Hudson Pacific Properties, Inc. (HPP) Q3 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to Hudson Pacific Properties' Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Laura Campbell, Senior Vice President, IR and Marketing. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties' Third Quarter 2018 Earnings Call. Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investor Relations section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investor Relations section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectation, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. With that, I'd like to welcome Victor Coleman, our Chairman and CEO; Mark Lammas, our COO and CFO; and Art Suazo, our EVP of Leasing. Victor will give an overview of our performance, Art will discuss leasing activity in our market and Mark will touch on financial highlights. Note, they will be joined by other senior management during the Q&A portion of our call. Victor?

Thanks, Laura, and welcome, everyone, to our third quarter 2018 call. Our West Coast markets continue to outperform driven by the further growth and expansion of tech and media companies. The third quarter of 2018 prove to be our most productive quarter ever in terms of office leasing and runs out the most successful four consecutive quarters of office leasing in our history. We signed 1.2 million square feet of leases in the quarter at 28% GAAP and 12% cash rent spreads. Putting a finer point on the strength of our markets, those spreads were 31% and 28%, respectively, excluding our Netflix renewal, which I'll discuss more in a moment. We're now on track to have our best year ever in terms of office leasing. Year-to-date, we signed 2.6 million square feet of deals at 28% GAAP and 14% cash rent spreads. Again, this translates to 28% GAAP and 19% cash rent spreads growth, excluding the Netflix renewal. Robust tenant demand at our Peninsula and Silicon Valley office assets has been a key driver of our phenomenal leasing momentum. Year-to-date, we've signed 1.3 million square feet at these properties, which represent 60% of non-development – or redevelopment leasing. This quarter alone, a handful of our remaining leased up assets located in the Peninsula and Silicon Valley contributed to 100,000 square feet of positive absorption within our portfolio. Techmart and Palo Alto Square are now stabilized at 98% and 95%, respectively. This quarter Gateway reached 93% leased, and upon extending 80,000-square-foot lease with Nutanix post-quarter, Metro Plaza, one of our priority large block availabilities discussed at our Investor Day, is now 92% leased. With regard to other priority large block availabilities noted at our Investor Day, we signed 132000-square-foot lease with Honey Science for the entirety of Fourth & Traction redevelopment asset in the Arts District. As expected, we achieved Westside Los Angeles level rents. A testament to both the quality and uniqueness of the project, along with a growing demand for office space in the Arts District. Spotify, Warner Music and now, Honey, will bring an aggregate of 2,600 new employees to that marketplace. The private members' club, Soho House, will open before year-end. Nearly 800 high-end residential units we'll deliver over the next six month. All this bodes very well for our other Arts District redevelopment, MaxWell. There's virtually no competitive office space and we have very good leasing activity in the property, which we'll deliver by year-end. We also leased our entire 300000-square-foot-plus award-winning EPIC development – I mean, Hollywood to Netflix. At the same time, we renewed their ICON and CUE leases, all which go until 2031. These three assets are the core of Netflix's LA urban production campus. Our studio portfolio uniquely enables us to provide them with immediate access to soundstages, production offices and support services essential to their business. In addition to EPIC, ICON and CUE, Netflix currently has leases for just over 190,000 square feet of stages and production offices at Sunset Bronson and Sunset Gower. We anticipate the utilization of our studio assets will continue to grow in the future. We're swiftly addressing our remaining 2018 and 2019 expirations with regard to the remaining 350,000 square feet of fourth quarter 2018 expirations we renewed or backfilled 39%; and our proposals, LOIs or leases on another 25%. As for the remaining 1.3 million square feet of 2019 expirations, we renewed or backfilled 34%; and our proposals, LOIs and leases for another 21%. We view these expirations as meaningful opportunities to drive organic growth. The mark-to-market is 28% on our remaining fourth quarter 2018 expirations, and 18% on our remaining 2019 expirations. We've also been very focused on capital recycling. We've taken full advantage of strong asset sales in the Peninsula and Silicon Valley to sell non-core properties and generate cash flow. To put this in perspective, to date, we sold $830 million of assets from the original $3.5 billion Blackstone portfolio. This quarter, we sold the remaining six Pacific office park buildings at a 14% premium to our purchase price. The quality of this asset has more suburban, non-transit-centric location in San Mateo did not align with our long-term strategy for Peninsula and Silicon Valley holdings like those in Palo Alto and the San Jose airport. We're now pursuing a sale of Campus Center in Milpitas, which we anticipate will generate a positive return. While we've not halted our leasing efforts, given the growing demand for tech giants for Silicon Valley industrial R&D and manufacturing products, we feel very good about our ability to create value from this asset. Case in point, last week, Apple signed a 300,000-square-foot industrial manufacturing lease next to our Campus Center. Electric vehicle maker, SF Motors, signed 136,000-square-foot lease earlier this year at the same project. Late last year, Google bought 560,000 square feet of industrial in North San Jose. And this summer, Micron Technology, leased 600,000 square feet in North San Jose. In short, we expect the Campus Center sale would generate a lot of interest for this type of non-office end users. We're using a combination of sales proceeds and joint venture capital to fund strategic, value-additive projects in our core markets. Our growth initiatives, so far, this year, have been focused on downtown San Francisco, West Los Angeles and Hollywood. In this quarter, Macerich contributed the Westside Pavilion mall valued at $190 million through our 75-25 joint venture. We're making good progress on entitlements for the 500,000-plus square foot creative office campus redevelopment, which we're calling One Westside. Schematic designs are 50% complete and this one-of-a-kind project is slated for delivery by mid-2021. And as previously noted, we're already filling very strong interest from multiple full and partial building users. Last month, we announced a 55-45 joint venture with Allianz to purchase the world-renowned San Francisco Ferry Building for $291 million. We're driving cash flow with that asset in the near term through a commencement of signed leases and renewing and/or backfilling roughly 1/4 of the office square footage with leases that are, on average, 28% below market. These two drivers alone get us about 200 basis points of additional yield by beginning of 2020. Not accounted for in this base case underwriting is that we're also fine-tuning plans to add new programs, amenities and events to drive visitor and tenant interest and to capitalize on the ferry terminal expansion project, which will increase ferry users from 10,000 to 24,000 per day in 2019. Where some saw a core opportunity in this iconic asset, we see and have the creativity and capabilities to realize a significant amount of up side. It's an exciting project. Now I'm going to turn the call over to Art for further commentary on leasing end markets.

Thanks, Victor. We feel very good about our fundamentals in our markets and the level of activity at our assets. Well-capitalized tech companies, big and small, and streaming media and content-related businesses, continue to grow exponentially. There are a finite number of big block of space in the right locations with access to the right talent, and the larger companies are rapidly absorbing existing and future supply to stay competitive. This is fueling further rent growth, significant levels of absorption and declining vacancy in our already very tight markets. We're still pushing rate and extending term across our portfolio, while concessions remain consistent. And our leasing pipeline, that is deals and proposals, LOIs or leases, stands at 1.4 million square feet, even as we've signed 1.2 million square feet of deals in the third quarter. Let's go first to Silicon Valley, wherefore this discussion excludes Palo Alto. In the third quarter alone, tenants signed seven leases greater than 100,000 square feet in the Valley, including 470,000-square-foot lease with Locu, 350,000-square-foot lease with Amazon and 290,000-square-foot lease with Splunk. Nearly 400,000 square feet of positive net absorption in the quarter, drove vacancy down about 70 basis points to 8.8%, while Class A rents were stable at $63 per square foot. Year-to-date, the Valley had a phenomenal 3.2 million square feet of positive net absorption. North San Jose, in particular, has tightened with year-to-date positive net absorption of 776,000 square feet, a 5% year-over-year increase in Class A rents to $43 per square foot and a 440 basis point vacancy decline of 13.8%. And our assets were capturing both rent and occupancy upside. For example, in the third quarter, our 73,000-square-foot lease with Nutanix and Concourse had a 25% mark-to-market. Overall, our stabilized Silicon Valley portfolio is 97.5% leased, with in-place leases 12% below market. Our approximately 500,000 square feet of remaining fourth quarter 2018 and 2019 expirations are 20% below market. Further north along the Peninsula, which for this discussion, includes Palo Alto, market conditions remain solid. In the third quarter, 86,000 square feet of positive absorption kept vacancy low at 7.1%, while Class A rents were up 5% to $85 per square foot. Similar to the Valley, pent-up demand for larger blocks is enabling landlords like ourselves to drive rate. In the third quarter, we signed a 50,000-square-foot lease with Poshmark at Towers at the Shore Center with an impressive 89% mark-to-market. We recently completed a series of capital improvements at our Redwood Shores assets, including common area upgrades and specs we build-out in anticipation of 300,000 square feet expiring at these properties in 2019. We already have coverage. That is, deals renewed, backfilled in proposals, LOIs or leases on 63% of that space, with an average 12% mark-to-market on those leases. We have room to get deals done. Overall, our stabilized Peninsula portfolio is 88.5% leased, with in-place leases 16% below market. Our roughly 600,000 square feet of remaining fourth quarter 2018 and 2019 expirations are 14% below market. San Francisco is achieving both record rents on positive net absorption levels. Year-to-date, 13 leases greater than 100,000 square feet have been signed in that market, and we expect another 1 million square feet of large deals by year-end. During the third quarter, positive net absorption of 1.2 million square feet reduced vacancy by 50 basis points to 4.7%, while rents increased 3% to $82 per square foot. Year-to-date, San Francisco have seen 7% rent growth and a record 3.3 million square feet of positive net absorption. Our stabilized San Francisco portfolio is 94.1% leased, with in-place leases 40% below market. Google recently completed a fantastic build-out and moved into 166,000 square feet at Rincon Center. Our only other significant availability is our newly converted 66,000 square foot former bank vault space at 1455 Market, where we have interest from multiple tenants at rents equivalent to approximately 200% mark-to-market. Our approximately 200,000 square feet of remaining fourth quarter 2018 and 2019 expirations are 29% below market. In Los Angeles, our portfolio remains unmatched in terms of product type, asset quality and location. Year-to-date, Hollywood and West LA had a combined 1 million square feet of positive net absorption. In Hollywood, during the third quarter, Class A rents increased 6% to $60 per square foot with vacancy essentially unchanged at 10.1%. West LA rents were steady at $62 per square foot with vacancy following 50 basis points to 11.1%. In the greater LA office market, during the quarter, our Netflix lease was the largest deal signed, and our Honey lease was the third largest deal signed. We're seeing great activity on the balance of our 1 million square feet of under construction and near-term plan to development and redevelopment properties. Our stabilized Los Angeles portfolio is 99.1% leased, with in-place leases 16% below market. Our roughly 225,000 square feet of remaining fourth quarter 2018 and 2019 expirations are 24% below market. Finally, in Seattle, our primary holdings are concentrated in downtown, which remains the region's most active office market. In the third quarter, downtown submarkets collectively comprised 800,000 square feet of the 1 million square feet of positive net absorption in the broader Puget Sound office market. And currently, vacancy fell 40 basis points to 8.2% with $45 per square foot Class A rents. Our stabilized portfolio is 96.8% leased and in-place leases are 23% below market. We're focused on lease-up of the remaining floors totaling 55,000 square feet at 450 Alaskan and incremental availability at our recently delivered 95 Jackson development, with good activity at both assets. We now have backfilled just over 80% of the 2019 Capital One expiration at a weighted 39% mark-to-market and are focused on addressing roughly 175,000 square feet of remaining fourth quarter 2018 and 2019 expirations, which are 35% below market. And with that, I'll turn the call over to Mark for financial highlights.

Thanks, Art. In the third quarter, we generated FFO, excluding specified items of $0.47 per diluted share compared to $0.50 per diluted share a year ago. Strategic capital recycling, specifically $850 million of non-core asset sales over the last four quarters, was the primary driver of this sequential decrease. Specified items in the third quarter consisted of transaction expenses of $200,000 or $0.00 per diluted share compared to specified items consisting of transaction expenses of $600,000 or $0.00 per diluted share a year ago. Our record third quarter office leasing activity that Victor and Art discussed, contributed to positive net absorption throughout our portfolio. Quarter-over-quarter, we achieved a 100 basis point increase in our stabilized office portfolio lease percentage to 94.6% and a 180 basis points increase in our in-service office portfolio lease percentage to 91.4%. In the third quarter, NOI at our 31 same-store office properties increased 3.2% on a GAAP basis and 2.5% on a cash basis. As noted in our press release, the quarterly cash basis comparison is muted by a $3.2 million onetime tenant improvement cost reimbursement received in 2017, which we excluded last year and in the current year for purposes of the same-store office cash NOI growth guidance estimates. Third quarter and year-to-date same-store office cash NOI adjusted for this onetime item, reflects growth of 7.6% and 4.3%, respectively. In the third quarter, the trailing 12-month lease percentage for the three same-store studio properties, inclusive of Sunset Las Palmas Studios, was 88.9%. Note, there is no applicable trailing 12-month comparison for third quarter 2017 given that Sunset Las Palmas was acquired in mid-2017. However, as a point of reference, the trailing 12-month lease percentage for Sunset Gower and Sunset Bronson Studios, increased 30 basis points year-over-year to 90.9%. Our same-store studio NOI increased by 12.6% on a GAAP basis and decreased by 3% on a cash basis. Again, as noted in our press release, the cash basis comparison is muted by a $700,000 onetime tenant improvement cost reimbursement received in 2017. Third quarter and year-to-date same-store studio cash NOI adjusted for this onetime item reflects growth of 6.4% and 11.9%, respectively. Note that starting in the third quarter, our three months same-store studio NOI comparisons includes Sunset Las Palmas, while year-to-date comparisons continue to include only Sunset Gower and Sunset Bronson. Beginning in 2019, Sunset Las Palmas, which I mentioned was acquired in mid-2017, will qualify for same-store year-to-date comparisons. Victor touched on the contribution of One Westside and 10850 Pico to our joint venture with Macerich during the third quarter. In connection with this transaction, we diffused a $139 million loan by purchasing U.S. government securities. Since the joint venture owns the successor/borrower for the diffused loan, both the loans outstanding balance and the securities collateralized in that loan are reflected on our balance sheet. Interest expense for that loan as well as interest income from the securities are likewise included in our statement of operations. Since the diffused loan is collateralized with U.S. government securities, unless required for GAAP accounting or covenant compliance purposes, certain leverage metrics such as the debt-to-market capitalization ratio reported in our supplemental, may not include either loan or securities. Turning to guidance. We are narrowing our full year 2018 FFO guidance to a range of $1.84 to $1.88 per diluted share, excluding specified items, maintaining the $1.86 midpoint last provided on October 10, 2018, in connection with the Ferry Building acquisition announcement. Specified items consist of $300,000 of transaction expenses, a $400,000 write-off of original issuance cost related to the recast of our credit facility in 5- and 7-year term loan facilities and $900,000 of unrealized gains from changes in fair value on non-real estate investments. As a reminder, our full year 2018 FFO guidance excludes the impact of unannounced or speculative acquisitions, dispositions, financings and capital markets activity. One final word about guidance. Some of you may have seen reports that Twilio re-leased – recently subleased 259,000 square feet from Salesforce at Rincon Center in San Francisco. The mark-to-market for that space prove to be over 60% of the in-place rents, our participation in which will ultimately be meaningful as the sublease space is in over the next two years. Since the first days of that sublease is not projected to commence until December, our profit participation is not expected to materially impact fourth quarter or full year 2018 FFO. We intend to provide further information regarding the sublease and its impact in 2019 and beyond in next quarter supplemental report. With that, I'll turn the call back to Victor.

Thank you, Mark. To summarize, we're successfully assembling the remaining building blocks to reach our goal of 18% NOI growth from first quarter 2018 through 2019, plus another 14% post-2019. We're doing this by tackling our 2018 and 2019 expirations, by stabilizing our lease-up assets and by pre-leasing our development pipeline, all of which are well on track. For the last several quarters, we've capitalized on strong investment markets to sell nonstrategic assets. Aside from the pending sale of Campus Center, we have no plans for further dispositions. Even without a Campus Center sale, as a result of our completed dispositions, we now have ample capital to run and grow our business. This includes funding our exceptional organic as well as select value-creation opportunities. We are keenly aware of a disconnect between public and private market valuations, and that our stock continues to trade a significant discount to NAV. As such, we continue to practically evaluate the potential repurchase of our stock pursuant to a previously obtained board authorization of up to $250 million. I want to thank everyone at Hudson Pacific, especially for the senior management team for their hard work this quarter and every quarter. Hudson Pacific was recently named one of Los Angeles best places to work. I'm very proud that we have built a phenomenal team at all levels. I view this recognition as a reflection of our collective commitment to fostering an exceptionally innovative, super collaborative, high-lead performance culture through which our employees feel valued. To everyone on the call, we appreciate your support. And operator, let's open the call for questions.

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Vikram Malhotra with Morgan Stanley. Please proceed with your question.

Hey guys. This is Adam Gabalski on for Vikram. I was just hoping you could walk through some of the biggest puts and takes that are going to be impacting same-store growth numbers in 2019.

Well, we haven't provided 2019 guidance so it's going to be a bit tricky to really try to highlight what the bigger inputs are on the same-store. Rather than try to – because we didn't really come with a list of items for this, for purposes of this call, why don't we try to tackle that one either at a later point in time or maybe in connection with providing that guidance.

Got you. Got you. And then another one. Can you just walk through how you guys are thinking about the potential regulatory impacts of the Costa-Hawkins vote and what that could ultimately mean for the office market?

Yes. I mean, we're tracking it. I think – I don't know if you listened to Douglas Emmett's call, but I think their – we view it exactly the same they do. Look, it's hard to say what the impact is, but I think – I guess, I just would encourage you to listen to their commentary on it, that kind of lines up with our commentary. As you know we're not directly affected by multifamily, but we're monitoring it and sort of line up with their point of view around it.

Got you. Thanks, that’s it from me.

Our next question comes from Emmanuel Korchman with Citi. Please proceed with your question.

Hey, it's Michael Bilerman here with Manny. Victor, I appreciated your comments at the end that you're keenly aware of the disconnect between public and private. I think relative to consensus NAV, HPP is trading at a 30% discount. The urban CBD office landlords, as a whole, are 20%. So your discount is certainly much wider than your peer set, but clearly there's an industry issue as well going on. And you said you're going to be proactively – you're looking at share buyback as an alternative, I guess, why haven't that been done to date? Why haven't you been buying stock the whole way through?

Well, first of all, as you know there's blackout periods. And so you can't buy stock in the blackout periods. And as of, I believe, this Tuesday or Wednesday, we will be able to purchase stock if we believe that it represents compelling value, which we currently do, and we believe that the purchases will be in the open market starting next week. That's what we're anticipating. Unfortunately, you can't wake up and say we're going to buy stock because 45 days of every quarter, you can't. And so – and then there's other compelling issues that take place with us knowing that we are buying assets or we're doing major leases or we're selling assets that are materially – assets that can or cannot impinge us. But rest assured we've got, as I said, about $0.25 billion approved. But we have a boarding meeting in the first week of December, we will revisit that number. And if it needs for us to go higher, then we will. But we may make purchases in the open market and we believe that our stock represents compelling value, which it currently does.

And then you're part of a small minority of REIT CEOs who have sold their companies and are back in the public domain. A small attractive group of guys have done that. So I guess, how do you put, outside of just buying your stock, how do you sort of put that into context knowing that you have sold the company before and the private market is extraordinarily active, the lending market is extraordinarily active, houses are trading at pretty compelling values on a per square foot in your markets? So I guess how do – when you stepped back strategically, does that become an option for you at all?

Well, listen, it's clear and evident by my comments in our company's position that we will always look at a fiduciary obligation. And the fact that we're in the best markets in the country and our performance is well in excess of the majority of our peer group from an operating standpoint, from a future growth standpoint and from a valuation standpoint, we are hurting dramatically in the public markets. That does not go unnoticed by this company or by private market investors. And so whether – what I've done in the past, and that's indicative of the future, is not what we're looking at here. We're looking at what's going to be the best scenario if not a knee-jerk reaction. We performed poorly this year. We're not happy about it. But we are very happy about the operations and about the infrastructure and where our growth prospects are, and I think it will work itself out.

Do you – I mean, for those that don't know, if you take us back to 2005 when you sold the company to GE, what were the situations around that time period that led you to that decision versus where you sit today with HPP?

It was a completely different company at that time. Our portfolio was much a different makeup. The marketplace was a lot re-executing in 2006 and the marketplace was a lot more active from a capital standpoint in the public markets than it is currently today. We just couldn't compete with the private market acquisitions at that time and we couldn't – we didn't have access to any capital. Our balance sheet was constrained much more differently and prospectively than it is today. And yet, we were approached by multiple private market guys who were interested in the value of our company going forward but that process was not, as I said, a short-term process. None of these processes are. It took some time to execute.

Okay, thanks.

You got it. Thank you.

Our next question comes from Daniel Santos with Sandler O'Neill. Please proceed with your question.

Hey, thanks for taking my question. Just the first one is given the recent sell-off in tech, has that had any impact on the mood and the outlook of the tenants you're discussing and maybe any impact in your leasing discussions?

Absolutely 0%. I think you saw by our prepared remarks and by Art's discussion as well, we've never had a better leasing quarter. And the preponderance of that has been in the Valley in San Francisco and the median tech business has been growing at great levels. It's had no impact on our valuation, our leasing comments and the structure of leases. And currently, I think Art will tell you that our pipelines, equally what it was one year ago, what it was six months ago, what it was three months ago.

Great. That's helpful. And then, next, on San Francisco. Just given the imbalance, are you seeing more activity in the Peninsula or East Bay? Or are you seeing – or maybe seeing some of those tenants go to different markets like Seattle or LA.

Well, San Francisco today has about, I think, 3-plus million square feet of assets under construction delivering somewhere between now and 2022. And of those 3 million square feet, I think 92% is pre-leased. And all the recently delivered projects in that marketplace is 99%. So it's not like they're leaving San Francisco, there's just nowhere to go in San Francisco right now. And the deals that we are doing, have done and about to announce, are all at high watermarks when it comes to leasing. I do think that we've seen the Peninsula being a massive benefactor of that on the large tenant strategies, and we've commented on that all the way through. The numbers are very compelling. The rental rate growth in the Valley is on a positive basis year-over-year and quarter-over-quarter. They're not as high, obviously, as the city which is almost approaching double digits, but you're seeing an impact on that basis. I do think that the comments around the blitz and tech, all of a sudden people get very nervous about what's changing. Just because the valuations may or may not shift to somebody's tech companies, doesn't mean they're laying off people. Quite frankly, I think by the signs of growth in other areas like Seattle, which we're seeing or here in Los Angeles, it's a positive momentum story around tech companies that can't grow in the city anymore. And so we take that as a positive sign and not a negative sign.

Got it. Thanks. That’s all for me.

Thank you.

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

Thank you. I know you guys give a lot of good information on 4Q 2018 and full year 2019 leasing progress. Can you talk about some of the known move outs that are coming? Or is there a certain percentage we should be thinking about that will be vacating through the end of 2019?

Well, I'll just start off with the global. And then Art can just sort of dig in a little bit, and he and Derric are sitting right beside me so they can talk about it a little bit. But as we commented on our prepared remarks, Jamie, I mean we – we're basically baked and done for 50% of 2019's move outs right now. And as I said, 35% of next year is already renewed and the remaining 20-plus percent is being backfilled. So we're well on our way at mark-to-market numbers that are pretty impressive. Some of that year-end – some of it is year-end, and we do know that – Stanford Health, as an example, is moving out. And we do know that we're dealing at the year with Saatchi & Saatchi, which we're in negotiations with right now for – but they're end of the year, and we're confident on that. I think Technicolor is the same thing. We're confident that we're going to renew those guys. So there's a lot of positive trends right now, but if you want to talk specifics about a few tenants, Art?

Sure. Hi, Jamie. Yes, so as Victor touched on, the larger tenants – let's just say the largest 10 tenants, we've got one known vacate in the largest 10, that's Stanford. We've got the largest, which is Capital One, as you're well aware, that's 133,000 square feet, we've already backfilled 80. We're working on kind of the last large floor. So we should have good news on that very, very soon. And one deal is in discussion, so of the top 10, we've got eight spoken for, one in discussions and one in negotiations so...

One move out.

And one move out with Stanford. All of that kind of totals up to about 55% coverage for all of next year, and we feel pretty good about that right now.

Okay. So you're saying those 10 leases are 55% of the expirations?

No. I'm saying we've got coverage on 55% of the total – kind of the total universe of expirations, which is about $1.3 million for next year.

Okay. So I guess those 10 leases, what does that add up to?

100% of expirations.

Yes. That's about 40% or about 50 – 50% of it. Those are just the top 10.

Yes. No, I know. Okay. That's very helpful. And then, I guess, for Mark. You guys mentioned the potential share buybacks. Can you just talk us through just the capital spending and timing, I guess, through 2019 if you can or even longer, with – given some of the projects you have. Just how should we be thinking about – I know Victor had mentioned you're kind of set with your capital needs for now, but how do we think about how the money is going to be flowing out and timing?

Sure. So if you take where we left off on third quarter, the balance sheet information in the press release and bring it forward for the Ferry buy, we're now at, call it, $650 million – just shy of $650 million of capital availability. And that assumes no asset sales or anything like that. So for example, if we did sell Campus Center, that would obviously increase that availability. And then you forecasted through the end of 2020, so more than two years from now, where the spend against that, net of cash flow available, factoring in all capital requirements, dividends and everything, is in the 470 range. So your net capital availability is somewhere north of $170 million of net availability after all known spend for more than two years from now. By the time we get to 2021, there are some remaining spend, take for example on Westside Pavilion, but you're also turning wildly net cash flow positive, right, because now things like EPIC and other developments are fully online. And so you're actually generating more cash flow than what your net capital requirements are associated with anything that has ongoing spend on it. So you have more than enough capital availability to satisfy all known capital requirements well through 2020 and beyond and room enough to do things like a share repurchase or even incremental acquisition. And again, that's all assuming, there's no further asset sales or anything.

Okay, great. That’s very helpful. All right, that’s it for me. Thank you.

Thanks Jamie.

[Operator Instructions] Our next question is from Rich Anderson with Mizuho. Please proceed with your question.

Thanks, good morning. So a question for anyone in the room. What do you view as sort of a normal tenant retention rate for the company on a go-forward basis given all the moving parts that you've had to this point and how might that compare to – how might that perspective on the future compare to what has happened in the last few years with your company?

Well, Rich, so I mean, on average, we have vacillated much on this. In terms of tenants that we retained, it's been on the average in the low to mid-70s across the board. Now there are exceptions to that because they couldn't accommodate growth. We've had a massive growth portfolio of tenants that have gone from small to midsize to large sizes, and so they've moved out. So we couldn't accommodate their growth prospects, but I don't think it's really changed much more than 70%. We don't really envision it. I mean the numbers we're looking for this year and the numbers we're looking for next year is going to be the same. The no move outs, as Art and Mark have commented on a regular occurrence, are tenants that either can't be accommodated in our portfolio for the most part or are – they're not downsizing their growth.

Okay. That's clear. Got it. When I – when we look at sort of – I know you're not giving 2019 guidance, but there is quite a wide range of estimates out there. Perhaps some misunderstandings about the implication of disposition, the timing factors around leasing, et cetera. And so I know you're not giving guidance, but perhaps you can comment on the repeatability of the same-store growth profile of the office segment, 5% for 2018. Would you call that a repeatable level or is it inflated or deflated for one reason or another in terms of what we could see from a recurring standpoint?

Yes. A couple of things on that. If you go back to beginning of this year, we set our midpoint guidance on office same-store in the mid-3s. And we've had sort of ongoing success, mostly on the leasing front, and it's slowly crept up to the current midpoint of 5. And so when you say repeatable, I think it's important to kind of understand that it's kind of move towards that five point which is, obviously, considerably higher than kind of our peers' mid-points. Having said that, and again I think we are dangerously strained in the kind of key metric to a number that – to a guidance number. But in any event, look, I think some of the same dynamics that has under – that are underlined, the 5% midpoint are still in play in 2019 with 11-ish or so percent of the square footage rolling in 2019. The level of coverage that we mentioned, both in terms of either backfilled or deals in process of 55%, a mark-to-market against that coming in approaching 20%, it seems possible that we could be kind of industry levels. We might get as close to a 5% same-store cash NOI growth. But you know, we haven't finalized the number yet, but I think some of the same dynamics are at play.

That's great color. And then last to Victor. When you compare what you're doing in L.A. with the studio and the Arts District and all those sort of unique things with Netflix, with San Francisco and the big roll ups and the opportunities that are there, where do you see the bigger opportunity on a go-forward basis for Hudson Pacific? Would you call them different, but equally exciting? Or is one sort of capturing your imagination more than the other?

Well, it's sort of a tougher question to sort of pinpoint on a single thing. In San Francisco, what we are seeing and then what we have available, unfortunately, is not the same. Other than the close to 40% mark-to-market, we're going to have on Ferry, and we got lots of activity in that space in the office, we're virtually leased in San Francisco right now. I think we're 97% leased of our stabilized stuff right now, and we're about to announce a couple of larger deals that we're going to be done. Here, I do think that in Los Angeles, we have a lot of opportunity in a marketplace that is on the upswing. And so if you're asking for, "the excitement level", right, we've talked about – we've got potential future development of over 1 million square feet. We've got another 100,000-square-foot-plus project that we're just coming out of the ground on. In Harlow, we've got a very exciting project with lots of activity on single-tenant users at West Side Pavilion. And we're seeing rental rate growth unlike we've seen in the last two or three years in West Los Angeles around the media and tech-related businesses. So I think if you're asking for "the excitement level", you have to sort of say the growth potentials and the excitement are going to be here in Los Angeles for Hudson in the near future.

That’s great color. Thanks Victor. That’s it for me.

See you, Rich.

Our next question comes from Dave Rodgers with Robert W. Baird. Please proceed with your question.

Hey guys, Victor, I wanted to just start with you in terms of what – are you seeing more and more opportunities to add to the value-add pipeline development or redevelopment adding new buildings? Because you talked about no asset sales, so I was thinking about funding. And then maybe the second question on that is bringing in the joint venture partner on the Ferry Building. Can you talk a little bit more about the appetite for that, the reason? Was it delusion? Was it just the amount of money, the opportunity was retail, et cetera?

Yes. So let me say this, Dave, first, on your first point. And I've made the commentary, as has Alex, who's really sort of supported it, the bandwagon in the company. We're seeing less and less transactions that are earmarked for Hudson in all of our markets. And so the transactions that we're seeing are almost formally development, redevelopment-related assets. And as a result, that fits right in our sweet spot for returns and yields. And what we're seeing on those assets, I think, we've been surprised on the positive side of what we've developed at and what we've redeveloped at and where we're going to have some metrics around a higher yield than we anticipated going in. And probably a part of that is a little bit about us pre-buying materials and some construction and some of our redevelopment cost and efficiencies, but majority of that is the efficiencies at the tenants market today where rental rates are. And we've tried to relate this message, albeit, I think we've gotten a number of questions and maybe slightly a little bit of push back, is we're not losing deals. And I keep reiterating this point, Dave. We're not losing deals to rental rate. We're losing deals to time frame, accessibility, interest level on companies, but it's not based on rental rate. And clearly, as you can see in the markets, it's absolutely not based on competition because there's very little competition in our markets for the kind of space that we're attracting. So that's all on the positive side and we're going continue to look for these value-added opportunities, and I think the yields are going to be very compelling. To answer your second question, we didn't buy the Ferry Building with the intent to bring in a JV partner. Allianz came to us during the process. We have now two JV partners, I guess you would call it three if we're referring to Macerich as one as well because they contributed their asset into our JV. But two capital JV partners, Allianz and CPP, both are very active. When you do a JV, you spend a tremendous amount of time courting each other, documenting and having the relationship. You want to maintain those relationships for more than one deal. We could have done Ferry on our own. We were actually prepared to do it on our own and the relationship just got basically energized to a part where we're saying, hey, let's do more together some maybe on existing stuff and some on future stuff. And so we're very comfortable with our two JV partners. They're extremely well capitalized. And sometimes, you got to show them deals in order to maintain those relationships going forward, and I think that's exactly what we did at the Ferry Building. It's an iconic asset. It's got better upside than most people realize and it's – we've got a partner with us now that really wants to do more deals with us.

Okay, great. Thank you, Victor.

Thanks Dave.

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

Hey, everyone. This is Laura Dickson here with Craig. So first question is for Art, you made progress on the lease-up portfolio on the quarter. And I was just wondering if you could kind of go – on Page 23, if we could just look through some of the different assets with the bigger vacancies and you could just go through some of the activity there. I know you mentioned 450 Alaskan and 95 Jackson earlier.

Sure. Laura, one second. Let me just hand them the supplemental. Got it. Okay. Let's start in Seattle, right, with 450 Alaskan. We are in leases right now so that's – for about 55,000 square feet. We move down to San Francisco, we've got cash vault, which is 66,000 square feet, right? That was the repositioning of the BofA cash vault. We are also in leases there for the entirety of that space. We move down – what?

Sorry. Which one was BofA cash vault at?

1455 Market.

Yes, okay.

Okay. We move down to Peninsula. We've got vacancy at Metro Center. We've got – we're really deploying our VSP program in a big way, large-scale and small suites. I want to ground that conversation to Metro Center because we've moved – we move that asset from 59% leased to 77.5% leased currently over this period – over a period of time. We have had some move outs, some downsizes that we've been successful with keeping tenants in there, but we probably have another 40,000 square feet in the pipeline now. They are close to LOI and behind that, probably another 25,000 to 30,000 square feet of real interest. So we feel positive about the momentum we're making over there.

Great. And then just a follow-up on 1455 Market, I think you said earlier there was a 200% mark-to-market expected on that space? Do you have activity on there?

Yes. Yes. If you recall, that was the tenant at subterranean, the first basement. There are two basements there, right? It was the first basement space that we've reimagined.

Is that going to be an office space or...

Yes. That's going to be office space.

Okay. Great. And then just one last question regarding Campus Center sale, if you could just discuss types of the demand you're seeing? I don't know if it's too early, but I'm just curious about any color there.

This is Alex. So we've launched officially a couple of weeks ago, so it's still early in the process. We are marketing the full sites, so both the 35 acres of industrial land as well as the existing office improvement. So far, we're seeing really good activity from potential buyers that want to take down the entire project. We're seeing good activity from buyers that one of the two components. We'll probably start getting a better sense of the market and where things are shaking out over the next couple of weeks. So it's still somewhat early, but we're encouraged by the activity so far in the market.

Okay, great. Thank you.

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

Thanks. Mark, sorry if I missed this. But can you just talk about the decrease in same-store guidance for the studios and what drove that?

Sure. I think, the key thing to understand about it is the difference between the 10.5 midpoint and the current nine midpoint is actually only $330,000, which is about 1.5% of last year's full year 2017 NOI, just to kind of give you a sense of magnitude. But since we guide for the segment separately, we want to just keep you guys kind of tracking with our internal projections even though the dollar impact amount is fairly insignificant. And what's driving it largely are some changes in operating expenses stemming from turning over some vendors like parking and security. That's really the key driver of that small difference in NOI.

Okay. That's helpful. And then, Art, NFL had an early termination, right, on or before, I think, October 4. Obviously, we're past that now. There have been some reports of them moving some of their operations to the new stadium. Does that directly affect you guys? And if so, how are you thinking about the prospect for a backfill there and mark-to-market? Any commentary?

I mean, listen, Blaine, if we're talking about 2023, we got to largest list than just NFL. So – I mean, the stadium is going to be done in 2022 or 2023. They're not going anywhere between now and then, so we've got three to four years. There is no – they're not moving out right now, so that's definitely the case.

By the way, Blaine, the early termination deadline isn't October of this year, it's next year. I mean, it doesn't affect what Victor just said in terms of prospects for whatever ends up happening and whether or not we get it back early or not, but we won't know for another year whether or not they exercise the early termination.

Okay, got you. Thanks guys.

Thank you.

There are no further questions at this time. At this point, I'd like to turn the call back to Victor Coleman for closing comments.

Thanks so much for the support and the participation. And I want to, again, reiterate my thanks to the entire Hudson Pacific team. Have a good day.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.