Hudson Pacific Properties - Earnings Call - Q3 2017
November 2, 2017
Transcript
Speaker 0
Greetings, and welcome to Hudson Pacific Properties Incorporated Third Quarter twenty seventeen Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Kay Tidwell, Executive Vice President and General Counsel.
Thank you. You may begin.
Speaker 1
Good morning, everyone, and welcome to Hudson Pacific Properties Third Quarter twenty seventeen 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, certain information presented contains forward looking statements. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions. Potential risks and uncertainties that could cause the company's business and financial results to differ materially from these forward looking statements are described in the company's periodic reports filed with the SEC from time to time.
All information discussed on this call is as of today, 11/02/2017, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented in this call represents non GAAP financial measures. The company's earnings release, which was released this morning and is available on the company's website, presents reconciliations to the appropriate GAAP measure and an explanation of why the company believes such non GAAP financial measures are useful to investors. And now I'd like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?
Speaker 2
Thanks, Gaye. Good morning, everyone, and welcome to our third quarter call. We had a very strong third quarter. On the leasing front, we signed over 460,000 square feet of new and rural deals at 32% cash and 46% GAAP rent spreads. That brings our year to date leasing activity to approximately 1,500,000 square feet at 41% cash and 60% GAAP rent spreads.
Fundamentals across our markets remain strong, if not exceptional. While I'll touch on each market in a minute, it's worth noting upfront that our demand pipeline stands at 1,600,000 square feet. That's elevated, in fact, from our last call and driven by increased demand for availabilities in our Silicon Valley assets. In addition to successfully executing our inaugural public bond offering, which Mark will speak on in a moment, in the third quarter, we've moved forward on several dispositions of its non strategic assets. In September, we put our 65% joint venture interest in Pinnacle one and two under contract to sell for a combined sales price of $350,000,000 Several factors led us to conclude our capital could be put to better use, including a joint venture partnership that had run its course, continued softness within the Burbank marketplace and significant near term role of two of the building's largest tenants.
We expect the Pinnacle transaction to close in mid November. Regarding dispositions, we're also exploring the sale of two of our Palo Alto assets, Embarcadero Center and 2180 Sandhill Road, which are outside the sought after Stanford Research Park, where the remainder of our Palo Alto holdings are concentrated. And should pricing prove attractive, these dispositions will also further our efforts to rebalance our portfolio in terms of the ABR generated across our core markets. Now to our markets. I'm going start again this quarter in Silicon Valley.
Bottom line, demand for high quality tenants remains healthy. Silicon Valley had 115,000 square feet of net absorption in the quarter and 1,600,000 square feet of gross absorption. Vacancy did increase 60 basis points to 10.3% in the quarter, and rents were essentially flat at $57 per square foot. While this can be attributed in part to new deliveries and sublease availabilities, there's good activity on both. The 5,900,000 square feet under construction in Silicon Valley is 70% pre leased.
We're also seeing significant absorption of large blocks of sublease space, which declined about 4% in the quarter. Since our last call, Amazon subleased 177,000 square feet from Ericsson at Santa Clara Square. WeWorks subleased 450,000 square feet at The Village At San Antonio Station in Mountain View, and MapR took 80,000 square feet of Palo Alto's network Santa Clara sub lease. Downtown and North San Jose have quickly become a magnet for major tech companies. And in addition to Apple's up to 4,200,000 square foot campus and Google's bulk purchase of 16 properties for an urban transit oriented village, Microsoft announced plans to build at least 380,000 square feet on a large site recently purchased in those markets.
We expect that over time, this type of owner user acquisitions and development will displace existing and draw in smaller new tenants, which is ideal for our current assets in our portfolio. Small deal volume has remained robust. Over 60% of Silicon Valley's deals this quarter were below 30,000 square feet. Our TechMart asset in Santa Clara is a good example of our ability to maintain leasing momentum despite larger block availability. In Q3, Techmark's leasing percentage increased nearly 500 basis points.
Each of these deals averaged six seven hundred square feet. In fact, since acquiring the property and making select capital improvements, we've increased Techmark's leasing percentage by over 1,000 basis points even while 54% of the square footage had rolled. While working diligently to position our San Jose assets to capture demand immediately and the market tight as the market tightens, we completed our significant repositioning of gateway about a year ago. Interior and exterior improvements combined with the VSP or spec suites, which we built out as leases roll, have made that space very competitive. More than 66% of the square footage at Gateway has rolled since mid-twenty fifteen, yet we still had two thirty basis points of net absorption.
We've built out DSP spaces at our remaining San Jose lease up asset, Metro Plaza. After seeing increased activity at Gateway, we're now pursuing plans to reposition additional common areas at Metro Plaza. Demand is also healthy further along North Of The Peninsula. Quality tenants continue to enter the marketplace. The 2,600,000 square feet under construction is 75% pre leased.
The Peninsula had its third straight quarter of occupancy gains, nearly 640,000 square feet of net absorption. And like Silicon Valley, vacancy rose 20 basis points to 7% because of new supply, but asking rents still increased five fifty basis points to $72 per square foot. Next week, we're holding our grand reopening ceremony for Palo Alto Square. Improvements of that asset include modernized lobbies and conference rooms, a new fitness center and upgraded indooroutdoor amenities in common areas. Market conditions in Palo Alto are among the best in the nation with sub-four percent vacancy and $100 per square foot rents, But 76% of Palo Alto square footage has rolled since mid-twenty fifteen.
And with construction at the property either anticipated or ongoing, it's been challenging to show or lease space. Those headwinds should now subside over the coming quarters. We've already seen an elevated demand in pipeline and, in particular, growing interest from tech tenants that previously overlooked Palo Alto Square. Broadening that asset's appeal was the key component to our repositioning efforts. Our other lease up assets along the Peninsula, Peninsula Office Park in San Mateo and Metro Center in Foster City, 333 Twin Dolphin and Shore Breeze in Redwood Shores share a common theme.
Vacancy is being comprised of more outdated and or larger, say, 20,000 to 25,000 square foot spaces. So we've needed to upgrade and, in many instances, break up the space to appeal to robust small tenants' demand in those submarkets. And collectively, at these assets, we have good activity on about 50,000 square feet of VSP suites and about approximately another 40,000 square feet in the pipeline, which should hit the market between early December and the February. We'll reload our VSP suites as tenants vacate and lease up continues. In San Francisco, large tenants are still driving demand in an increasingly supply constrained marketplace.
Asking rents were flat for the quarter at $73 per square foot, but vacancy dropped 40 basis points to 6.3%, in line with over 340,000 square feet of net absorption. Two breaking leases were signed: Facebook for 436,000 square feet and Dropbox for 736,000 square feet. Our stabilized San Francisco portfolio is now 98.5% leased. That includes 33,000 square feet with SNAP at 875 Howard, which had 110% mark to market on rent and our renewal and expansion with Hotel Tonight at 901 Market, which had a blended 84% mark to market rent. We have over 300,000 square feet of expirations in 2017 and 2018 combined, which are now 58% below market.
Turning to Seattle, I'm pleased to announce a terrific addition to our team, Andy Witulo. Andy joins us as Senior Vice President at the Pacific Northwest. He most recently was at Beacon Capital where he ran Seattle's operations, asset management, acquisitions and development. And I'm confident Andy's expertise, relationship and Seattle tenure will give us a competitive edge as we push to grow our platform in that marketplace. And I suspect you'll all have a chance to meet him.
You'll equally be impressed. Seattle's fundamentals continued to improve in Q3 as tech companies flocked to the city's urban core. Vacancy in Downtown Seattle fell 20 basis points to 8.8% along with over 430,000 square feet of net absorption. And Class A asking rates hit $44 per square foot, up nearly 1% quarter over quarter. The 5,300,000 square feet under construction is 54% pre leased, with more than 1,000,000 square feet delivered thus far this year is 99% leased.
In terms of our assets, Hill 7 is fully leased following our 54,000 square foot deal with WeWork for the bottom two floors. Likewise, our 20,000 square foot lease with lift at A3 King brought that building to 100% leased. And subsequent to the quarter, we leased 25,000 square feet at 95 Jackson And 21000 square feet at 450 Alaskan. That brings Jackson to approximately 80% leased and Alaskan Way to approximately 70% leased. So we're seeing great activity in all of our availabilities in that marketplace.
Shifting to Los Angeles. Organic growth in media and tech and the convergence of those industries continues to fuel demand for office space. West Los Angeles office conditions remain very tight. Rents increased over 3% to $60 per square foot, and we saw a second straight quarter of net absorption north of 100,000 square feet despite having vacancy being up 130 basis points to 12.2%. Rising rents in some cases caused tenants to consider alternative submarkets, which has impacted demand to some extent.
But even so, in Q3, we quickly re leased all 44,000 square feet of our six zero four Arizona building to ZipRecruiter at a 46% mark to market on rents. In Hollywood, vacancy is down 190 basis points to 13.2%, and Class A rents of $54 per square foot are up 2.5% year over year. And year to date net absorption of 515,000 square feet well outpaces other Los Angeles submarkets. We're tracking nearly 1,000,000 square feet of demand for our newest Hollywood construction project, EPIC. These are all high quality streaming content creators and our ability to deliver premier office space and studio access makes our portfolio uniquely qualified to meet their needs.
Amazon's recent decision to take 280,000 square feet of Culver Studios highlights the importance of access to sound stages and production offices for this user type. In terms of future development pipeline, we're finalizing designs for our entitled 106,000 square foot office development at Sunset Las Palmas Studios, and we expect to break ground as early as 2018 with delivery of that project approximately eighteen to twenty months thereafter. We're also working on master plans for entitlements for an additional 823,000 square feet of office at Sunset Gower and Sunset Las Palmas, and approvals related to these two projects and additional square footages are approximately two years out. With that, I'm going to turn the call over to Mark, who's going to walk through our third quarter financial highlights. Thanks, Victor.
Funds from operations, or FFO, excluding specified items, for the three months ended September 3037, totaled $78,900,000 or $0.50 per diluted share compared to FFO, excluding specified items, of $67,400,000 or $0.46 per share a year ago. Specified items for the 2017 consisted of transaction related expenses of $600,000 or $0.00 per diluted share. Specified items for the 2016 consisted of transaction related expense of $300,000 or $0.00 per diluted share. As of September 3037, our stabilized immune service office portfolio was 95.991.5% leased, respectively, versus 95.690.8% in the second quarter of this year. The primary drivers of these increases were our 54,000 square foot deal with WeWork at Hill 7, our 33,000 square foot deal with Snap at 875 Howard and multiple deals at Metro Center totaling roughly 29,000 square feet.
Net operating income with respect to our 32 same store office properties for the third quarter increased 12.3% on a cash basis and 6.2% on a GAAP basis. The trailing twelve month lease percentage for our same store media and entertainment properties ended the second quarter at 90.6%, up 70 basis points in the quarter and three twenty basis points year over year. This upward trend in studio lease percentage continues to reflect the heightened demand for stages and production offices. Same store media and entertainment net operating income during the third quarter increased by 15.7% on a cash basis and 2.5% on a GAAP basis. This was again due to higher occupancy and production at both Sunset Gower and Sunset Bronson.
Before turning to guidance, I'll touch on a few other items. First, I will comment on the 9085% year end lease targets for the 22 former EOP Northern California assets and the eight remaining lease up assets. As of the end of the third quarter, the former EOP assets were 87.4% leased, up 30 basis points over last quarter despite over 3.5% of related square footage expiring in the third quarter. We anticipate continued positive net absorption at the former EOP assets through year end even as we address fourth quarter expirations representing 2.4% of their lease square footage. Regarding the eight lease up assets, as of the end of the third quarter, these properties were 79.8% leased, up 80 basis points in the quarter despite 5.5% of related square footage expiring in the third quarter.
Looking ahead, we expect the lease percentage on the eight lease up assets to improve through year end. However, with fourth quarter expirations affecting 3.9% of the lease square footage, we have significant leasing to do to approach our lease percentage target. With over $2,600,000 of our $3,400,000 total Silicon Valley square footage located in San Jose, we thought it useful to briefly touch on our success in that submarket. Our five San Jose assets were 90.8% leased as of the end of the quarter, up 60 basis points over last quarter. That is essentially in line with the 91.3% lease percentage when we acquired them in second quarter twenty fifteen.
During our ownership, we have maintained the lease percentage of these assets even as nearly 40% of the square footage has expired. At the same time, we have improved cash NOI by more than 21%. Remember, although lease roll inherently slows the attainment of a 92% stabilized threshold, it's precisely what's generating such significant NOI growth. I'll also touch on the balance sheet following our successful public offering of $400,000,000 of senior notes in early October. The offering priced at 99.815% of par value with a coupon of 3.95% and a ten year term was more than 5x oversubscribed.
As part of that transaction, we repaid the entire balance of our revolving credit facility as well as a portion of our five year floating rate debt. Between cash on hand, 400,000,000 of line availability and capacity under our Sunset Gower, Sunset Pronsent facility, we have north of $600,000,000 of immediate liquidity. Together with the debt relief upon the upcoming sale of Pinnacle one and two, our percentage of floating rate debt sits in only 4% of our total indebtedness with only 18% of our indebtedness being secured. In short, the offering exemplifies our commitment to having a strong balance sheet and superior credit metrics along with the flexibility to access a variety of high quality capital sources to grow our business. Finally, with focus increasingly turning to 2018 and potentially impactful items on the horizon, I'll note that we don't have any sizable expirations in 2018.
As of the end of Q3, less than 10% of our portfolio's square footage totaling 1,300,000 square feet is scheduled to expire next year, about 70% of which is along the Peninsula or in Silicon Valley. Burlington Coat Factory at 875 Howard in San Francisco is the largest square footage expiration next year at about 95,000 square feet, but the impact would be minimal on our ABR. Plus they have an extension right, which we expect them to exercise. Note further details on lease expirations over the next eight quarters are on Pages thirty four and thirty five of our supplemental. Turning to guidance, we are narrowing our full year 2017 FFO guidance to a range of $1.93 to $1.99 per diluted share excluding specified items, maintaining the previous midpoint of $1.96 per diluted share.
This was compared to our previously announced range of $1.92 to $2 per diluted share excluding specified items. Specified items for purposes of this revised full year 2017 FFO guidance consists of the write off of approximately $900,000 of original issuance costs, such as deferred financing costs associated with the repayment of a 150,000,000 of our five year term loan due April 2020. It also includes the write off of approximately 300,000 of original issuance costs associated with the anticipated repayment of $85,000,000 of our five year term loan due November 2020 upon the sale of our interest in Pinnacle one and two. As always, our full year 2017 FFO estimate reflects management's view of current and future market conditions, including assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced on this call in our earnings release and in prior announcements. It excludes the impact of future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters.
For the sake of clarity, this guidance does not reflect the impact of a potential disposition of either Embarcadero Center or 2180 Sand Hill Road. There can be no assurance that the actual results will not differ materially from this estimate. With that, I'll turn the call back over to Victor. Thanks, Mark. Excellent job.
As we head into 2018, we are well positioned to capitalize on the growth trends and positive fundamentals in each of our core markets. We have an unmatched pipeline of development opportunities in Hollywood. We have outsized mark to market on lease expirations in San Francisco. We're poised to expand our platform of value add opportunities in Downtown Seattle, and we're generating additional significant NOI through leasing along the Peninsula and Silicon Valley. And I'm confident that we've got the right markets, portfolio and people to deliver additional value for our shareholders during the remainder of this year and next.
As always, I want to thank the entire Hudson Pacific team and particularly our senior management for their hard work this quarter. And to everyone at the level, we appreciate your support on Hudson Pacific Properties, and we look forward to updating you next quarter. Operator, with that, I'm going to turn the call over to you for questions.
Speaker 0
Thank you. At this time, we'll be conducting a question and answer session. Our first question is from Craig Mailman with KeyBanc Capital Markets. Please proceed with your question.
Speaker 3
Hey, guys. Mark, I just want to clarify. It sounds like you're walking back a bit from the 90 target for
Speaker 2
the Silicon Valley portfolio. Is that accurate? No. First of all, you kind of what was the number you said?
Speaker 3
The 90% target you guys had said last quarter.
Speaker 2
No, not at all. We're not watching it back. What's your indication on that?
Speaker 3
It when Mark was going through the expirations and the impact on it, it sounded like you guys No.
Speaker 2
He just he was just giving facts. He he is not walking back. He was just giving the facts.
Speaker 3
Okay. Alright. Just just wanted to to double check. So, I mean, it looks like you guys need about a 190,000 square feet to hit that. And
Speaker 2
can you just kinda give you said of the 1,600,000, a good
Speaker 3
amount of that is Silicon Valley. Could you kinda give the breakout of maybe what percentage
Speaker 2
I could see? What percentage of what?
Speaker 3
So 1,600,000 square foot demand pipeline?
Speaker 2
Yes. I mean right now, we're looking at of the 1,600,000 I mean since you're laser focused, it seems like in the valley between the valley and the peninsula, about 1,000,000 square feet is in the pipeline of that. So it's about 63%, 64%, something like that. There's about 465,000 feet in Los Angeles and 100,000 or so feet in Seattle.
Speaker 3
Great. And then, Mark, what was driving the better same store NOI guidance on
Speaker 2
the studios? Is that Las Palmas doing better than you guys thought it would? Well, Las Palmas won't be in the same store. Right? It's it's really just, you know, better performance at Gower Bronson.
I mean, those are they're trending incredibly well this year relative to last. I mean, I think we early expectation when we first guided early this year was maybe we'd get three to 4%, and it's it's looking quite a bit higher than that as we're nearing year end.
Speaker 3
Our
Speaker 0
next question is from Alex Goldfarb with Sandler O'Neill. Please proceed with your question.
Speaker 4
Good morning out there. First, just sort of broader market, just got off the Essex call. And on there, they were talking about sort of a job slowdown the fall of this year. They said it wasn't demand driven, it was just sort of lack of people to hire. What do you guys see as far as demand from the tech companies and the employers out there?
And do you notice a seasonality whereby it's maybe very strong in the summer and then it cools off later in the year?
Speaker 2
Well, Alex, we're not seeing an impact on the ground thus far. I mean there's modest job losses to the Bay Area, I think, in September. But year over year, it's still, I think, 50,000 plus jobs. I do think that we are at or near full employment. And obviously, there is a housing crunch factor that sort of is built in there.
I do think you're before we sort of touch on the seasonality, which I don't think I'm qualified to talk about on a seasonality basis because I don't think we see any definitive seasonality shifts, but I can tell you that I do think that the availability of qualified tech job people seems to be seems to be a factor. But, you know, then again, if you look up in Seattle, I think the number is 6,000 employees for tech tech jobs for the next two years. Amazon's looking alone for their additional 2,000,000 square feet that they need to populate. And there's similar sort of demand driver in Pacific Northwest with Facebook and Google and Apple for about 4,000 people. So there's a lot of jobs that need to be filled, and I'm not so sure where those people are coming from.
Speaker 4
Okay. And then the second question is CBS Studios, obviously, on the market. It seems like a big price. Can you just talk about one, how you guys think about that asset and doing it on your own, which would seem to be a little much just given where your equity is, so perhaps bring in a joint venture partner? And then two, just given the Amazon news for their Culver City lease there and others, it seems like the cat's out of the bag on studio space.
So if you can give your sort of expectations for how pricing may change on this versus when you guys bid on Las Palmas last year?
Speaker 2
Well, I don't know what kind of cat you have, but I don't think there's any cat out of the bag concept on the studio business. They've been running the movie business since the early 1900s, so I don't know what cat out of the bag concept that is. But also to leave that at that, in terms of Amazon moving into Culver, that's a fantastic thing for the industry. It's another feather in the Los Angeles cap for content providers. We've been talking about that we've known that deal has been coming down the pike as others are.
And so I don't think that's a negative at all. And quite frankly, it's a positive. It's taking stages off the marketplace that are not allocated to specific owned studios of the big core guys. In terms of CBS, I don't know what expensive number you're referring to. There is no posted number.
If you want to read the regs, go ahead and read the regs and get your information off of that. But it's inaccurate and it's not at all even remotely what I think expectations are. We won't comment on deals that we're working on unless we've tied them up. Clearly, that's a deal that is a fantastic piece of property in a marketplace that we think we're well suited to be the leaders and current leaders and future leaders in that industry. I'm not going to say anything else about that.
Speaker 4
Victor, I appreciate it. Thank you.
Speaker 2
Thanks.
Speaker 0
Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Speaker 5
Victor, all your responses so far seem pretty frustrated. Is there something else, any other message you want to get out here or?
Speaker 2
Jamie. This the question she's I guess I'd be frustrated if you had some accurate comments in your write ups today. That would be nice. I think you were the one who said we met. Is that right?
But if you looked at the contestants, I think we beat. You shouldn't write so quickly before you read all your information. No. It's raining in Los Angeles. I think that's probably where my frustration is coming from.
Speaker 5
Okay.
Speaker 2
What's your quest what's your question? You can talk about feelings later.
Speaker 5
Yes. Okay. So I guess I heard the same thing as Craig. So you're saying on the EOP assets, you guys are still comfortable with the 90% target. Is that the answer to his question?
But the eight piece of assets, you sound like you're not there, you're not quite as comfortable?
Speaker 2
Well, we'll see. I mean, all we were trying to do is relay that relatively speaking, there's a higher percentage of deals have to get done in that eight assets than they do on the 22 assets. Think we one thing I would add to that is, look, I guess there's a tendency to look at those eight assets and get a little myopic about it. Our goal here is to stabilize our portfolio in Silicon Valley that we bought that was underperforming. And that, in our opinion, should be looked at holistically against 22 assets.
If we're moving in the right direction against that wider portfolio, we think, one, not only does it reflect the strength of our performance, but also it's a better reflection of the overall market rather than isolating some subset of assets. By the way, I mean, we also provided commentary on just San Jose and you can see how well those are doing and that's a bigger portfolio than those eight assets. So I mean, one could choose to dissect whatever subset of assets they want as an indicator of performance. Our only point is we think the 22 assets is a better reflection of that, and we're not walking back that those leasing targets on that at all.
Speaker 5
Okay. That makes sense. Then on the construction pipeline, so did you did I hear you say 450 Alaskan Way and 95 Jackson are both farther along now than than is listed in the supplemental?
Speaker 2
That's right. We did a deal. You'll see in the supplemental in the footnotes that that was signed post quarter. So, naturally, it doesn't show up in the tables, but we've given the information around that so you can see what the impact of that is.
Speaker 5
Okay. And then what about the Downtown L. A. Developments? Fourth and Traction, any can you talk about leasing progress there?
Speaker 2
Yes. I mean, listen, you know what, I think the Fourth and Traction process in terms of it's completed. We're really right now about 250,000 square feet of demand for that project. We've got one tenant for a very large piece that we're going back and forth on, and it's sort of the chicken and the egg. Jamie, whether we decide to wait on that or do a couple of smaller deals.
I think we're very astutely aware of the spotlight on that asset not being leased. I'd say we have a lot of activity of smaller of scale. We could announce a couple of leases that would be signed maybe as early as the end of the year. But candidly, I think we're a little frustrated that we haven't signed leases at fourth and Traction to date. Maxwell is a different story because we're still in the construction process and that's going to be one tenant or two tenants.
And quite frankly, the activity on that seems to be even more surrounded about that comfort level of one or two tenants.
Speaker 5
Okay. Did you have any appetite to sell those assets before they're leased and just move on?
Speaker 2
You know, we never really considered it. Nobody's ever come to us and we've there are no users that have come to us and I don't I don't think that we would we would not be interested in selling to a user if they came, but, you know, obviously, we're not marking those assets.
Speaker 5
Okay. And then any update on Campus Center? I think you said in your prepared or in your press release that that's part of the good demand you're seeing.
Speaker 2
Well, think it's excellent demand. There's a short list of about 1,000,000 square feet of interest. Let's just sort of run through. Think we're ahead of schedule. I know we're ahead of schedule on our construction and the access to the space Right now, our repositioning is well underway.
I think the first building I was up there two weeks ago, the first building is looking great. The entire reposition is targeted for February. We got early access to the property even though they're still paying rent, so we're doing the work now. So we're ahead of schedule on that. But more importantly, of sort of the 1,000,000 feet of top prospects, I'm looking at in proposals on one tenant for 180,000 feet to 200,000 and then three tenants sorry, four tenants running between 700,000 feet each.
And then there's an additional 12 prospects for another 3,200,000 square feet with as small as 60,000 feet all the way up to 450,000 feet. The interesting thing is, is that whether it's us that lands these or not, these are tenants that are in the marketplace, and almost half of them are new and half of them are relocated. So that's a great sign for the area that there will be some absorption, whether it's us or somebody else. And we're not going off we're not moving off of our underwriting of onethree in January, twothree in six months and twelve months thereafter.
Speaker 5
Okay. All right. Thank you.
Speaker 0
Our next question is from Nick Yulico with UBS. Please proceed with your question.
Speaker 2
Thanks. Couple of questions. First, on the lease up portfolio, are any of those assets going to be
Speaker 5
entering your same store next year?
Speaker 2
They won't and they have to have been for the quarterly same store, they have to have been stabilized in the prior year. And so as you're since they're not currently stabilized, there would be no ability to put them in the same store even if they stabilize next year. That is to say, could reach stabilization, but they won't qualify to the same store pool.
Speaker 5
Okay. That's helpful.
Speaker 2
And then I guess just going back to some of the leasing you did in Seattle this quarter at the development and then also at the Hill Building. It looks like you did some leasing with Regis and also with WeWork. So what was kind of driving some of that, I guess, shared workspace demand in that market? How do you think about your thoughts on that space? Well, I'll start with Regis was done this quarter.
And that is there's new use concept, and that's over at 450 Alaska Way. That's a deal that we our team have been working on that deal for a considerable amount of time. There's a huge demand for small tenant use in Pioneer Square, and that space was sought after for those for that tenant. We'd focus on Regis for some time because we love their concept, and they took some space that was not what we would consider the the best space in the building. So it worked out well for us.
In terms of Hill 7, you know, we we we look at WeWork took that space. That that that's the lowest two floors of the building that made the building fully leased from that point on. It's I think at the end of the day, that deal was a very high rent. It was over $36 triple net rent. It had a substantial amount of TIs included to it.
And again, that serviced I mean, just that building alone, both vacant buildings beside us 100% vacant buildings beside us just took leases to Amazon. So the attractiveness to have that kind of co working space, so having larger users have some sort of flex space to be next to Amazon or the remaining the other tenants in that marketplace made a lot of sense from our standpoint. I kind of get where you're sort of going at, Nick, and I'll not it does not go unnoticed. That's the only WeWork lease we have in the whole portfolio.
Speaker 5
Okay. And and and do you have have you had
Speaker 2
done leases with Regis before? Yeah. We inherited Regis in in Northern California two two properties. Is that right? And then also one asset here in Southern California.
Speaker 5
Got it. Okay. Thanks, Victor.
Speaker 0
Next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question.
Speaker 2
Hey, Dave. Just wanted to
Speaker 6
ask you a couple of questions following up on the Campus Center discussion in backfilling Cisco. How much of the discussions that you're having there and the demand that you're tracking would be interested in kind of that excess land that you have for something other I mean, is that kind of a key component to any of your discussions today?
Speaker 2
So there's sort of two parts to that question, Dave. Some of the existing tenants absolutely want the ability to expand. And these are I mean, they're not all tech tenants, but they're some of them are fortune one of one of the tenants is a fortune a fortune ten ten company that is not tech, and, you know, they definitely want this for expansion. And it would be office in office related for a campus facility. I think you probably heard Microsoft took the space right next to us almost.
That space they bought is literally within a mile away that they're going to build their new campus on. And so you're seeing that desire in that area because of the access to, transportation and the labor force and the likes of that. The second part of your question is the interest level that we've also received on the excess land is for flex space. And so it's not necessarily pure office. It's flex.
We've not underwritten it yet because we've not gotten close to those conversations. But literally, if you stood on our campus and you looked across the field or the acreage or whatever you wanna call it, where the berm is, the most the first thing you see is a development project that is building a two story flex, and it was building by a developer here in Southern California. And they broke ground and put it up, and it's fully leased already. And that seems to be where the desire is on this sort of flex space. So we're contemplating that.
But we're early on in the process, and we're going to evaluate the existing tenants that are sort of at the table now. The bigger decision is going be, from our standpoint, is not who's going take that, what it's going to look like. It's are we going to split the project up or are going to sort of leave it for one tenant to take 300 to grow into four seventy five.
Speaker 6
Okay. Yes. Thanks for the added color there. On EPIC, I think you said 1,000,000 square feet of demand. Is that just what you're tracking in the market?
Or are those current conversations that you're kind of having with three, four, five different tenants? What's the interest level for a near term signing there?
Speaker 2
So I said 1,000,000 feet. It's not 1,000,000. It's 1.5 feet, and there are five tenants over a million and a half feet that are specific for tracking in that area. And those are tenants that have toured and or asked for RFPs or we are in proposals on. The additional 12 tenants is another 3,200,000.0 feet, and they are in that area and the marketplace, which is basically, I would say, Palo Alto South.
And so it totals about 4,700,000 feet. So we hope to get our fair share of that.
Speaker 6
And then over to Las Palmas, I think you or Mark said that you'd start the next building fairly soon there and then you're reentitling the rest. Obviously, you have Netflix on campus and Amazon made a previous commitment. Do you think that either one of those precludes those same tenants from expanding in those areas? And I guess maybe the alternate to that question does those commitments help you track tenants much more quickly? Are you seeing any of that?
Speaker 2
So hang on, Dave. I'm sorry. You were asking about Epic, these guys were pointing out right before. I thought we were still talking about campus. On Epic, we have had one tenant that has requested a proposal for the entire building that's a expanding tenant in the marketplace that's gonna come from, I don't know, Derek, multiple locations.
Right? They're moving from multiple locations and expanding from the West Side. They're not currently in Hollywood. And and we've had we've had three tenant increase
Speaker 6
up to 500,000 feet,
Speaker 2
and none of those are net worth. Going to your Las Palmas question, the 100 thou right right? The 100,000. On the 100,000 feet, I mean, currently, right now, we are building that as a as a as we've said in the past spec, it's a small building. It will be we're anticipating it to be a production type building, so multi tenanted to enhance the studio space that we currently have since there is really no what we would consider production post and pre Class A space at that facility.
And so as we are converting that facility over to similar to what we did to Gower and Bronson, it looks like that would be the high level demand there. We're not saying that we wouldn't have a single tenant, we haven't even shown our rent rates on that asset yet. But we're hopefully, we'll get our design review will go through in the next couple of months and we'll break ground by April 1, hopefully.
Speaker 6
All right, great. Thanks for that clarity on Epic. That made a lot more sense. Appreciate
Speaker 2
it. Sorry. No, it's alright.
Speaker 0
Our next question is from Blaine Heck with Wells Fargo. Please proceed with your question.
Speaker 7
Hey, guys. Can you talk a little bit more about your decision to market Embarcadero Place in 2180 Sand Hill? Just want to make sure there's really nothing concerning about that market for you guys and it's just more of a noncore to your portfolio? And second part of that question, specifically on Embargadero, it's a little under 80% leased. Would it be beneficial to try to get that back to stabilization before selling it?
Or do you guys think the demand is good enough that it doesn't really matter?
Speaker 2
Well, let me tackle your first question. I mean, clearly, Palo Alto is nothing concerning from our standpoint or I think anybody else who owns or has real estate there. It's clearly the hottest market in the Valley, and it continues to show the highest rents. We have now repositioned our building there. Is the activity that we're seeing and the rents that we're seeing are all consistent with what we perceptively have said the market conditions are.
So there's no hidden secret of Palo Alto, and there's no hidden secret as to why we're marketing those assets. The assets are not core to our portfolio. Marketo is fortunately a Palo Alto asset, but it is sort of on the outskirts of Palo Alto. It always was one of those assets we had a conversation on about its ability for us to maintain it or sell it. And we've always thought that, that would be a great candidate for us to sell.
I think in terms of your vacancy question, mean, I think we've got 100 packages requests for packages out. And the response so far on our pricing guidelines is from what what Eastdil is telling us is well well in our comfort zone of what we would be able to transact on. So we have no concerns on selling that with some vacancy. Quite frankly, I think it's attractive that we're selling it with the vacancy aspect there. Sandhill Road is Sandhill Road.
This is a boutique building. It's small. I think we're gonna give some historic numbers in terms of where we're gonna sell this at. And if we don't, we won't sell it. I mean, that's plain and simple.
But it's such a small asset, and we do have a little bit of a role coming there. So it's attracting some high net worth owner users, with with Zoox coming out in the first quarter of this coming year. And again, I think that asset has got another 100 or so packages out, and I think we're calling for offers on that in the next thirty days.
Speaker 7
Okay. Sounds good. Any sort of cap rate or range of cap rates you guys are targeting for that? And then also, did you I don't know if I missed, but was there a cap rate given on the Pinnacle sale?
Speaker 2
So the answer is if we gave you a cap rate in this call, then we would just kind of cloud the pricing, right? Wouldn't that be kind of obvious?
Speaker 5
Fair enough.
Speaker 2
We're not going to talk about cap rates on that outside. And in terms of Pinnacle, no, we didn't disclose a cap rate on that, I don't think. Did we, Mark? Well, somewhat indirectly insofar as you've seen the impact of it in our guidance. You know, I don't know that it I don't know.
I'm looking at Alex in terms of whether or not you feel, you know, that it wouldn't affect the sale or anything. I mean, we haven't closed yet. We historically don't comment on things until things get get closed.
Speaker 7
All That's fair. I can probably back into it. And then I guess with all the capital coming in, Victor or Alex, can you guys just talk a little bit more about the acquisition environment? You talked a little bit about CBS.
But are you finding any opportunistic investments on the office side out there in general?
Speaker 2
So yes. I mean, absolutely, Blaine. I mean, we're looking at, right now, a nice off market redevelopment value add play that's a fairly substantial sized project that we've been working on for a while. We've got a smaller project that we should be announcing shortly under contract in Seattle. We've got a bigger project in San Francisco actually that we're looking at.
We obviously have that $1,000,000,000 number for CBFs that everybody thinks is a value add project. And we have another Los Angeles asset that's also off market. So we are finding our fair share. I think we'll get our fair share. I'm not going to give a timeline as to when they come to fruition.
Mean, we are sort of at an interesting time of the year, right? Even if we were to tie up a project, you're not closing by year end. So it's everything that we're working on right now will be first quarter executed with maybe the exception of a smaller project up in Seattle.
Speaker 0
Our next question is from Rich Anderson with Mizuho. Please proceed with your question.
Speaker 8
Thank you. So on the same store, Mark, I appreciate the explanation. You don't add assets until they're both owned and stabilized in the year ago period, which is great. Most a lot of other REITs don't do it that way. They just need to own it in the previous period so they get the benefit from occupancy upside.
So that's a more conservative way to do it and appreciate it. The question is, 9% to 10% guidance, adjusted 10% to 11% for a while, gosh, on the Cisco lease term. How sustainable is this range? Is there anything about 9% to 10% or 10% to 11% or however you want to look at it that isn't something we should expect five years from now? Or is it just that you're getting so much role in certain markets that this type of high single digit type number is kind of foreseeable for a while?
Speaker 2
Well, I certainly I mean, look, if you look to twenty eighteen-twenty nineteen, which is kind of where we're more focused on expirations, which is going to be the key driver on the stabilized portfolio, the there's still lofty mark to market embedded in 1819. I mean, '18 is right around a 24% mark to market on expiration. '19 is in the high teens, and they blend, you know, to, like, 19% mark to market. And that is gonna be the primary driver of the NOI growth. And so and those are cash numbers I'm giving you, by the way.
So do you know, years from now, I think it's beyond any reasonable, you know, sort of, you know, projection. But I think two one year, two years from now, we could I expect this outpace our peer group in terms of cash NOI growth. And I don't know. Could we get to 10% year over year? It seems possible.
Speaker 8
I mean, that's good color. The idea is, well, you don't have a whole lot expiring next year. I think you mentioned 10%. Would you maybe pursue early a little bit more in the early lease or attack leases a little bit earlier and kind of capture some of this sooner rather than later?
Speaker 2
We are doing that. We consistently do that, Rich. Mean, I guys are there's a couple of larger tenants that we are in conversations with right now that expire in 'nineteen, and they have an option to go take it from there. We're doing that, of course.
Speaker 8
Yeah. I guess I'm thinking more yeah. I'm thinking more, I guess, than than you have been. But
Speaker 2
We'll take advantage of whatever opportunities we can to blend and extend. I mean, BofA, by the way, we did a large blend and extend with them just last quarter and Oracle is an example not to there's always we're always looking for that opportunity.
Speaker 8
Okay. Second question is, I attended the Boston Properties Investor Day and on Slide three fifty one, they talk about Silicon Valley. And they identify a few things different than yours. And I'm just seeing if you have any information why they might be so different. They have pre leased percentage of 38%.
You mentioned 70%. They have sub leased space going up. I think you said going down. I'm just curious, has there been some recent activity that maybe has closed the gap between what they see and what you see? Or do you just have no comment because you don't know what their metrics are?
Speaker 2
Well, I mean, listen, I didn't get Slide three eighty seven, and I didn't get Slide one to three eighty seven either. I can't speak to what their numbers include. I can tell you what ours You know, first of all, ours include, you know, active construction projects that are gonna be delivered, that have been approved. Ours include, you know, everything South Of Palo Alto. Ours do not include r and d because it's not competitive to our space.
We also we do include owner user data on that basis. So we're confident with the experts that give us that information on that. In terms of the sublease, I mean, I can go market by market in terms of San Mateo and Foster City, Palo Alto and Santa Clara as to where we see that is. And we look at what's leased and what's coming in the sublease market. And again, we are out there verifying the numbers that we are given by JLL and CB and the experts in those markets.
I don't
Speaker 8
I know if there's think it might be just geographic. They even have lower under construction at 4,500,000 square feet. You said 5,700,000 square feet. So I think it might be just geography differentials or something like that. I just wanted to see if you had any comment on it.
Speaker 2
Yes. Don't forget. Heavily look at San Jose and North San Jose, and they don't. That's not part of their landscape.
Speaker 8
Ladies
Speaker 0
and gentlemen, we've reached the end of the question and answer session. At this point, I'd like to turn the call back to Victor Coleman for final comments.
Speaker 2
Thank you so much for participating. And again, I'd like to thank the senior management team for their exceptional work and dedication to making Hudson Pacific what it is today. Have a good day.
Speaker 0
This concludes today's conference. You may disconnect your lines at this time, and we thank
Speaker 5
you
Speaker 2
for your participation.