Hudson Pacific Properties - Earnings Call - Q3 2016

Transcript

Speaker 0

Greetings, and welcome to the Hudson Pacific Properties Third Quarter twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. And as a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Ms. Kay Tidwell, Executive VP and General Counsel.

Thank you, Ms. Tidwell. You have the floor.

Speaker 1

Good morning, everyone, and welcome to Hudson Pacific Properties third 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 Wallace. 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, 11/03/2016, and Hudson Pacific does not intend and it 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. Now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

Speaker 2

Thanks, Kay. Good morning, everyone, and welcome to our third quarter call. We wrapped up another very strong quarter marked by our continued outperformance on the leasing front and by the ongoing evolution of our markets in ways that validate several of our early mover investments. But I'm going talk about more of that in a moment. We executed over 560,000 square feet of new and renewal deals this quarter at 30% GAAP and 20% cash rent spreads.

The delta between this and the second quarter spreads, which were 5849%, respectively, is largely due to our renewal of new tenants, which comprised nearly a third of this quarter's activity. This particular deal had a significant lower mark to market because of the pre existing leases recent start dates and subsequent rent bumps. Mark's going to provide a little bit more detail in a few moments. We closed a total of 2,400,000 square feet of new and renewal deals in the first nine months of twenty sixteen, surpassing the 2,000,000 square foot benchmark we discussed on one of our earnings calls earlier this year. GAAP and cash rent spreads for the first nine months are equally remarkable at 5244% respectively.

We still have excellent leasing momentum throughout the Bay Area portfolio. We've keeping a close eye on the market conditions in San Francisco regardless of the fact that our portfolio there remains stabilized at 95% occupied and 97% leased. We view it as a positive that resilient demand is counterbalancing an uptick in supply and in turn keeping already record rents stable at $73 per square foot and vacancy at a low 6.9%. And while there are a few larger deals this quarter, we, like others, expect to see significant transactions by year end, including large public tech companies opening offices or expanding significantly in the city. Even so, it should be noted that year to date positive net absorption of 1,000,000 square feet has already exceeded last year's total by about 100,000 square feet.

Not surprisingly, the vast majority of our leasing activity this quarter was at our Silicon Valley assets, which included the significant lease extension and expansion of Nutanix, which I mentioned earlier. No longer a unicorn, Nutanix completed a highly successful IPO in the September with analysts covering the stock, citing the company's tremendous long term potential. After renewing 165,000 square feet and signing a must take agreement on an additional 39,000 square feet, Nutanix will ultimately occupy a total of 204,000 square feet at our seventeen forty Technology and Metro Plaza assets in North San Jose. Our portfolio in that submarket, which consists of approximately 2,600,000 square feet of properties directly adjacent to one another, continues to be ideal for accommodating tenants like Nutanix as they grow and mature. Subsequent to the quarter, we signed a ten year lease with established public tech company Qualys for 75,000 square feet in two full floors at our 919 Hillsdale Building at Metro Center in Foster City.

This space will serve as our new corporate headquarters. The lease delayed rent commencement is attributable to the company's existing Redwood City lease terminating at the 2017 plus standard free rent concessions, although for accounting purposes, we'll see an impact of GAAP rents as of February. Big picture on the heels of the BrightEdge technology leased last quarter, the Qualys deal signals strong momentum with high quality tenants and perhaps our most challenging lease up asset acquired from Blackstone. We're seeing nice activity on the balance vacancy despite only just beginning our more significant capital improvements. Even after signaling nearly 440,000 square feet of leases in our Silicon Valley assets this quarter, our pipeline of deals for those markets that is real activity or trading paper on LOIs or leases is very consistent.

Overall, fundamentals across the Silicon Valley remain very strong, characterized by vacancy hovering around seven percent, which is at or near its historic lows, stable or rising rents and positive net absorption. Further, new construction supply continues to fill up nicely. As of the end of the third quarter, projects under construction that are expected to deliver in the next six to eight months are approximately 75% pre leased. We view trends in the VC funding market as a net positive in the quarter and believe the sector is positioning itself nicely for a rebound over the next twelve to eighteen months. Funding for companies was down this quarter as The U.

S. Election and potential interest rate hike are creating market uncertainty that is carrying over into Q4. But in parallel, VC firms are building their war chests with Founders Fund, Excel, Andreessen Horowitz and most recently Greylock raising billions of dollars in funds. And the IPO market as well is opening up with successful exits by several companies, including Twilio, Aptio and our Nutanix. Bottom line is, over the next year, we believe that the environment is shaping up nicely for increased venture investments.

On the disposition front, we expect to close our previously announced sale of $12,006.55 Jefferson in Playa Vista in the coming days at a 30% premium to our basis. We continue to evaluate disposition opportunities, and we're still finding unique value add acquisition targets in our strongest markets. We've been particularly focused on opportunities in Seattle and Los Angeles over the last few months where more gradual recoveries have generally kept pricing attractive longer than say the Bay Area. We announced purchases at our headquarters building 11601 Wilshire in Los Angeles and Hill 7 in Seattle prior to this call. Around 80% leased both are lease up plays.

Whereas Hill 7 is a premier quality new construction, 11601 affords us the opportunity to command higher rents and encourage tenant retention through capital investment. In Seattle, we remain focused on downtown where the market conditions continue to tighten as high quality tenants expand. Vacancy dropped to 8.1%, which is the lowest direct vacancy since Q3 of 'eight, accompanied by more than 370,000 square feet of positive net absorption. Wirehaven's move to Pioneer Square made it the fastest growing submarket this quarter as vacancy dropped to just over 5%. Still about a year from completion, we're seeing consistent interest on the balance of 55% pre leased 450 Alaska Way project and remain comfortable with the city's current development pipeline, which at the end of this quarter is over 60% pre leased.

And even more impressive and a testament to the market's robust demand, the 4,400,000 square feet delivered in the last twelve months is over 95% leased. In Los Angeles, office using employment is expected to continue to expand in 2017. And in Westlake, Class A rates increased slightly to $57 per square foot, up 1.5% in the quarter and 6.5% year over year. Vacancy did tick up 50 basis points to 10%, but is still down 200 basis points year over year. Hollywood and Burbank were two of the biggest contributors to positive net absorption, posting 150,000 square feet and 100,000 square feet, respectively.

And rents in Hollywood remained around $52 a foot, and we continue to evaluate several lease opportunities for our Q development, which is only expected to deliver sometime in late 'seventeen. We see demand equal to 6x the total building square footage. Our relationship with Netflix, the company that's leading the media and entertainment industry, has only expanded, most recently resulting in a ten year agreement to occupy stages and production offices at Sunset Bronson. Netflix is now set to occupy more than 420,000 square feet within our portfolio, and this is the latest commitment is supplemental to any future interest in Q or other projects that we may have. All of our various deals with Netflix highlight the massive shift in content, which is created and distributed and recently announced the acquisition of Time Warner by AT and T signals further industry realignment.

As a growing number of media companies spend billions to produce a pipeline of original content for streaming anytime, anywhere, our studio ownership affords us unparalleled facilities and capabilities to participate in that growth. This is something we've spoken about for several years now. We can provide locations for and expertise in content production to companies like Google and Amazon and support companies like ABC, CBS, HBO and Showtime as they build out their digital infrastructure for global branding and distribution. And by capitalizing on these industry shifts, we expect studio cash flow to continue to become increasingly predictable and stage adjacent office space even more valuable. This confirms our original investment thesis regarding the studios and that is an element of our business with significant potential to grow.

Further, these trends, while currently more concentrated in Hollywood, will ultimately spill over to and benefit other Los Angeles markets. Although smaller in scale, our Arts District investment has similar characteristics to our Hollywood entree ten years ago, in that we're among a handful of early movers to identify the seeds for future office demand from leading creative companies. The Neighborhood's growing appeal for these types of users have documented recently by several national publications. Warner Music's move was a long anticipated one by us and others and is most certainly legitimizes the Arts District in a way that increases the value of our holdings. Even so, pre Warner Music deal, with our Fourth and Traction delivery in early twenty seventeen and four '0 5 delivery in early twenty eighteen, we've added demand equal to more than 2x the combined building square footage for these two assets from a variety of service and creative firms.

And I suspect our investment in the Arts District will ultimately prove out as another example of what our company does best, identifying and realizing opportunities that others don't get access to overlook. As for Warner Music leaving Pinnacle, they've already gotten a subtenant for about a third of their space who's looking to expand both in terms and square footage. And Warner's lease runs through the end of twenty nineteen, which combined with LA's very limited supply of big blocks of space gives us plenty of options. With that now, I'm going to turn the call over to Mark, who's going to speak to our third quarter financial highlights. Thanks, Victor.

Funds from operations, or FFO, excluding specified items for the three months ended September 3036, totaled $67,400,000 or $0.46 per diluted share compared to FFO excluding specified items of $63,000,000 or $0.43 per share a year ago. Specified items for the 2016 consisted of acquisition related expense of $300,000 or $0.00 per diluted share. Specified items for the 2015 consisted of acquisition related expense of $100,000 or $00 per diluted share. FFO including specified items for the three months ended September 3036 totaled $67,100,000 or $0.46 per diluted share compared to $63,100,000 or $0.43 per diluted share a year ago. As of September 3036, our stabilized and in service office portfolio was 96.590.7% leased respectively compared to 96.591.1% at the end of the second quarter and 94.589.5% a year ago.

The 40 basis point decrease in our in service portfolio lease percentage this quarter is largely due to the inclusion of our newly acquired lease up asset 11601 Wilshire, which was 84.8% leased as of the end of the quarter. We may see a similar result next quarter upon incorporating Hill 7, which is currently 80.4 leased. Turning back briefly to Victor's point on this quarter's rent spreads. Nutanix pre existing lease was signed in tranches from 2014 to 2016 with rents subject to annual increases. In addition, we renewed the lease nearly two years early, pushing out their original 2018 termination date to 2021.

As such, the renewal rate represented only 3% growth off the expiring rate. Give you a better sense of the deal's overall impact, excluding the Nutanix renewal, third quarter GAAP and cash rent spreads would have been 4432% respectively versus the reported 3020%. Net operating income with respect to our 31 same store office properties for the third quarter increased 9.3% on a cash basis and 9.5% on a GAAP basis. The trailing twelve month occupancy for our media and entertainment properties increased to 87.1% from 76.8% for the same period a year ago and net operating income increased during the third quarter by 63.9% on a cash basis and 51.7% on a GAAP basis. As Victor mentioned, we're seeing heightened demand at both studios, which contributed to higher occupancy and net operating income along with our returning to service certain stages and production offices we previously taken offline for improvements at Sunset Bronson.

Our completion of parking structures at both studios at the end of last year also contributed to this quarter's substantial net operating income increase. The strength of our balance sheet continues to afford us excellent access to capital. With regard to financings, in July, we completed a $200,000,000 private placement from which we applied net proceeds from $150,000,000 of ten year 3.98% senior guaranteed notes to repay amounts drawn on our credit facility to fund our 11601 Wilshire acquisition. Subsequently, we accessed the additional $50,000,000 of seven year 3.66 senior guaranteed notes also to repay amounts outstanding under our credit facility. Concurrent with the closing of our second joint venture with CGP IB to acquire Hill7, we closed a secured nonrecourse $101,000,000 loan at a fixed rate of 3.383 due in 2028.

This quarter, we are pleased to expand our partnership with CPPIV, one of the largest global pension funds on our Hill Southern acquisition. This deal was a follow on to our sale of a partial interest in 1455 Market to CPPIB in early twenty fifteen. We're currently CPPIB's exclusive West Coast partner and we'll continue to evaluate each opportunity to determine if it's a fit for our joint venture structure. With regard to other funding sources to execute our business plan, be it acquisition or otherwise, we have plenty of dry powder, including at least $325,000,000 undrawn on our credit facility upon the closing of 12655 Jefferson. In general, our capital structure and credit metrics continue to afford us exceptional liquidity and access to the highest quality capital providers, debt and equity alike.

Turning to guidance. We're increasing our full year 2016 FFO guidance from the previously announced range of $1.71 to $1.77 per diluted share excluding specified items to a revised range of $1.74 to $1.78 per diluted share excluding specified items. This reflects our third quarter FFO of $0.46 per diluted share excluding specified items as well as the transactions mentioned in our press release and on this call, including the sale of 12,655 Jefferson in the fourth quarter. This guidance assumes full year 2016 weighted average fully diluted common stock in units of 147,000,007 and $40,000 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 that otherwise excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. And now I'll turn it back to Victor.

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

Operator, with that, we're going to turn the call over to you for questions.

Speaker 0

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. Our first question comes from the line of Nick Yulito with UBS. Please go ahead, sir.

Speaker 3

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

Speaker 2

Sure, Nick. Actually, I don't want let Art address that. He can give you some good color around that. Yes. So we're talking about the lease up portfolio with the exclusion of 11,601.

We're really talking about 20 basis points, which represents about 24 only about 24,000 square feet, and, you know, that's made up of, from two assets. One is POP, the other is the other is Gateway. And in both cases both cases, you know, the tenants are about 14,000, 15,000 square feet. We've added this to our VSP program, which we've been very successful at in leasing up. In one case, with Gateway, because of the demand in the market for smaller, ready to eat ready to go space, that's going to be divided divided down, and we'll that's already underway.

The plans are already underway. And and it popped, you know, because of the demand in the mid size range in that market, kind of 10 to 20,000 square feet, we're going to white box it. We feel we can we have a better opportunity to lease it up in that size range. And so there's certainly demand in both markets total space as we speak now. We're really dealing with a snapshot.

We're losing 20 basis points. We're dealing with a snapshot in time at the end of the quarter. Truth is, we do the Qualys deal a couple of days after. Instead of losing 20 basis points, we'd picking up about 190 basis points on that same lease up portfolio in the same span of time. And since then, since the Qualys deal, we certainly picked up some additional net new absorption.

So we're not I'm certainly not concerned at all on that little downtick because of the activity we have in the pipeline in leases and so forth. So I think that kind of takes you through it.

Speaker 3

Yes, that's helpful. And then just one other question is on Cisco. I know that the early termination, right, I think the 2017 at Campus Center for over 400,000 square feet. We've heard from some brokers in the market that the expectation is that Cisco probably doesn't stay in that space. Can you just talk about what you're expecting there?

And ultimately, think that's also a mark to market opportunity for you guys.

Speaker 2

Nicky, it's Victor. So I will tell you we've engaged our brokerage team with their brokerage team. And just to be factually correct, they expire at the end of 'nineteen. They don't expire at end of 'seventeen. They have an option to terminate at March.

They need to let us know by March 1 to move out by the end of 'seventeen. We've always said that we're reaching out, we're going through conversations. Candidly, they've been fairly quiet. And as a result, I think it's going be challenging for them to get out by 2017 since they haven't really come to us yet. My guess is they'll be there through 2019.

And then at that point between 2017 and 2019, we'll see what happens. But we're on top of it. And in terms of the mark to market with that asset, I mean, it's a slight increase, but it's nowhere near competitive to what I mean, compared to what we have in a lot of the other mark to markets in our portfolio.

Speaker 3

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

Speaker 2

Yes, exactly. It's newer space. I think the value add from our standpoint in terms of real capital dollars are going be a lot less than we normally do for our creative office portfolio. You got it, buddy.

Speaker 0

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

Speaker 4

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

Speaker 2

Well, Art, do want to take that? Yes. So the activity on the activity, we're seeing an uptick in that market. We're seeing an uptick in mid sized to larger deals over the last couple of quarters. Certainly, what we have is probably from the 20,000 to for what's left over 70,000 square foot until we've got multiple offers going out on that.

We're really when we talk about Metro, we're really talking about the Hillsdale, kind of the large blocks that are available there. And I think we got about 180,000 feet vacant right now, and we got about 80,000 square feet in negotiations in various forms of leases in the sort of that common area portfolio that we have.

Speaker 4

And are you guys adjusting rents at all there to kind of get this activity going? Or is it just things are just picking up in general?

Speaker 2

Yes. Think things are picking up. We've also done some capital work, some interior and exterior work that's making it more appealing. So no, we haven't in fact, the last kind of the last couple of deals have been ahead of underwriting.

Speaker 4

Okay. And then on the Nutanix deal, I mean, it sounds like you guys basically just gave them an escalator bump to get them to stay and push it out. I'm just curious, I mean, I would have thought market rents in that market would have been a little bit higher here, seen some growth since 2014. I mean, were you guys worried that they were going to leave? Or No,

Speaker 2

no, no. So let me sort of give you the top line and then Mark can get into the details. They're at $17.40 at Metro. They were 165,000 feet. What they had a must take for almost 40 no, 39,000 feet, which they had based upon the deal that was negotiated on their original deal.

So all we did was push out the lease for two years to accommodate the must take. So the market rent that they were at was based on their agreed upon must take. So it wasn't that the market conditions were different. It was based upon their demand needs, and there was never any conversation around them leaving that space. But I think they're growing, and I expect to hear more from them on that.

The bulk of the 165 renewal was footage that was actually executed in '15 and even '16. So that 3% mark to market on that renewal is not a reflection of some, you know, sort of pullback in any respect of where market has been trending to in terms of rents, but rather the fact that the lease that we were renewing was a very, you know, it was a very recent lease that you know? And and, you know, rents reflecting more like fifteen and sixteen rents. Right? There just hasn't been that much passage of time in order to get a large mark to market on that renewal that pushed out the incremental two years.

Speaker 0

K. And did you guys

Speaker 4

give them any TI or free rent on the renewal?

Speaker 2

A little a little TI. No free rent, I think. Right? Little just a little TI just because of space. Yes, on the additional space, obviously, but not on the renewal.

Speaker 4

Our

Speaker 0

next question comes from the line of Blaine Heck with Wells Fargo.

Speaker 5

Thanks. Good morning out there. Victor, obviously, you guys are ahead of the expectations on leasing. You talked about, I think, 2,000,000 square foot full year figure earlier this year and exceeded that with this quarter. So I guess, can you put your finger on anything specific that's been driving the better than expected demand in your portfolio?

Speaker 2

So obviously, you gave me the opportunity to commend our leasing team and Art and all his guys, so thanks for that. Without them, we wouldn't have been able to accomplish what we wanted to accomplish. I think what we've done overall is amassed the portfolio, specifically the transition around the Blackstone portfolio. We always said it needed to be repositioned. I think we did it a lot quicker than we thought.

Our initial budgetary time frame was a three- to four year period. And as a result, we turned it around in a twelve- to twenty four month period. And that's put more space in the marketplace that a lot of tenants, quite frankly, never looked at. If I'm looking at our activity, what we do is we sort of chart two, three and four sort of anywhere from LOIs into leases. And for our leasing activity, the preponderance of what's going on right now, either new leases or news or backfills for tenants that are over 10,000 feet right now in that portfolio, is pretty much as good as we've ever had in terms of the flow of tenant activity and the consistency of the demand there.

And the numbers are very impressive across the board. So I think we've repositioned those assets. We put a lot of capital dollars in quickly to the ones that really needed it right away. There's a programmatic plan going forward. And I think the market sort of understands that we're long term holders.

We're not short term guys.

Speaker 5

Yes. So that's helpful. I guess following up on that, you've seen very good activity in that kind of lease up portfolio. I guess, are you seeing any big differences in tenant demand or behavior in The Peninsula versus what you're seeing in CBD these days?

Speaker 2

Think the only thing I would comment Art, jump in on this, but I think the only thing I would comment is lease term seems to be longer. The desire to have longer lease terms, the five to seven is more like seven to 10. Isn't that right? That's right. Yeah.

And listen, also, at the end of the day, Blaine, I think people have asked us this question, we are seeing no pushback on rent, consistent with the first two quarters of the year prior to this quarter. And concessions are flat to well, I'll just say flat. Don't know we can say there's no pressure concessions right now. So we're not seeing anything of any magnitude.

Speaker 5

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

Speaker 2

Well, it's an asset by asset answer. And so off line, I'm sure Mark and Art can sort of walk you through that on that basis. But overall, I don't think anything in the portfolio is looking in terms of that specific portfolio is looking to be repositioned greater than through 2017. I think the anticipation with the activity and the capital dollars applied by the end of twenty seventeen, all those assets should be online, if not sooner, with specific assets in play right now. We've got I'm just sort of looking at the amassing of some of the assets that are being backfilled in the expirations through 2017 on that.

We've got a tremendous amount of activity. And obviously, as you know, the mark to market dollars the rent differential is going be pretty impressive.

Speaker 5

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

Or would you consider any stabilized acquisitions?

Speaker 6

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

Speaker 0

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

Speaker 7

Great, thank you. I guess starting Victor, you had commented you expect to see significant CBD San Francisco leasing activity in the year end, especially larger tenant. Can you provide more color on what you think we'll see?

Speaker 2

Yes. I mean, listen, as you know, I think we're 97% leased in the city right now. Is that right? 9696.5% or something like that. So we've a couple of large spaces that we have tremendous activity on.

And one in particular, we've got over two specific tenants looking for the same space, which is pretty impressive numbers overall. And so we're seeing that large space in the market today, there seems to be a demand for that. And I think as a result, we're going to see some pretty impressive numbers from a mark to market standpoint in our portfolio. And I got to believe that if it's happening with us, the space that is also in the marketplace has got to happen with others. We're not going to be unique to the market.

So it's a positive sign in the city, and the demand is still the same kind of mix and quality of tenant that you would think is in the works right now. So they're high quality tenants with great credit.

Speaker 7

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

Speaker 2

Well, so I'll make I'll sort of make two comments around that, one more generic and then one more specific. So in the Valley specifically, we're looking at a high single digit year end number in terms of where the markets should exceed year over year. But when you look at our portfolio, and it's a blend, and you've seen those numbers for the most part. We're looking at our 17 expirations, And we're looking at just our tenants over 10,000 feet that we're in conversations with either on renewals or new deals or backfills. And it's almost a million feet of transactions right now, and we're seeing you know, a 40% of conversations are going on in that million feet right now which are pretty consistent to renew or backfill and we're seeing over a 50% increase in mark to market rents.

Speaker 7

Okay. And that's and then I guess while you're talking about 17, I mean, any known move outs? And then specifically, any have you been discussing any discussions with AIG in July?

Speaker 2

So the two big no move outs, I should say, well, what we had the two big no move outs are obviously AIG. They've come to us to stay for partial space. We are not going to entertain that because we've got enough activity for the whole space. And and well, I was just gonna give sort of the rough number on that. They're they're 23,000 b.

Yeah. Rolling at 47 fives. Going to? 70 plus. There you go.

And and then there's BofA, which is not a known move out because we have not heard from them, but the the reality is they're blended $11 roughly going to, I don't know, Jamie, 50 something like that. So my guess is the choice will be theirs to stay. But the activity, think, Mark I mean, Artfield's on $14.55 for those guys is pretty strong, especially specifically in the tower, he's already got people interested in the podium.

Speaker 7

Okay. I'm showing AIG your supplemental says AIG is a 132,000?

Speaker 2

Yeah. Yeah. That's yeah. Sorry. I think we picked up a little bit of that footage potentially after the quarter.

They might be $1.23 right now, Jamie. But yeah. It might be $1.23 right now.

Speaker 7

Alright. You said you said 23. Alright. It's $1.23. And then beyond that, you're saying there's really no chunky move outs?

Speaker 8

No. Those are the big ones.

Speaker 2

And the other decent sized one is Bosch in Palo Alto. They got 58,000 feet. That one, we're in discussions with. Either way, they're, you know they they either renew or we backfill, but they're at $66 in a market that is probably $80 plus right now.

Speaker 7

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

Speaker 2

So let's not over exaggerate what the IPO market may or may not be for Inexit because we all know that this year was pretty anemic at best. Fortuitously, for our standpoint, we had a couple of wins with tenants of ours that got through that window. I think, more importantly, less around the IPO market but more about the recapitalization and distribution of capital. When we're talking about the VC market, when we're talking about the amount of money that they've raised, they have to they have a finite period of investment to get out, and we think that those opportunities will start in 2017 and continue throughout. I can't proportionately say that those dollars are going to be allocated in the first half of their investment term versus the second.

But I can tell you, when you're talking about the billions that have been raised, those dollars going to get out in 2017, 1819 and some will exit. There are obviously some very large potential IPOs on the horizon that may crack the window for others to follow, but we'll have to sort of wait and see. I'm more optimistic on the distribution of capital on the VC side and the ability for them to invest in some of these companies that are not early stage guys, but more middle and upper.

Speaker 7

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

Speaker 2

Yes. Mean, listen, if you look at sort of the pipeline of guys that are looking at our space, the quality of tenant is very, very secure. We sort of talk about, from the real estate standpoint, the deals that we've signed, basically, through the first three quarters of the year, it's still a sixty-forty percent public companies versus private companies, sixty-forty tech versus non tech. And Mark's great statistic about companies that are less than ten years in existence that have signed in our portfolio and that we're looking at our portfolio are right around 10%. So the quality of tenants that are going into the real estate markets that we're in is still very high.

Speaker 0

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

Speaker 9

Hey, good morning out there.

Speaker 2

Hey, Al.

Speaker 9

Hey, how are you? Just a few questions here. I guess, first, maybe just switching to the studios for a minute. Yeah. I realized that they're not fully occupied, but, you know, just in think, not totally sure how the lease structure works.

But given the increased demand for content, is there a way for you guys to sort of get more out of the space that out of the studio space you have as far as leasing it to more users? Or the way the leases are structured, people have it locked up whether or not they're using it. So in a sense, maybe it's maximized as much as you can.

Speaker 2

So I'm I'm gonna start, I'll have Bill jump in for a second here. But, you know, we're referring to, you know, Netflix and Icon, and then the new deal we just did with Netflix both for, Office and Soundstages, which is an additional almost 100,000 feet combined. The activity around that new lease is sort of indicative of what the content play with all the other players that are looking at our Gower and the remaining stages that we currently have as well as the office space. I think the interesting thing, Alex, is you're looking at a market where the space is going to be accounted for and leased. And as to date, the stages that Netflix has had an opportunity to take down for their long term and they're going to take down, they will fully occupy them.

They're going to have a consistent flow of production, and that's where the need for back office space is and the demand on that. And that's why, as Mark mentioned, they've expedited their occupancy on Icon from two years to a year earlier than anticipated or thirteen months earlier, I think that messaging for the other guys in the business is gonna be consistent. And Bill's sending off that right now with not just the guys I mentioned, the HBO's and Showtime's and ABC's and CBS's and Fox, but others as well. You want to comment on that, Bill? Yeah.

I think what's happening is that the streaming media companies, again, they don't really own their own physical facilities as traditional studios. So they need to figure out a way to I'll use the term warehouse space. They also don't follow the traditional pattern of network television. So they basically produce in bundles, and they stream that content on a global basis in bundles as well around sort of around the clock kind of way of doing it. They they are Netflix just announced

Speaker 8

that they're gonna have 50% of

Speaker 2

their content be original content in the next twenty four months, they're gonna have to up the ante. What's happening, all the other players around them are gonna do the same. So the the the demand is gonna continue to increase. The amount of supply on this on this on this this side in LA is gonna stay pretty stable, so we'll still be in a very, very strong position.

Speaker 9

Okay. Okay. So that's helpful. And then, on the acquisition side, Alex, you guys mentioned you're more focused on LA and Seattle, which is consistent with your investor day. But just given where pricing has gone in LA, it's it would seem like the secret is out.

So one is between the two markets, should we expect more Hill sevens, more Seattle deals? Or do you see that the rent growth in LA is such that even where pricing is today in the sort of going in three handles that you still see some pretty good opportunity on the next few years even buying at today's prices in LA?

Speaker 2

Sure. I think,

Speaker 6

you can expect that we're gonna continue to look at opportunities in both markets. We still think that for the right opportunities, can find good value. We haven't been, as you know, the buyers of of properties at three three handles looking to get it to a five. We tend to look at things that we can get to the real estate sooner and and get outside deals. So we're gonna continue to stick to our investment thesis and look for those opportunities.

I do think, you know, we still think there's good opportunities just where we are in the cycle, where we see rents going in both markets, find opportunities that will be attractive.

Speaker 9

Okay. But as far as, the rent growth that you see in Seattle and in LA, would you say they're similar trajectories Or is one market seeing faster rent growth, you know, as you underwrite acquisitions that you're looking at in either LA or Seattle?

Speaker 6

I I think they're both fairly balanced, especially within the specific sub market that we look to invest in.

Speaker 0

Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Just

Speaker 8

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

Speaker 2

Sure. So I mean, currently, today, our relationship with CDP is one that we look to quality of real estate in the markets that we are in. So they've not differentiated from in terms of the alliance of our regional and marketplaces and the class of real estate that we're in. I think clearly, going forward, if there were other opportunities like a fourteen fifty five in the existing portfolio to bring them in something existing or something like a Hill seven, which is a brand new construction with lease up opportunity, they would be an absolute identified potential partner for us. Not to say that we need to use them.

Our balance sheet, the way Mark has managed it, is such that we have capacity. In terms of other partners going forward, clearly, we've been approached by a number of them. We like our relationship. It takes a long time to negotiate sort of a JV agreement. And so if you have one that works and we're comfortable with a partner, that seems to be our desire.

Not to say that we wouldn't look at another partner down the road, but we're focused on that relationship to the extent that the assets match our sort of game plan going forward with them.

Speaker 8

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

Speaker 2

So that's a great question. Listen, historically, we've always looked at 100 to 150 basis points wide of where we trade our Class A stuff in our similar markets. That's going to be a pretty tough comp today to validate, given the fact that there are very few of them out there that have one traded and two are valued. Also, when you look at our competitive set of our Class A real estate there, it's hard to argue that Icon, as an example, would be anything less than a five cap. It would have a four handle in front of it.

So my guess is if you're looking to value these relative to stabilized office that is not an Icon type asset, we're probably talking somewhere around six, six point five hours. So you sort of in that range.

Speaker 6

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

Speaker 8

Yeah. It certainly seems like the combination is tough to replicate, so that that will make sense. Thank you very much.

Speaker 2

Thank you.

Speaker 0

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

Speaker 10

Good morning. Last question, I guess. But so before you got started in Silicon Valley and The Peninsula, you had just kind of I can't remember the chain of events exactly, but you just kind of finished up in San Francisco and then you took on that major effort and it's obviously worked out great for you. So now I'm curious what you think about the future for HPP beyond Seattle, Northern California and Los Angeles. Do you have designs on taking another rifle shot at a nearby area?

Or do you think that you'll just now build upon what you have here from a market individual region perspective that you have in the portfolio today?

Speaker 2

Yes, Rich, thanks for the question. I think we've been pretty consistent in our thought process. We think our markets are some, if not the best in the country. And we think that there's opportunities with the Central Northwest in the Bay Area and in L. A.

In our current markets and in the surrounding markets that are around those that we see opportunities and that we're going want to expand in. We have no desires in going to other markets at this time. We're not even sort of evaluating those other markets. I think there's just enough opportunity. And I think the platform that we've positioned with our management team around those markets is rock solid.

As a result, those are the ones we're going to focus all our energy on.

Speaker 0

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

Speaker 2

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

Speaker 0

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation, and you may disconnect your lines at this time. Have a wonderful