketplace. But if you go market by market, I mean I think you've got -- on the Peninsula side, you've got Palo Alto that's doing well. You've got Redwood Shores that are doing well. You've got Foster City doing well. I mean, San Mateo is doing okay for us in the marketplace. North San Jose, I specifically talked about our North San Jose marketplaces. I mean, I think you're talking about the activity in that market has been as good as it's ever been. We've got 800,000 square feet of assets in the -- I mean, activity in the pipeline in the Peninsula. And over half of the activity in that right now are in leases or in LOIs. And I'm not referring to Campus Center. When we take that out, Jamie in terms of our numbers we've got I think 1.5 million feet in proposals back and forth and another 3.5 million feet in prospects, and that's not inclusive of any of those numbers in our Campus Center. I think it's a total of 17 different tenants looking at that marketplace. So you take Santa Clara out, I do think that if you look at what we've had in Metro, I think it's been slow. We've commented on both those tech market in Metro. I do think that those two assets have been pretty slow and maybe pop as well, which was gaining a lot more activity on right now. But their select assets versus the global, say the Peninsula is really doing poorly. And I think you've got a good handle on it.

Okay. And then, I think, you've mentioned Campus Center. Can you just provide more detail on the leasing progress, their activity progress?

Yes, I mean let's say, we haven't got the asset back. I mean you're going to hear me say this until we announce the lease. We're not going to go on the way like other people may or may not do and say, we're in leases or we got a great activity, and then we're going to wait two years and we're going to say the same thing. We're going to tell you where the activity is and we're going to tell you what the prospects are. Right now we have three proposals at various different phases from three different tenants totaling almost 1.4 million feet. Our marketing plan is complete. Our design interior is almost complete and exterior's complete. We're prepared to start construction on the exterior this fall. We get it back January 1. I think, we've got another 3.5 million feet of prospects in the marketplace, which are about somewhere in the range of 13 or 14 additional tenants. But at this time, I'm not prepared to talk about rate, I'm not prepared to talk about timing, and we're definitely not prepared to talk about any commitments. But I'm pleased, given the fact that we don't even have it back yet, that we're on track for a pretty effective splash January 1 of 2018 in terms of our marketing.

Okay. And is the sale one of those three proposals?

No.

No. Is that still on the table, potential sale?

No.

Okay. And then just finally for Mark. So you took your same-store guidance up, but you maintained the midpoint of your earnings guidance. Can you just talk us through what was offsetting that better core outlook?

Sure. So I think the first point to understand is the same-store changed on account of getting back recapturing 604 and moving it to redevelopment because we're going to do some repositioning there, and as I think we walked everyone through when we made the press release following the recapture. So it muted a little bit the FFO. We maintained our midpoint, the $1.97, notwithstanding the fact that we lost the FFO on 604 because there's other positive things going on in the rest of the portfolio that mitigated the impact of that. Having said that, 604 is no longer running through the cash on same-store full year projection, right? So the fact that we lost that in FFO isn't impacting negatively the full year year-over-year cash NOI growth. Meanwhile -- so there is no negative impact coming from 604 there. Meanwhile, other positive things helped the cash same-store growth, and I mean, [Indiscernible] is sitting next to me. We really went through every single asset there. And I have to tell you, I mean, it's made up of a lot of small items here and there. But the main drivers sort of fall, I would say within two categories. One is, we have some favorable resolution on some recovery items. There was a decent-sized one at 1455 on some utility expenses that we were kind of going back and forth with one of the main tenants on. That worked out favorably and helped us on cash NOI. Another one was at Concourse, for example. Again, we had some property tax savings. We did -- we picked up some cash recoveries there. The other one was we're doing a bit better on upfront free rent on a fair amount of the leasing activity that we had projected. That is to say we're giving -- we're having to give less upfront free rent. And those I would say are the main contributors to the better-than-previously projected cash NOI, but which don't really -- they help on the FFO front, but again, 604 muted that impact on FFO. Hopefully, that gets you there, Jamie.

Yes, that's helpful. So just to be clear, so if you had not moved 604 out, you still would've increased -- what would have changed?

Well, we had -- well, like you said, if we didn't move it out, we would have locked about $1.3 million -- between $1.3 million and $1.4 million of FFO, right? So that would have actually further muted the cash NOI growth, if you will, right.

I guess, I figured you would have increased your same-store.

So the year-over-year NOI growth is about $4.8 million. I mean the difference between the previous estimate and current estimate, you would have to ding that about $1.35 million, right? So you could run the math, if you want, but that would be the net impact of we -- of keeping 604 in the same-store, but not having the NOI associated with it.

Jamie, are you referring to, if 604 didn't have a leasing issue and, therefore, contributed like the previous year? Or are you asking, if we just kept at the same-store...

But had no tenancy.

But had no tenancy.

I'm just saying if you just remove 604 completely, would you've raised your same-store and your FFO? Or would you have same-store...

We did remove it. That's why the same-store went from 34 to 33 assets.

I’ll follow-up with these later. I get it. Thank you.

Okay.

Our next question comes from Blaine Heck with Wells Fargo Securities. Please proceed with your question.

Thanks. Hey, guys. I'll get away from the Silicon Valley for a second. Victor or Alex, can you guys just talk a little bit about the acquisition environment? Are you guys finding any opportunistic investments out there in general? And then, maybe, are there any other opportunities to grow the media portfolio as you did with Hollywood Center?

So on a global basis, we've got a couple of deals that are non-marketed deals, not represented deals that we're sort of working on in -- both in Los Angeles and in -- or one is in Los Angeles and one is in Seattle. On the media side, we're looking at one opportunity right now that is also a non-marketed opportunity. And as I think I mentioned in the past, with Sunset Las Palmas, it took us almost two years to pry that deal, and I'm not saying this will take two years, but we're looking at an opportunity that's sort of a unique one that Alex and his team have been working on. There's a few assets in the marketplace that we are actively bidding on with other guys that are in our space, and the majority of what we're looking at right now is I think in Los Angeles relative to San Francisco or the Bay Area, I mean, and Seattle, but the activity right now, summertime is a little slower than normal. Alex, do you want to comment?

Yes, like always, we continue to try to find opportunities in our four main markets. As Victor highlighted, a lot of the activity right now seems to be in L.A. We do think there's going to be a healthy pipeline coming to market in the fall in the latter part of this year. That being said, as you know, most of our success has come from off-market deals versus the marketed stuff. But we're working on a couple of transactions and they're a little chunkier in size, but hopefully, we'll be able to get a couple things done.

All right. That's helpful. And kind of related to that, Mark, I guess when you look at the balance sheet it looks like you guys are pretty close to six times on a debt-to-EBITDA basis now. But you have about $100 million more spend on the current pipeline. You have spent on EPIC that'll be ramping up soon. You have continued CapEx spend on the lease-up properties and then whatever you're going to spend on Campus Center, and then, on top of that, possible acquisition. So can you just talk about how you guys think about funding all of that? What capital sources are attractive to you at this point since kind of the stock prices moved away from you, and I guess how much capacity do you think you have before hitting kind of the top of your internal leverage range?

So when we run the sort of hypothetical -- both the capital spend as you mentioned, which, is maybe on an asset-specific basis seems decent, but when you aggregate it, really isn't that much. So take, for example, Campus Center, our whole repositioning cost on that cycle, $11.5 million, is really from a capital availability point of view, it barely moves the needle and similar for 604, it's really next to nothing. And then the remaining spend on the active development, if you look at the supplementals, quite a small at this point. So when you flow all that through and then you run through some hypothetical acquisitions, even if we do some sizable amounts of acquisitions, hundreds of millions of acquisitions, 300 or even 400, and you use leverage to finance that, what you find is, on a leverage ratio basis, you get into kind of the mid-ish 30 range debt-to-net enterprise. So leverage really doesn't become much of a governor on it. In terms of capital availability, we have line availability currently on $190 million or so. We've got untapped availability on a line that's secured by our ICON Gower and Bronson properties. We have $250 million of availability under that. We have decent amount of cash on hand. Yes, and then -- there's -- and actually no, and I don't want to get ahead of anything, but we're always exploring the possibility of strategic dispositions. And if we should get a disposition done over that time frame, that could potentially both delever to some extent and also offer net cash flow, so suffice to say, when we run it through all of those scenarios, leverage, we have ample sources of capital and leverage stays in that mid-30-ish range.

Okay. Thanks. And then just on EPIC. Can you guys share how much you guys are expecting to spend there? And whether that's going to be another kind of media and entertainment-focused development? Or is it going to be more a traditional office?

Well, I mean, the asset itself is an office building and so it will be an office building. Whether it's a media entertainment-focused tenant, it's probably the case, or tenants will probably be the case. I mean, that's the activity that we are seeing with the multiple tenants right now. In terms of the dollar amount on the asset, I think it's just slightly under $200 million is what our sort of numbers going to be by the time we're into it. And that looks like we're going to break ground, as I said, in the next -- within the next month or two.

Any early feel for the kind of yield you expect on that?

I mean, listen, I don't want to give specific, but it's got a seven handle in front of it.

Okay. Thanks, guys.

Our next question comes from Nick Yulico with UBS. Please proceed with your question.

Thanks. Just sticking with EPIC, I mean, this sounds like the demand in Hollywood is very strong right now. How long do you think it might take before you would be able to expect to announce some leasing on the project? I know you haven't even started yet, but…

I mean, listen, Nick, everybody knows we're coming out of the ground. I think it's the best project ever to be built in Hollywood going forward. So I think the activity has already shown itself. I wouldn't want to put a net time frame. Listen, nobody seems to be stupid in the marketplace. We have a tenant that's growing. They've indicated interest. We have lots of other tenants in the marketplace that have indicated interest. And we're the only project coming out of the ground in the near term. There will be other projects in time, but I do think that there are several tenants that have approached our CB Richard Ellis brokers, who are the same guys who did ICON and CUE for 100,000 to 250,000 feet in the marketplace.

Okay, that's helpful. And then Mark, I want to make sure I heard this correctly. When you're talking about the eight EOP assets that are in that lease-up category, which were 79% leased quarter -- quarter-end, did you say that you anticipate getting to about 85% leased by the end of the year?

Yes. I think that, by the way, in the earlier conversation when we were talking about the activity on the 22, obviously, the subset of that. I think sort of similar to the response on the 90%, I think 90% is definitely an achievable threshold for the 22 and it could be north of that. I think, likewise, 85% is definitely an achievable threshold and it could even be a little bit north of that.

Okay. And if -- I mean, these 8 assets were -- the leased amount was flat this quarter versus last quarter. Looks like some of them, the numbers went down. I imagine it was with some expiration. I guess, I'm just trying to understand how much expiration impact you had so far this year? And then, does that ease in the back half of the year so it kind of helps with your net absorption?

Yes, it's a little -- it's a bit of an ease on expiration, but it's also a fair amount of just positive activity on -- for, obviously, weaning the net absorption. I do think to some extent there's perhaps not complete enough or good enough appreciation of what -- how little activity it takes to really move the needle on these assets because I think the percentage just looked at, but if you actually run the numbers, you realize it doesn't take much to move the needle one direction or the other. So let's just -- if I could illustrate that really quick. If you look at 333, I think one of the notes highlighted that is where there was a roll down from the previous quarter of 80.3% leased to 74.6% leased, which on a percentage basis looks like it might be material, but that's 10,000 square feet of negative net absorption. I mean, it's next to nothing in the grand scheme of things, right? And likewise, Palo Alto Square was focused on because it rolled from 82.5% to 79.1%. That's 11,000 feet of net negative absorption. I mean we're not -- obviously, we want to continue to move this portfolio in a positive direction and get them all stabilized. But I think on the heels of doing 580,000 feet of activity in the quarter, to get focused on 10,000 feet of negative net absorption in an asset is completely missing the -- what's really going on here. And again, I'm not trying to say don't focus on it, its fine, but you've got to keep it in perspective.

Yes, it would be helpful to see because I think when you look at the lease-up numbers, we have those numbers. We don't have all the details about all the expirations associated with the specific segment. So it's a little hard to figure out how much of that is impacting leasing, but it sounds like...

Yes, fair enough. I would say, Nick, and I know you know this, but we do provide by region all lease expirations two years forward. Now in fairness, we do bucket them by region and not by specific asset. But I mean, there is a considerable amount of detail in the supplemental about expirations for it.

And to underscore more -- Nick, this is Art talking. The activity, again, it remains very strong. That was kind of 800,000 square feet of activity that we have in our pipeline, some of which was in Silicon Valley, probably, I'd say about 450,000 square feet. The rest is on the Peninsula. Looking at these smaller spaces, the backfill, again not insignificant, but some of these vacancies will tend to actually downsize, right, where you keep the tenant and they downsize and they kind of accumulate to about 10,000 feet. So I think with what we have, we're very, very bullish on net impact on just some of the vacancies.

Okay. Thanks everyone.

Our next question comes from Vikram Malhotra from Morgan Stanley. Please proceed with your question.

Thank you. So just maybe taking a step back, maybe, focusing on San Fran and L.A. just in terms of asset pricing. Some of the peers, I should say, focused on New York City have started saying there's a disconnect between certain buyers and sellers, certain, call it, maybe, lower quality assets, they're starting to see downtick. I'm wondering what you're seeing kind of in your markets, are there any disconnect emerging? And just your expectations for asset pricing?

Vikram, so I'll start off and then Alex could jump in. So both in the two instances that you mentioned, San Francisco and L.A., first of all, there are not a lot of transactions in the last quarter that have been done that you can cite. But the ones that have, there has really not been a disconnect, I mean the price per foot in Los Angeles that have closed or that had been announced are the highest we've ever seen in Class A assets, and there's going to be an announcement on a Class B asset that was recently awarded, literally this week, a very large asset that will top its last sale by 50%. And so I think that's consistent throughout the L.A. marketplace. There's not a huge cap rate differential between A and B class assets or leased-up assets. So I think in San Francisco, clearly, what you're seeing with the leasing activity and what's happened there, there've been so few transactions even this year in San Francisco, but the ones that have been completed, I mean, you're talking $1,000-plus a foot. And even on the second tier stuff, its $700, $800 a foot numbers that have been pretty consistent over the last 12-plus months. And there are a lots of guys, who want assets still in those -- in that marketplace that are still looking at a few that are out there. You want to comment?

Yes, L.A. obviously, is a huge market and a lot of the attention that's been given recently is that flurry of transactions that have occurred, really, from Beverly Hills and Santa Monica, which is going to command the highest pricing on a per-square foot. I think if you go kind of submarket by submarket, if there was an asset to trade, let's say, in the San Fernando Valley, you're not going to achieve the same price per square foot you're going to achieve in Santa Monica. So the things that have been trading have really been kind of trophy core assets on the West side of Los Angeles, which is going to continue to garner the really high prices. And I think in San Francisco, we've just seen a very limited pipeline this year just because of how much it's traded over the last couple of years. So there haven't been a lot of comps, but I think for the assets that have come to market, there's certainly been no slowdown, and that's the buyer force for the Class A product in both markets.

Okay, that's helpful. And then just, Mark, maybe for you, just from a trajectory standpoint on the same-store NOI growth. Just given guidance, is it fair to say that the next two quarters we see a decelerating trajectory? And then as we think about 2018, it's sort of the opposite where you start seeing some of the benefit of the recent leasing activity you've down towards the second half of 2018?

If you're referring to sort of expectations for same-store like cash NOI growth, let's take, for example, where we finished off the second quarter 8.5, I don't think we have any reason to expect deceleration of that into the next two quarters.

No, the number we've provided is an annual number, so it already factors in the first few quarters so to the extent that the projections have to map the annual numbers. So we think it will be consistent.

Yes.

We haven't relooked at 2018 yet in granular detail. So we haven't done the budget and that will be a suite-by-suite analysis and so we're not prepared to talk about that yet.

Okay, great. Thanks guys.

Thanks.

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

Hey, guys. Just to follow up on EPIC. Just curious what the leasing strategy is going to be in terms of how quickly you prefer to put a tenant in there just to get the risk kind of off the table versus trying to find a tenant that may want the studio space and pay a higher rate for having the office in the studio kind of packaged together?

Well, Craig, if you look at where we are right now, we just launched our website last week, I believe, on EPIC. So that just went live. We won't hold back on it -- on the tenant activity. I think it's going to be -- the marketing suite is virtually complete. We're adding something do that as well that will be sort of a virtual marketing suite as well. And I think that the activity will be a combination of media and entertainment tenants. And also because of the activity that Bill has had at the studios across the Street, both of them, there may be a ground-floor studio -- ability for us to put a studio facility in there as well for the interest level of the tenant. But we're not going to hold back. I think the rates we're talking about are -- well, they eclipse the rates that we're doing at ICON and CUE and so those are the highest rates in Hollywood right now. So there's no need for us to hold back, and we're talking at seven-plus yield on the asset.

Got you. That's helpful. And then, up at the Seattle, can you just talk about the activity you guys are seeing for the rest of 450 Alaskan?

Yes. I mean, as I mentioned, we are in leases for another full flow [ph] there. We're in leases for virtually all of 95 Jackson. And the activity for the remainder of 450 has really been pretty solid. I mean, Seattle is, as you know, Craig, virtually on fire right now. I think that we've got, I think, 100,000 square feet of current activity for the remaining of the property. We're about to complete the building by year-end. And as a result, I do think there's an instance we're holding back. I think as you know, we're sort of a victim of our own success in that asset and that we leased it [Indiscernible] so early on at the highest rents at the time that we're in Seattle. And now and the building is going to be complete, I think you're going to find that, that -- I think we're going to achieve even better rates than we initially thought on that asset, given the fact that the assets going to be completed. It came out spectacularly and it's got to be one of the nicest assets in all of Pioneer Square, I'm sure, so at the end of the day. And then the remainder of Seattle, we're also in leases for the last two floors at our Hill7 project, which, again, will be stabilized 100% occupancy asset as well at the underwriting that we projected it to be.

That's helpful. And then assuming we go back to Silicon Valley for a second because Mark, you were talking about putting numbers around things. I kind of looked at your expiration schedule and looked at what you guys would need to get to 90% leased, and it looks like about 190,000 square feet of absorption. And so just looking at what you guys have expiring over the next two quarters and kind of slap it on a normal retention rate there, it seems like you guys need to do somewhere in the order of 550,000 to 600,000 square feet-ish to get there and you guys have 800,000 kind of demand. Is that some sort of round numbers ballpark?

Yes, exactly. I more or less outlined that number, right? I said, we had a little bit over 600,000 feet in our Q3, Q4 kind of lease block for the 22 assets. And so your math is hovering right around our number.

Okay. Given all the concerns around the health of the Valley, you guys have given a strong pipeline. Any way you guys might give kind of what you guys have done quarter to-date?

No.

All right. Great. Thanks, guys.

[Operator Instructions]. Our next question comes from Zachary Silverberg with Mizuho Securities. Please proceed with your question.

Rich Anderson here for Zach. Good morning out there. So, on a call yesterday, Jordan talked about down-zoning in the L.A. area. I'm curious -- two questions on that. How much do you think the market has been impacted by that fact? In other words, how much more expensive are existing assets because of the down-zoning? And two, has it impacted your ability to develop -- would you have been able to develop bigger? Or has it not really impacted you from that standpoint?

Well, I think, let's say, on the first part, Rich, is it absolutely impacted the value of the assets. I mean look at Santa Monica is a great example on the down-zoning, and the value of the assets in the most recent comps that have gone transpired in the last 12 months. So you've seen a precipitous increase. And so yes, the answer is -- listen, down-zoning is absolutely a factor and will increase the value of our portfolio and our peers' portfolios and the real estate, in general, throughout all of West Los Angeles and inclusive of Beverly Hills and Hollywood. I just think that the other aspect of trying to develop in L.A. is a huge challenge. Just getting entitlements period is a huge challenge. And so to answer your second part of your question, it's not the down-zoning that has impacted us. It's the ability or lack thereof to develop, given the political and basically local constraints that are put in place. I mean, when you have the ability to seek with suite and approve project, just because you feel like it and it will slow the process, and then if you win, it's then gone to the project and ends up then going through an appeal process, that's millions of dollars of legal fees and time that goes away that enables you to miss a marketplace. And we have lived that in our projects as has everybody else who tries to develop here. It's not easy. But as a result, it also makes the value of the current real estate worth more.

Could, I mean – go ahead.

And more important -- sorry, Rich, one more thing, and more importantly, and I've mentioned this before, entitled real estate is worth a lot more than people perceive it could be.

Okay. I mean so if a deal goes for $1,100 a square foot, I mean, absent the down-zoning, could it be $800? I mean, is there any way to quantify how much it's impacted the value of your real estate, of your portfolio?

No, listen, I think $1,100 a square foot is market. That's what market is. Market's telling you that's what the market is. I don't think -- we're not going back from down-zoning, so you can't look back in a rearview mirror and say because of down-zoning, it's worth less. So it's market, and I think people just have to get used to that's what the market is.

Okay. Fair enough. That’s all I have. Thanks.

Thank you.

Ladies and gentlemen, we've reached the end of the question-and-answer session. I'd like to turn the call back to Victor Coleman for closing comments.

Thank you so much for the support and for participating in our second quarter conference call. We look forward to talking to you all at a later date.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.