Hudson Pacific Properties - Earnings Call - Q1 2016
May 5, 2016
Transcript
Speaker 0
Greetings and welcome to Hudson Pacific Properties First Quarter twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kay Tidwell, Executive VP and General Counsel.
Thank you. You may begin.
Speaker 1
Good afternoon, everyone, and welcome to Hudson Pacific Properties first quarter twenty sixteen 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 Lamas. Before I hand the call over to them, please note that on this call, 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, 05/05/2016, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non GAAP financial measures. The company's earnings release, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non GAAP financial measures are useful to investors. And now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?
Speaker 2
Thanks, Kate. Good afternoon, everyone, and welcome to our first quarter call. We had a terrific first quarter across the board, but particularly in terms of our leasing results. We've also had notable activity on the disposition front in the first half of the year, which I'm going get to in a moment. And we're going keep our prepared remarks relatively brief this morning sorry, this afternoon.
We'll have a bit more time for Q and A, and we'll be digging in a lot more at our upcoming Investor Day in Los Angeles on May 2425. If you'd like more information about this event, please reach out to our Head of IR, Laura Campbell, whose contact details can be found on our website. In the 2016 alone, we executed nearly 820,000 square feet of new and renewal leases across our markets. Not only is this on track with a pipeline of executed and in lease deals that Mark discussed on our last quarter's call, but is our best quarter ever in terms of leasing, both on an absolute and a pro rata basis. And even more impressively, and a testament to our ability to push rate and maintain velocity, We achieved phenomenal cash and GAAP rent spreads of 6673% respectively.
In terms of earnings reported thus far this quarter, none of our office peers are posting these kind of results. We have pre leased a significant proportion of our development and redevelopment pipeline. Netflix leased the balance of Icon, Saltchuk took 55% of 450 Alaska Way and a deal with WeWork took 12,655 Jefferson to 100% leased. The activity along the Peninsula and the Valley this quarter has been robust, and we're going to keep providing a deep dive at our upcoming Investor Day on these results. But in the first quarter, we completed over 350,000 square feet of new owner leases in those markets at rents spreads on par with the larger portfolio.
Noteworthy deals both in Palo Alto, including 22,000 square foot lease with Toyota Research Institute, Toyota's R and D division focused on the autonomous cars and Lockheed Martin's 43,000 square foot renewal for our entire 3176 Porter Drive asset. We also executed a 25,000 square foot renewal with Virtual Instruments, the world's leading IT analytics company at Metro Plaza in North San Jose. We're making excellent progress with regard to our upcoming expirations. As we alluded to on our last call, we've now executed a renewal lease with Qualcomm for 365,000 square feet at Skypark Plaza in North San Jose. While we're not going to discuss all of our second quarter activity today, this deal, a credit to our leasing team's proactive approach, addresses our 2017 expirations and brings our year to date total leasing activity to north of 1,200,000 square feet.
The terms of this renewal executed nearly sixteen months before the expiration include a 44% mark to market on cash rent effective as of April 1 and extend through expiration of July. Overall conditions across our markets remain positive. In Los Angeles, it has the right ingredients for strong to medium near term performance, a high level of investor interest, modest new construction, stable employment growth and reinvigorated media entertainment industry. Our primary Los Angeles markets continued to perform well across all key metrics in the first quarter. We're currently in discussions with a pipeline of media related tenants representing around 350,000 square feet of requirements for our 90,000 square foot Q development to be delivered in mid-seventeen.
We're also seeing a pickup in activity at all of our studio stages as a result of Netflix. And since our last call, we kicked off formal marketing efforts for our 120,000 square foot Fourth And Traction redevelopment. We're seeing growing interest from potential tenants, particularly as the submarket continues to gain recognition. And we now have demand for pipeline for about for both of our two Arch District projects for nearly 500,000 square feet. In Seattle, the market remains very strong.
Subleasing activity less than 1% and fundamentals improving across the board. 50% of the projects currently under construction are pre leased, almost entirely by tenants expanding to the marketplace new and renewed. And while we're closely monitoring new supply for companies looking to locate in the rapidly transforming Pioneer Square, options for Class A space remain very limited. Specifically, our 450 Alaska Way development is set up part by already having a credit worthy anchor tenant as well as adjacency to the progressing Seattle Waterfront redevelopment. We're in active conversations with both tech and non tech tenants representing nearly 400,000 square feet of demand for the remaining four floors.
In the Bay Area, we're seeing some signs of moderation. Asking rates for the CBD, Peninsula and Valley all increased slightly with incremental increases in vacancy and in general slowing absorption. Sublease vacancy in the CBD ticked up. And while we suspect this is a result of some of the tech companies rightsizing, demand for this type of space remains very strong. We're keeping a close eye on supply, but our portfolio is well positioned as the market, which has experienced feverish growth in the recent quarters, inevitably cools.
Leasing momentum at our properties remain very solid, and we're seeing nice activity at assets with some of the larger vacancies like Metro Center. We'll be digging in here much more on upcoming Investor Day. We've completed a number of nonstrategic asset sales, and year to date, we've closed or put under contract nearly $315,000,000 of deals, and I'm going walk you through those now. Our previously announced dispositions of Bay Hill Office Center in San Bruno to YouTube and Patrick Henry Drive in Santa Clara to KT Urban generated a combined $234,000,000 of gross proceeds. Like our fourth quarter sale of Bay Park Plaza in Burlingame, these assets were all sold on an all cash off market transactions at premiums to our original purchase prices.
As I mentioned, we're working on a couple of other dispositions and we've recently placed 1200655 Jefferson under contract to sell. After successfully pre leasing the building and our only holding in Playa Vista, we received a reverse inquiry from a qualified buyer that highly valued the asset's location, redesign and tenancy. The agreed upon $80,000,000 sale purchase price represents a 30% increase over our projected future basis. And the buyer's good faith deposit is now nonrefundable and a portion of it has been released to the company. This deal is expected to close in the 2016 after we complete all the tenant work.
With that, I'm going to turn the call over to Mark, who's going to touch on our first quarter financial results, including how strong our performance has led us to rate our one year full guidance even though we have pending dispositions. Thanks, Victor. Funds from operations, excluding specified items, for the three months ended March 3136, totaled $63,200,000 or $0.43 per diluted share compared to FFO, excluding specified items, of $18,500,000 or $0.23 per share a year ago. There were no specified items for the first quarter of twenty sixteen, but we had $6,000,000 or $08 per diluted share of acquisition related expense in the first quarter of last year. FFO, including the specified items for the three months ended March 3135, totaled $12,400,000 or $0.16 per diluted share.
As of March 3136, our stabilized and in service office portfolio was 95.890.7% leased, respectively, up from 95.390.1% as of the end of last year. The trailing twelve month occupancy for our V and Entertainment properties increased to 81.6% from 71.6% for the same period a year ago. Net operating income with respect to our 21 same store office properties for the first quarter increased 8.5% on a cash basis and by 6.4% on a GAAP basis. Net operating income at our same store media and entertainment properties increased by 47.9% on a cash basis and 36.3% on a GAAP basis. As many of you know, April 1 marked the one year anniversary of our acquisition of the EOP Northern California portfolio.
Beginning next quarter, our financial statements will reflect a more comparable portfolio for quarterly year over year comparison purposes. Consistent with our same store reporting policy, the EOP Northern California portfolio assets owned as of 01/01/2017, will be added to our same store office portfolio beginning with our 2017 reports. Before turning to guidance, we would like to walk you through our recent loan activity, which has improved our debt maturity schedule and our access to capital for future requirements. On May 3, we drew all $175,000,000 of five year and $125,000,000 of seven year unsecured term loan credit facilities entered into in November. We used the loan proceeds to replace to repay floating rate indebtedness, including the $30,000,000 loan secured by 901 Market Street, the $60,000,000 outstanding balance under revolving credit facility, dollars 110,000,000 of the outstanding balance under our loan secured by Sunset Gower and Sunset Bronson and $100,000,000 of our unhedged existing five year term loan.
The repayment of the loan secured by nine zero one Market Street addresses one of our only two loan maturities scheduled to occur this year. I will discuss the other maturity in a moment. For the $110,000,000 pay down of our Sunset Gower and Sunset Bronson loan, we arranged with the lender the right to reborrow these proceeds, thereby enabling us to reduce our current interest expense while providing yet another committed source of capital. The $100,000,000 paydown of our existing five year term loan effectively extends the maturity on $100,000,000 of our term loan indebtedness by a weighted average of one point two five years. And finally, repayment of our credit facility provides us complete access to all 400,000,000 of our of our revolving loan facility.
Our only other 2016 loan maturity is at Pinnacle two, where we have already selected a lender and begun documentation to fully refinance the existing $86,000,000 loan on or ideally before the scheduled maturity in September. We will provide more details as we get closer to finalizing this loan, but we anticipate ten year financing at a rate as much as 125 to 150 basis points lower than the existing loan. As a result of our successful disposition and loan activity, our already conservative leverage levels continue to improve while providing the company with ample capital to fund all projected 2016 and 2017 leasing development and redevelopment expenditures. Even if we assume no future dispositions, we expect to have in excess of $250,000,000 of capital available net of operating set asides and after accounting for all 2016 '20 17 capital requirements. The successful completion of targeted dispositions, including the sale of 12655 Jefferson, could increase that projected availability to more than $380,000,000 So in short, we are very well positioned to fund our future capital requirements while remaining highly liquid.
Now turning to guidance. We are increasing our full year 2016 FFO guidance from the previously announced range of $1.65 to $1.75 per diluted share excluding specified items to $1.68 to $1.76 per diluted share excluding specified items. This reflects our first year FFO of $0.43 per diluted share excluding specified items as well as the transactions mentioned on this call, including the sale of 12655 Jefferson. We have also assumed the sale of another asset yet to be announced for approximately $50,000,000 later this second quarter with proceeds going to repay a corresponding amount of our unhedged existing five year term loan. This guidance also reflects the funding of the $175,000,000 five year and $125,000,000 seven year unsecured term loan credit facilities and the repayment of indebtedness I described earlier.
We have assumed the new $175,000,000 unsecured five year credit facility remains unhedged through this guidance period, while the $125,000,000 unsecured seven year term loan becomes fixed as of June 1 through an interest rate swap at a rate of 3.03% to 3.98% per annum depending on leverage and before amortization and deferred financing costs. This guidance assumes full year 2016 weighted average fully diluted common stock in units of 147,118,000 As always, the full year 2016 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in our press release and on this call, but otherwise excludes any impact in future unannouncements or speculative acquisitions, dispositions, debt financing to repayments, recapitalizations, capital market activity or similar matters. And now I'll turn it back to Victor. Thank you, Mark. Once again, I'd like to thank the entire Hudson Pacific team and our talented senior management for their fantastic work this quarter.
And to everyone on this call, we appreciate your continued support of Hudson Pacific Properties and look forward to updating you next quarter. Operator, with that, let's open the call for any questions.
Speaker 0
Thank you. Ladies and gentlemen, we will now be conducting our question and answer Our first question comes from the line of Craig Mailman from KeyBanc. Please go ahead. Hey
Speaker 3
guys. Victor, maybe just on your comments about San Francisco moderating. Could you just clarify, is that just you're seeing growth moderate or you're starting to see cracks?
Speaker 2
Well, I think it's listen, Craig, good to hear from you. Thanks for calling in. I think it's a couple of things. First of all, we've had quarter over quarter, year over year tremendous growth. And so we're not seeing cracks by any means, and the activity is still fairly consistent.
But what I think we're starting to see a little bit is deals are just specifically larger deals are taking longer to get done. Now granted, we had a phenomenal quarter and executed a lot of stuff, but a lot of that stuff is being worked on in the fourth quarter when we got done in the first quarter. And so I just believe that that's just a sign of brokers and tenants taking their time to get deals done, and that's what I'm inferring.
Speaker 3
Okay. So you're not seeing any weakness in rents or anything like that, maybe just a little bit more sublet space, but you're not seeing a huge impact from a moderating pace of VC funding yet?
Speaker 2
No, absolutely not.
Speaker 3
Okay. And then moving on to the leasing. So you guys are basically 75% of the way through the $1,600,000 you laid out last quarter. Could you just give an update on what the pipeline looks like? Has it grown at all from that $1.6 in terms of backfilling it?
And what you think a reasonable volume of leasing for the full year could end up being?
Speaker 2
Yes. Mean, think this is Art. I the pipeline remains it vacillates around 1,000,000 point dollars across the portfolio. Even after doing the volume that we've done, it still remains you know, we've gone out over the last thirty days, we picked up some deals that went on the radar. And we're still here.
We are at about a $0.2 in the pipeline. So I I feel very bullish, in all markets.
Speaker 3
Okay. So you guys could top $2,000,000 for the year?
Speaker 2
I don't want to give a number of what we can and can't top. But I think right now, with the $820,000,000 and the Qualcomm deal, We've got other deals that we've executed this quarter. We're well on our way to $1,000,000 plus.
Speaker 3
Okay. That's helpful. Then just lastly, with Netflix being more active at the studios, what kind of, I guess, how much do you think you can push rents and push revenues at the studios versus what you guys thought was a more historic kind of top out level?
Speaker 2
Well, I think listen, this is indicative of this quarter. I mean, the numbers are as best as we've ever performed. A lot of it is the stickiness of heavy Netflix. I think we're also going to see some more stability in the sound stages around Netflix and tenants like them who are taking longer term, not just show to show or year to year. And that's going to prove out to see some proven revenue over a multiple year period.
I'm comfortable with the numbers the way they are right now. I do see that our media team has seen a large pickup in desire for office space there. And virtually, we're full on office, which bodes well to our Q development and the kind of activity we're seeing around that. Even though it's a small number right now, we're pretty excited about the opportunity around the growth.
Speaker 3
Great. Thanks, guys.
Speaker 2
Thanks, Craig.
Speaker 0
Thank you. Our next question comes from the line of Blaine Heck from Wells Fargo. Please go ahead.
Speaker 4
Thanks. Just a couple for Mark here. It looks like your office operating margins have shown pretty vast improvement. You guys average margins of 58 to 59% in 2013 and 2014. And over the last five quarters, that's been closer to 65% to 66%.
So do you think that's mostly attributable to the addition of the EOP portfolio? And is it fair to assume these margins can hold up for the rest of the year? Is there anything that might put pressure on either the revenue or the expense side?
Speaker 2
Yes. I mean, you're looking at the GAAP margins, right? And I don't attribute that and that's flowing through same store, right, which does not include Redwood. So it's really indicative of the 21 office assets flowing through that number. I think, you know, what you're really seeing there is, you know, stabilized occupancy, kinda a leveling off of well, talk without free rent because that's running through gap.
I I think what you're really just seeing is improved operating efficiencies in that 21 office portfolio and a leveling off of towards what I think is a normalized operating margin, which it should be somewhere in, you know, kind of a low to mid sixties.
Speaker 4
Okay. So no kind of headwinds that you see that that might No.
Speaker 2
Changing. Think I think we ought to be able to maintain that that low that margin in a stabilized portfolio.
Speaker 4
Great. Okay. And then just looking at earnings going forward, you guys will have a little FFO pressure from sales, but Beho was done early in the first quarter and Patrick Henry in 12/1955 weren't really generating NOI. So the biggest drag is going to come from $50,000,000 coming later this quarter. Your guidance implies that each of the next three quarters averages about $0.43 a share, which is equal with the first quarter.
And so that seems like to me, I'm just wondering if there's something else I'm missing that's going to keep that No. From
Speaker 2
You got it. I mean, there is going to be some dilution on NOI from that assumed sale, but we've got a pickup in no small part from Qualcomm. Right? We did an early blend and extend on that effective as of April 1. So that offset the dilution from the sales more than offset the dilution.
Speaker 4
Okay. So, I mean, how should we think about lumpiness as far as FFO kind of is is trending throughout the rest of the year?
Speaker 2
I don't think it's going to be very lumpy.
Speaker 4
Okay.
Speaker 2
I mean, I don't get any precise in terms of guiding on a quarterly basis. Obviously, it's not we don't do that. But it won't be particularly lumpy.
Speaker 4
Okay. Fair enough. And then just one more for me. Can you just and maybe for Victor, can you talk about some of the largest vacancies in the lease up portfolio, specifically Metro Center and Phosphorus City and Shore Breeze and Redwood Shores?
Speaker 2
Yeah. I mean, listen. We've got, you know, in our in the last few months, we've got a lot more interest in Metro, which is really our biggest gap, and we've got a couple of full floor tenants that we're looking at. And now we're looking at also subdividing one of the floors on a multitenant basis, and the activity seems to be pretty stable. Redwood Shores, the same thing.
There's virtually nothing in the portfolio on the peninsula of the large vacancies that we're not having at least some activity on at or better than our underwriting numbers. So we're pretty comfortable with the flow in the pipeline, as Art mentioned.
Speaker 0
Thank you. Our next question comes from the line of Nick Yulico from UBS. Please go ahead.
Speaker 5
Thanks. Can you guys just remind us where you think your in place portfolio rents are in the overall San Francisco Bay Area versus market rents today?
Speaker 2
Well, the markets are quite a bit different between CBD and say Peninsula and Silicon Valley. Just if you're focusing on the CBD, judging by deals that are getting done, we're anywhere we're probably over 50% below market. Deals that you saw our mark to market on the lease activity page of 66% cash and 70% GAAP. The deals that are driving that are things like Uber, which signed at $69 compared to, at least on half of that space, rolling out base rent of $13.51. So that gives you some indication of just how significant the spread is between at the c b in the CBD between market and in place.
So it's 50 probably could be well high higher much higher than that. In the finance on Silicon Valley, it's in the high twenties, maybe a 30% mark to market on rent, and that's also borne out by some of the bigger deals that are flowing through that leasing activity that are closer to that range.
Speaker 5
Okay. And then recognizing you guys don't give same store guidance, can you talk a little bit about how you think the same store trends might play out directionally for the rest of the year on cash basis?
Speaker 2
I think the first quarter that is probably will burn off some let me think about this. I think it'll probably stay around the levels that we posted in the first quarter, that six four on growth rate on a year over year basis. That's probably a fair we didn't we don't guide for it, so I didn't isolate that number for the balance of the year. But I think that's probably a fair expectation.
Speaker 5
Okay. Okay. Got it. And then that's helpful. And then just one last one.
Can you just remind us what's left on the capital spend for the EOP portfolio?
Speaker 2
Yeah. I sure can. We've just because of the old number that people you know, we spoke of in the very early going of the acquisition, that 75,000,000,000 or so, that's been adjusted in no small part because of asset sales. So for that three year period, that is the period ending by the end of 'seventeen, the total spend has been adjusted to 63. Of that amount, we've already incurred about, let's call it, 9,500,000,000.0.
That leaves, call it, 53 or so million of spend for the balance of this year and into 17. Of that, we've already committed, about $36,000,000.
Speaker 5
Okay. Thanks, Mark.
Speaker 0
Thank you. Our next question comes from the line of Sumit Sharma from Morgan Stanley. Please go ahead.
Speaker 6
The 65% or 66% mark to market spreads. I guess I was wondering how much of this was driven by the demographics of the leasing sort of tilted towards San Francisco? And I guess as a follow-up to that, how much of this was because we were expecting a lot of this to occur in 2017 based on a previous schedule. How much of this sort of moves twenty seventeen's numbers upfront into the run rate?
Speaker 2
Well, was anticipated the only '17 movement that is inclusive, which we haven't posted on that number is Qualcomm. Now this is all all all 16 related mark to market. It's just been a better the leases are better performed than than we thought. We we knew where they were rolling at, but then for the most part, we're just getting higher rental rates on average across the board for 'sixteen. I mean, the numbers in 'seventeen are looking the exact same way.
Mark just quoted them at 50 plus percent mark to market. That's going forward for the remainder of this year and into next year. It could even be higher. We've got some pretty substantial roll below market in the city and in the Peninsula and here in Los Angeles. And then we start to roll in 'eighteen late 'seventeen, 'eighteen in Seattle at well below market numbers.
So I mean, he's throwing a 50% number out there. Our estimates here, they're going to be higher than that and specific instances, a lot higher in many specific instances.
Speaker 6
Yes, which was kind of in line with what we had originally forecast as well. I was just trying to see if there's an opportunity that some of the '17 sort of staggered mark to market had moved forward. But thanks for clarifying that. I guess with regards to the large Qualcomm lease, is there anything about you can add about the tenant improvements or leasing commissions that were sort of different, especially given what you're talking about in terms of the Bay Area moderation? Any changes in that sort of in those statistics at all?
Speaker 2
Well, on the leasing commissions, they were in line with what we underwrote them at. Obviously, they were earlier because we didn't anticipate signing this until 2017 or closer to their expiration. In terms of TIs, they were well below our underwriting in that there was very little that we thought that was going to be in place for that relative where the market was for us to have it be replaced clearly.
Speaker 6
Understood. Understood. So it sounds like it's basically in line with your expectations and possibly the market. I guess last question. Besides the $50,000,000 asset that you've mentioned in your guidance, is there anything else that you're looking to sort of dispose a cull from the EOP portfolio or actually more interestingly outside the EOP portfolio now with SioVista?
Speaker 2
No. I think there's nothing of material levels that we're looking to dispose of in the EOP portfolio now left. There may be a smaller asset or two in the existing portfolio, but we've not identified anything at this time.
Speaker 6
Understood. Okay. Well, I promise this is my last question, so I'll save it up for another time. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Our next question comes from the line of Rich Anderson from Mizuho Securities. Please go ahead.
Speaker 7
Thanks and good afternoon. I saw that answer my first question, which was the $50,000,000 out of EOP, but it sounds like it is not. So second question is, you mentioned sublease space trending up. Can you put the numbers around that, what you're seeing from a sublease space perspective in the Bay Area?
Speaker 2
Yes. So Rich, let me clarify because I think you guys understood. The asset that we're not going to tell any details on in the $50,000,000 is an EOP asset.
Speaker 7
Oh, excuse me. Okay. Okay.
Speaker 2
Yes. He was referring to any additional assets outside of that one. So just So to let me give you sort of the statistics around sublease space. And so for the most part, the sublease space has been a dominant conversation around the CBD of San Francisco. And if you look at the Valley first and foremost, there's really been no material sublease changes at all.
It's very minimal and not noteworthy at this time, which is good news. I think if you started at the beginning of the year, there was an average of 77,000,000 square foot portfolio in the city is what they're benchmarking it off of. There's 1,700,000 feet or 2.2% of the market was available for sublease. That number today is about 3.1, 2,400,000 square feet of sublease space. But what's important to look at is of that 1,700,000 feet, about 730,000 feet is actually vacant, about so a million is available.
So about 0.9% of the total market in the beginning of the year was vacant. That number has moved to about 820,000 feet vacant, so a little bit more than 90,000 feet. It's immaterial, it's about 1.1% of the total market. And those are the numbers that the people aren't focusing on. They're focusing on the total sublease space, which is still very small relative to the marketplace.
But what's sublet and what is now occupied of the sublease space with tenants other than the tenants that are on the lease is really minimal. And what's shifted from Jan one basically till May 1 has only been a 90,000 square foot increase.
Speaker 7
Yes. Okay. Sort of a theoretical question. Would you have signed a lease with WeWork if you weren't selling Jefferson?
Speaker 2
Well, we signed a lease with WeWork without selling Jefferson. So I guess that answers your question. Listen, I can tell you, I mean, we spent a lot of time with WeWork. And specific to Playa Vista, the reason we sold that asset is because we realized that we couldn't get any more traction in buying any more assets in that marketplace at valuations, one. And two, the value of that asset relative to what we're into it for ended up being an exceptional deal.
WeWork's business model in Playa Vista makes a lot of sense in that, Rich, Playa Vista's got a tremendous number of large tenants, and there is no small multi floor creative space available for all the ancillary consultants and other administrative related co working space requirements in that area. They're the only guys. And the demand, when they decided to look at the space, the demand that they've already had without even starting to market it, but the tenor of which the market understood they were going there, has been incredible. So it makes a lot of sense for a WeWork type operation, a coworking operation to be in a marketplace like Playa Vista with no other competition and, you know, tenants like Google and YouTube, and Facebook and the likes of that that are there and growing dramatically, there is a lot of need for them. But to answer your question indirectly, you know, we didn't get the yield and the turns until we signed that lease.
And when we were approached by an off market buyer, it was because of that lease and the renovation work that our team did and the other lease in the building that got the value of the building to the pricing that we thought was indicative enough for us to sell.
Speaker 7
Okay. Fair enough. And then, Mark, to you what is the rationale for leaving the 175,000,000 floating? I know some of will be paid down, but what's the thought process there?
Speaker 2
That was it. I mean, we reduced we had $250,000,000 of unhedged and we want to leave ourselves some financial flexibility on some of these relatively near term facilities so that depending on how proceeds come through, let's say, on dispositions, we have some availability, if necessary, to apply it against indebtedness and avoid too much dilution. And with the reduction of the existing five year by the 100 and the introduction of the new 175, we incrementally ticked up on the unhedged piece of it, but we have other activity which is going to potentially generate proceeds. Depending on whether or not we utilize that or not, we we wanted to leave ourselves additional floating rate exposure, low repayment cost debt to apply that against if necessary. And if you look at the overall debt picture, the floating rate amount is relatively minimal compared to the overall indebtedness.
Speaker 7
Okay. Do you have an interest expense number you have in mind for guidance?
Speaker 2
Well, we obviously have an interest expense amount running through our guidance, but I don't know that it I mean, I don't think it makes sense to isolate it to this call.
Speaker 7
Okay. Fair enough.
Speaker 6
All right. Thank you.
Speaker 2
Thanks, Rich.
Speaker 0
Thank you. Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Please go ahead.
Speaker 8
Good afternoon. And first, thank
Speaker 4
you
Speaker 8
for releasing results before the open today. It made things a lot easier. So just a few questions here. Victor, on the tech, you mentioned the moderation in San Francisco and then taking longer to do deals, but said it really is not having an effect overall. Just sort of curious, is there no change in Seattle and Southern Cal?
Just curious how the tech is different in those other two markets versus what you're experiencing in Northern California.
Speaker 2
Alex, that's a good question. I think in Seattle, we are really seeing no change at all. I mean, the activity on a pre leased basis for 450 Alaska Way and the activity there, as well as our other vacancies, we have a fairly strong pipeline of tech and non tech related tenants. And so I think if you isolated the tech side, you'd see no slowness relative to that marketplace. In L.
A, specific to our markets and the assets we currently have, we have the exact same amount of momentum. I would actually say it's even increased with the correlation of media related tech tenants. So it is still very strong here, and we're still seeing, I think, a flow of activity that we're pretty excited about where the rent comps are moving to. So I don't see the same correlation. And I want to make sure you understand that the slowness of large tenants is just natural in the progression of right now, I think tenants realize that they can take their time if there's space available.
But that being said, we have space coming to the market at 875 Howard, hopefully, and we have a tremendous amount of activity around that and mark to market rents that are greater than we even imagined. And I think we are equally being as slow to sign to make sure we actually do the right deal. So I think it's a mutual sort of process.
Speaker 8
But you mentioned like where Mark mentioned about the 50% mark to market later this year into next year's role. How on your degree of confidence about locking that in if this is the start of a trend and first it takes longer to do deals and then next people are backing out or downsizing, etcetera, how confident would you guys budget? I mean, you budgeting the 50% marks or you're budgeting something less than and leaving that to the upside?
Speaker 2
It's a good question. I think what we're doing is we're underwriting our assets on our budget year over year. And so we don't sit back and reflect back in the middle of the year and say, Because rates are moving so dramatically, we're going to underwrite a different budget. Clearly, we're pushing for rate, term, concessions and TIs. And so our deployment across the board is what we're going to be budgeting on.
I think when Mark says 50%, he is using that as across the board. There are clear indicators of numbers that are well in excess of that that we're going to try to capture on an ongoing basis. But that being said, you look at some of the renewals we've done early, we've done those renewals at some great mark to market spreads. If we had waited, would we have got a better number? Who knows?
But we were pretty comfortable with the execution, so we took it. Yes, Alex, let me just underscore one thing. I was attempting to answer where the mark would be across the CBD portfolio, not with respect to near term expirations per se, right? So I was giving an indication which would include even a mark that would reflect deals that were even recently signed. You're gonna see an elevated spread on near term expirations because those will be more disproportionately made up of leases that were signed longer ago.
Right? So when you blend it out with those deals which are way, way, way below market and deals that were more recently signed, I think you're probably in that 50 plus percent range, but you're going to see elevated amounts in the near term.
Speaker 8
Okay. And just final, Victor, did you say upfront in your opening comments, you talked about it almost sounded like the next Hollywood development site, but then you mentioned the Arts District. So were you mentioning two new developments or it was just you were just talking only about the Arts District?
Speaker 2
Only about the Arts District, the activity around. What we did was we on our fourth contraction and four zero five material projects, we we said that the respectively, we'd come out in mid-seventeen, late-seventeen, early-eighteen with the two. We started marketing on the fourth and traction project. Now so our materials are ready to go, and now we are just releasing the materials out to the marketplace. It's around that project I'm referring to.
Speaker 8
Thank you very much.
Speaker 2
Thanks.
Speaker 0
Thank you. Our next question comes from the line of Jamie Feldman from BOA. Please go ahead.
Speaker 5
Thanks. Good afternoon. Guess just starting out Mark. So can you just walk us through the changes to the guidance in terms of if you hadn't done the sales, how much your core NOI or your core FFO would have gone up? I'm trying to
Speaker 2
just reiterate
Speaker 5
the two pieces.
Speaker 2
On the office component, it probably would have been a pickup of something on, you know, from last guidance of closer to 3¢, which is now being offset by that disposition assumption, which is maybe about a penny and a half. Then we've got some interest savings as a result of that debt that debt activity I, you know, walked through, Jamie, and that's we're that's being partially offset by a little higher expectation on minority interest, which is the non controlling piece that's offsetting by $0 And then we have a little bit higher G and A just because we're trying to anticipate for the potential impact at year end of our OPP. And then one other item on the the interest expense, which should be more or less isolated Q1 if we put this in place. But you'll notice in our income statement, we had $2,100,000 of hedge ineffectiveness. That's a noncash in effect, interest expense that stemmed from the unusual rate environment in the first quarter as we've actually seen interest rates go negative in certain countries.
And what that led to was if you run a regression analysis against the 650,000,000 of swap, there's actually now a mismatch in the swap and the underlying instrument because the the underlying debt has a zero LIBOR floor, but there's a there's an actual real value now in or there's an ineffectiveness in in effect from the possibility that LIBOR could go negative. So Q1 reflects that noncash interest expense of $2,100,000 That's mitigating our Q1 results. But, one, we don't think that, that's likely to continue into Q2 and indications are that we're also looking at putting a force into our existing swaps so we would remove that inefficiency or ineffectiveness going forward.
Speaker 5
Okay. So it sounds like you would have raised $03 except for the sales, the higher G and A and the changes in the interest expense?
Speaker 2
Yes. And maybe I would say that potentially $04 if it weren't for the sale and the higher interest expense.
Speaker 6
Okay.
Speaker 5
And then going back to Victor's comment on the Bay Area and moderation, can you talk about The Peninsula and Silicon Valley versus San Francisco and how things might behaving might be behaving differently across the two different parts of the region?
Speaker 2
Well, I I don't I mean, I don't think we're seeing material changes at all in the Peninsula. And the I mean, it's obviously evident by our numbers and the and the flow of activity and the leases we're signing and we're negotiating on now. And I think the flow of leases going into the second and third quarter looks pretty strong. So I don't think we're seeing anything on that basis. And I know people jump on comments of any moderation and want to obviously assume that that's the end of the cycle.
I'm clearly not saying that. I want to make sure I'm I'm glad you brought it up because now you're the third guy out of eight questions that have mentioned it. I'm clearly not saying that we're seeing a slowdown. We have virtually every space in the city and in the valley of material size we have activity on. And so that's clearly indicative of the fact that we've seen quarter over quarter, year over year, five plus years now in a row, rental rate increases in growth.
And so those are all fairly aggressive signs as to what we're seeing and the activity, I think, that we're producing, combined with the fact that rental rates are moving still in our favor on a positive basis and we have a great amount of tailwind behind us on the basis of mark to market rents that even at a standstill are going to be very impressive numbers. And I've seen the new deals that are are being worked on, and they're consistent with the past. So I don't see it in the Valley, and and by no means should it be interpreted that taking a little longer to make deals means that it's over in the city.
Speaker 5
Okay. But I guess as we've seen a a I don't wanna say more restrictive, but I guess a slower funding environment from VC. How has the behavior or leasing patterns changed in terms of the kind of space people are looking at? So
Speaker 2
it's interesting, Jamie. A lot of focus on the VCs and a lot of focus on what they're doing now in terms of funding that has sort of impacted some of the tenants' aspects. One of the largest Bill Gurley, one of the largest Benchmark VC guys out there came out and said, What we're looking at for supplying capital to our clients and the companies by which we're banking is for them to be much more cognizant of expense cutting, not of taking less space, much more cognizant of how they run their business. But that being said, you know, the the flip side of that is $13,000,000,000 in capital was flowed into the DC market in the first three months of this year, which is the highest ever since February. And so I I I think, you know, there's some mixed messages there, Like anything else, because they they have the capital, maybe they're just deploying it at different at different levels and different tempos by which but we're not seeing VC step in and telling decision makers and companies to say, don't take space or take less space or pay less rent.
We just haven't seen that intervention.
Speaker 5
Okay. And then last from me, the Toyota lease. I think it was kind of pretty interesting here, the driverless car. Can you just talk about maybe around that building what the other opportunities are maybe in your portfolio for others in that sector? And then maybe just more color on the leasing pipeline around there?
Speaker 2
Yes, absolutely. So what we're seeing you've heard our banter around that, we are seeing a definitive movement in the autonomous car from named companies and non named companies. So we're seeing the the Toyotas of the world, the Teslas of the world, BMWs, Mercedes. Ford now is out in the marketplace looking for space. And so the name brand automobile guys for R and D and IP are looking for space in and around that area, and it seems to be a hot demand item.
Volkswagen was in the marketplace for 200,000 feet. I believe they're gonna be back in the market. They've obviously had a slowdown. That being said, what we're also seeing is we have tenants that are looking at expanding that are not main tenants that you would that that are the core brand names like Toyota's. We have a tenant in our portfolio, Zoox.
They're a driverless company. They're German backed. They've grown from one floor to almost three floors in a matter of seven months, and they're paying top dollar rents, and they're backed, by by a by a not a a capital company out of out of Germany, as I mentioned. And so this is a wave, I think, that's getting now some attention and some traction, and we're pretty excited about the fact that we have availability. We are looking at right now two of those companies that are are name related, and I haven't even mentioned the, you know, 400,000 feet that that Google is looking to take down and the 800,000 feet that Apple is looking to take down for their autonomous cars as well.
Speaker 5
Okay. And those last two, could that be in your portfolio? Or I know you have that much space, but, like, any
Speaker 2
Well, we we have the potential have the potential to attract one of those in one location in the portfolio on a build to suit and we have the attraction to look at one of those depending on what happens with one of our vacancies in 2019.
Speaker 5
Okay. All right. Thank you.
Speaker 2
Thank you.
Speaker 0
Thank you. Ladies and gentlemen, there are no further questions in queue at this time. I would like to turn the floor back over to management for closing comments.
Speaker 2
Thank you so much for participating in our first quarter call. We look forward to seeing all of you at our Investor Day, May 2425, right here in Los Angeles.
Speaker 0
Thank you, ladies and gentlemen. This does conclude our teleconference for today. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.