Hudson Pacific Properties - Earnings Call - Q4 2017

Transcript

Speaker 0

Greetings, and welcome to Hudson Pacific Properties Fourth 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, Laura Campbell, Vice President, Head of Investor Relations.

Thank you. You may

Speaker 1

Thank you, operator. Good morning, everyone. Welcome to Hudson Pacific Properties fourth quarter twenty seventeen earnings call. Earlier today, our press release and supplemental were filed on an eight ks with the SEC. Both are now available on the Investor Relations section of our Web site, hudsonpacificproperties.com.

An audio webcast of this call will also be available for replay by phone over the next week and on the Investor Relations section of our Web site for ninety days. During this call, we will discuss non GAAP financial measures, which are reconciled to our GAAP financial results in our press release and supplemental. We will also be making forward looking statements based on our current expectations, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our results to differ materially from these forward looking statements, which we undertake no duty to update. With that, I'd like to welcome Victor Coleman, our Chairman and CEO Mark Lammas, our COO and CFO and Art Suazo, our EVP of Leasing.

Victor will give an overview of our performance Art will discuss leasing activities and our markets and Mark will touch on the financial highlights. Notte will be joined by other senior management during the Q and A portion of our call. Victor?

Speaker 2

Thanks, Laura. Hello, everyone. Welcome to our fourth quarter twenty seventeen call. 2017 was a great year for Hudson Pacific. We grew FFO by 11%, our same store property NOI by 13% and our dividend by 25%.

We had one of our best years for leasing. We signed 2,100,000 square feet of deals with 34% cash and 50% GAAP spreads. We had 1,600,000 square feet of expirations in 2017, yet our stabilized office portfolio lease percentage ended up 30 basis points for the year at 96.7%. Our in service office portfolio lease percentage ended up 90 basis points at 92.1%. Our same store media and entertainment portfolio trailing 12 lease percentage was up 160 basis points for the year at 90.7%.

We took advantage of the strong market conditions to improve our portfolio and sell four thirty seven million dollars of non core assets. All were sold at premiums to our basis, making significant capital available for future growth. We delivered 754,000 square feet of development and redevelopment projects, nearly 80% pre leased. And we expanded our Sunset Studio portfolio with the acquisition of Sunset Las Palmas for $200,000,000 Through that acquisition, we gained access to an additional 500,000 square feet of studio adjacent development opportunities in Hollywood. Specifically in the fourth quarter, we signed 558,000 square feet of deals, 1728% cash and GAAP spreads, respectively.

Our biggest deal in the quarter was the two year extension of NFL at 920950 Washington in Culver City. This deal has a smaller mark, about 11%, since we only recently signed their extension through 2021. NFL will now occupy these buildings through 2023. And this, along with the capital they've recently invested to upgrade interiors, is just another sign of their continued commitment to this asset. Also in the fourth quarter, we broke ground on EPIC, our third Hollywood development for 300,000 square feet of office space.

And we sold 65% interest in the Pinnacle 1 And 2 in Burbank for $350,000,000 netting us $85,000,000 of proceeds that we believe can be put to better use. Before I'm going to turn it over to Art, I'd like to give you a little bit of our big picture thinking regarding our markets and what's ahead for 2018. Our strategy has and continues to be focused on markets and assets that are the first choice for the best talent for the most cutting edge firms and innovators. These locations and properties, we believe, have the best growth potential, the best chance for outperformance and in the event of a downturn, the best staying power. Maturation and proliferation of tech, the rapid growth of cloud, AR, VR and data science, the growing dominance of streaming content creators, these are all trends we're watching and buying, selling, building real estate around our portfolio.

Our leadership in Silicon Valley and Peninsula markets is the heart of this strategy. It's the birthplace of tech. Its innovation clusters are impossible to replicate, and we believe that we will continue translate into growth opportunities for us. In Q4, Silicon Valley had the highest quarter on record for net absorption at 1,700,000 square feet. The Peninsula had its highest annual total net absorption since 2011 at 1,300,000 square feet.

Sublease space declined by 9% with decreases in every submarket except Palo Alto where Theranos put its corporate headquarters on the market. Other construction projects are 60% pre leased. Companies like Facebook, Amazon, Hitachi, Veritas are all taking down large blocks of both sublease and new construction availabilities. We are very well positioned in those markets. We bought well and where needed, we've deployed capital to transform these assets for next generation tenants.

Some of what works continues, but they've generated superior cash flow growth for us thus far, and we believe it will continue to do so in the future. While Silicon Valley is a tech Los Angeles, especially Hollywood is to media. And the content revolution has, in effect, amplified the demand to be in these key markets. Our footprint and growth potential in Hollywood is unmatched. I mentioned Epic earlier.

There's no other project like in Los Angeles in terms of building design, infrastructure and outdoor space. And given the demand we've seen, we're moving forward with designs for another 100,000 square foot development at Sunset Las Palmas, which we're calling Palo. A few words about the Arts District. We own great assets in that submarket, but it's definitely taking more time than we anticipated for the neighborhood to activate. While there are tenants inquiring and touring, there's just not sufficient volume of quality users for large blocks.

So we're actively evaluating our alternatives and are prepared to break up the space for smaller 5,000 to 15,000 square foot users if that's what it takes to get momentum. Rest assured Art and the entire leasing team will leave no stone unturned. In many ways, Seattle speaks for itself. PricewaterhouseCoopers Emerging Trends in Real Estate report just named the city the number one market to watch in 2018. And I've said this before, but Seattle tops every list every day that you pick up the paper.

We're finishing lease up on our recently delivered four fifty Alaska development and actively looking to grow our Downtown Seattle footprint. Our head of that region, who's new, Andy Witula, has strengthened our Seattle presence, and he's closely working with Alex and his team on multiple potential deals. What can our investors expect for us in 2018? Well, we're still taking advantage of our strong markets to sell noncore assets. We already closed two sales in Barcadero Place and Building 6 at Peninsula Office Park.

And we have 2180 Sandhill and 9300 Wilshire under contract and is scheduled to close March 1. That's another $255,000,000 of dispositions and an average of 20% premium to our basis we've completed or teed up. We're also taking a serious look at multiple value add acquisition opportunities across our markets, and I'm confident we're going to find ways to strategically grow our portfolio this year. Other than EPIC, we have two redevelopment projects under construction, 99,000 square foot Maxwell building in the Arts District and our 32,000 square foot 95 Jackson project in Pioneer Square, which is already 80% leased. In all, that's 431,000 square feet or two twenty five million dollars of remaining project costs, which is equivalent to about 3% of our total market cap.

We're typically at 10% or less of the total market cap in terms of ongoing construction spend, so we have a lot of room to take on more, such as Harlow. And finally, we have 1,100,000 square feet of expirations to address in 'eighteen, which are 21% below market. We've renewed or backfilled 24% of that square footage already and we're in leases, LOIs or negotiations on an additional 26%. Occupancy gains in our lease up portfolio as we approach stabilization will also provide us with continued cash flow growth. With that, I'm going to turn it over to Art for some additional commentary on our markets and our assets.

Art? Thanks, Victor. In Silicon Valley, large deals are supplementing small deal activity and driving absorption. Even with 3,900,000 square feet of new deliveries, Class A vacancy of 11.7% and asking rents of $66 per square foot remained unchanged in the quarter. Deal volume was up 63% quarter over quarter and January year over year at 2,400,000 square feet.

We've got great activity at Campus Center. Last call, we referenced six proposals representing 1,400,000 square feet of net new requirements. This was before we'd even completed improvements to adequately show the asset. Those deals went elsewhere, but they were all signed in Milpitas or adjacent Silicon Valley markets. Outside those proposals, we've seen another 6,000,000 square feet or 22 large block deals in the market, all net new demand and mostly targeting Santa Clara or North or Downtown San Jose.

About $2,000,000 of that signed, which takes even more product off the market. So right now, we're looking we're working with 15 requirements representing an aggregate of 4,000,000 square feet. Those range from about 50,000 square feet to full building users, truly our sweet spot. So we're well positioned as we get ready to formally launch Campus Center into the market with a huge broker event in mid March. The asset has been transformed and shows exceptionally well.

A couple of other comments about the Valley. Over the last several quarters, we've consistently seen lots of demand for smaller sub-ten thousand square foot users. We've completed 29 deals at those assets this quarter and the average deal size was about 4,000 square feet. But now we're also seeing a resurgence in demand for medium sized blocks. We have twelve ten thousand to 25,000 square foot spaces for lease with about 82% of those in proposals, LOIs or leases.

In San Jose, we're working with large tenants on renewals and expansions and we've got great activity over at Gateway. So we're activated on all fronts and we feel good about addressing our 354,000 square feet expirations in the Valley this year. Those are about 20% below market. As Victor noted, we also have good activity further north along the Peninsula. This was the fourth consecutive quarter of occupancy gains with 162,000 square feet of positive net absorption.

Class A vacancy fell 80 basis points quarter over quarter to six point nine percent and two ten basis points year over year. Class A asking rates were flat in the quarter, but still up 11% year over year and at $84 per square foot. Palo Alto Square is a great success story for us. We've now completed our significant capital improvements and we've really modernized the facility, both in terms of design and amenities. Historically, as you know, this property appealed to professional service firms, but our improvements have allowed us to tap into tech demand.

Post Q4, we signed a 40,000 square foot lease with tech company Orbital Insight, and we brought in specialties, cafe and bakery for about 5,000 square feet. And the property is now 89% leased. We still have significant room to chop this year in The Peninsula as we have 496,000 square feet of expirations, but those leases are at 26% below market. So we've got room to get deals done. The strength of the tech industry is very evident in Downtown San Francisco.

Expanding tech companies were responsible for 14 of 30 large lease transactions in 2017. That's a record 3,900,000 square feet of deals contributing to 762,000 square feet of positive net absorption. Class eight vacancy ended the year down 90 basis points at 5.1% and asking rents stayed flat at $76 per square foot. Clearly, with 2018 construction delivers already 84% pre leased, the city is going to continue to be a landlord favorable market. Our stabilized portfolio is 98% leased in San Francisco, and we have about 113,000 square feet of expirations, which are about 10% below market.

In Los Angeles, Q4 occupancy gains were driven by seven large deals north of 100,000 square feet. Several of those were tech and media related. In Hollywood, vacancy stayed flat at 13.4%, while Class A asking rates were up 2% in the quarter and 5% year over year at $55 per square foot. For EPIC, our demand pipeline now exceeds 3,000,000 square feet, including multiple full building requirements. At fourth and Traction, we have about 100,000 square feet in proposals, LOIs or leases ranging from 5,000 to 75,000 square foot requirement.

And we've had another 500,000 square feet of tours and inquiries to date. We're feeling a comparable amount of activity for Maxwell and we're still targeting large users for that project. Our stabilized portfolio in Los Angeles is 98% leased. We have about 133,000 square feet of expirations this year, and those leases are approximately 15% below market. That's a great spread, particularly for Los Angeles.

Downtown Seattle is still driving the overall Seattle office market. Vacancy nudged up 80 basis points to 8.9% in the quarter due to new projects delivered. The rents were up 3% to $45 per square foot and the market had positive absorption of 351,000 square feet as supply remains in check. Projects delivered in the last twelve months are largely spoken for and under construction projects are 65% pre leased. Although the lease commenced on November 30, our anchor tenant, Saltchuk, moved into 450 Alaskan in January.

It's really a stunning custom build out and that project is currently about 70% leased. We have two full office floors remaining to lease. Right now, the views on these floors are obstructed by a viaduct, which will come down early next year, but we're seeing interest pick up as that date approaches. Obviously, are advantages to holding for rate, but we still have over 130,000 square feet of tours and inquiries from high quality tech and non tech tenants. Our stabilized Seattle portfolio is 96.8 leased with very little in the way of expiration this year.

We're already in negotiations with tenants to backfill a significant portion of our 133,000 square foot Capital One lease, which expires in 2019 at 83 King. Those deals are at a blended 54% mark to market. With that, I'll turn the call over to Mark for financial highlights. Thanks, Art. FFO, excluding specified items, for the fourth quarter twenty seventeen totaled $81,700,000 or $0.52 per diluted share compared to $68,000,000 or $0.46 per diluted share a year ago.

Specified items for the fourth quarter twenty seventeen include a $1,100,000 write off of original issuance costs associated with the pay down of two five year term loans in connection with our October public debt offering and the sale of our interest in Pinnacle 1 And 2. There were no specified items for the fourth quarter of twenty sixteen. FFO, including specified items, for the 2017 totaled $80,600,000 or $0.52 per diluted share versus $68,000,000 or $0.46 per share a year ago. At the end of the fourth quarter, our stabilized office portfolio was 96.7% leased, up 80 basis points relative to third quarter. Our in service office portfolio was 92.1 leased, up 60 basis points compared to third quarter.

Our cash same store office NOI increased 7.9% in the quarter and 13% over the year. On a GAAP basis, those percentages were 10.29.9% respectively. The trailing twelve month lease percentage at our same store media and entertainment properties ended the quarter at 90.7%, up 10 basis points in the quarter. Our cash same store media and entertainment NOI increased 15.5% in the quarter and 13.1% over the year. On a GAAP basis, those percentages were 12.97.4% respectively.

At the end of the fourth quarter, after accounting for asset sales, the remaining 20 former EOP properties were 88.3% leased. If you factor in our lease with Orbital Insight, a fairly significant deal signed just after the first of the year, those assets were 88.9% leased. As a point of reference, those same 20 properties concluded the third quarter at 88.5% and we had 270,000 square feet of expirations at these assets in the fourth quarter. Note that we're giving you the stats for these 20 assets only because we naturally tapered our leasing efforts with respect to the dispositions well before they were under contract. More importantly, cash NOI for the former EOP portfolio continues to improve.

From Q2 twenty fifteen through Q4 twenty seventeen, we've generated over 21% cash NOI growth. And we've now sold or are under contract to sell eight assets for close to $620,000,000 That's nearly $100,000,000 of gross profit at an average 19.5% premium to our original purchase prices. Sale and financing activities throughout last year and especially over the fourth quarter significantly improved our balance sheet, debt metrics and future access to capital. On account of relief of asset level indebtedness in connection with the sale of Pinnacle one and two and pay downs of our two five year term loans in connection with the October public debt offering and the Pinnacle sale, we reduced our total consolidated indebtedness by more than $216,000,000 in the fourth quarter, extended our weighted average loan maturities from four point eight years to six years and reduced our floating rate indebtedness from 22% to 7%. All of these metrics improved with only a modest increase to our weighted average interest rate from 3.56% to 3.75%.

Our unencumbered portfolio and debt capacity also continues to improve. Unencumbered NOI increased from 78% to 83% from the third to the fourth quarter and further increased to a current 86% upon the February 1 repayment of the loan secured by Rincon Center. We have no indebtedness maturing in 2018 and upon the completion of the pending asset sales, we expect our revolving credit facility to have all $400,000,000 of total capacity. Turning to guidance. We are providing full year 2018 FFO guidance in the range of 1.87 to $1.95 per diluted share excluding specified items.

Specified items include the write off of approximately $700,000 of original issuance costs associated with the anticipated recast of our unsecured revolving credit facility and five and seven year term loans. As always, our full year 2018 FFO estimate reflects our view of current and future market conditions. This includes assumptions with respect to rental rates, occupancy levels and the earnings impact of events referenced in our press release and on this call. Our estimate excludes any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. I'd like to give you some perspective around our same store cash NOI 2018 guidance.

Our final 2017 office and media and entertainment midpoint guidance was 9.59% respectively. By comparison, our 2018 office and media and entertainment midpoint guidance is 3.54.5% respectively. To some extent, this is the result of our own success. Our 2,100,000 square feet of leasing activity at 34% cash rent spreads drove our strong same store office performance in 2017. Specifically, last year in our 31 asset same store office portfolio, we had 1,400,000 square feet of total lease expirations with renewal and backfill activity getting done at 46% cash rent spreads.

Not surprisingly, we have lower expirations in our 29 asset same store office portfolio for 2018 with only 547,000 square feet expiring at approximately 29% cash rent spreads. So by nature of the leasing we've completed, a decrease in the same store office pool and lower 2018 lease expirations, we have relatively less opportunity in 2018 to drive growth within our same store office assets. We have a similar effect within our 2018 same store media and entertainment portfolio. We improved occupancy at Sunset Gower And Bronson by 160 basis points to 90.7% and rents by 6.3% to $35.26 These assets are now approaching maximum occupancy under longer term higher rent leases. With this improved stability comes moderation in our same store media and entertainment cash NOI growth.

But if you look back at our operating history, our same store has never fully captured the NOI growth potential. Our 12 non same store in service office properties and our non same store Sunset Las Palmas studio property are poised to contribute cash NOI growth in 2018 in excess of 15135% respectively. Two development properties, two and four fifty Alaskan and two redevelopment properties, 95 Jackson and four Contraction are projected to contribute $3,900,000 or approximately 100 basis points of additional cash NOI this year. In aggregate, our non same store properties will comprise 31.5% of our total projected cash NOI for 2018 and thus a substantial portion of our growth compared to last year. And now I'll turn the call back over to Victor.

Thanks, Mark, and thanks, Arch. Fundamentals in our markets remain very strong. We are well positioned to continue to realize value from within our existing portfolio and look forward to taking on some exciting new growth opportunities in 2018. As always, I want to take the time to thank the entire Hudson Pacific team and especially our senior management for their hard work and dedication for this quarter and for the entire last year. And to everyone listening, we appreciate your support of Hudson Pacific Properties, and we look forward to the upcoming quarters to come throughout 2018.

And with that, operator, I will turn it over to you for the line to be opened for questions.

Speaker 0

Thank you. At this time, we'll be conducting a question and answer session. Our first question is from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.

Speaker 3

Good morning out there. Good morning. Morning. How are you? Just two questions here.

And certainly, Victor, the perennial, where you guys are trading and certainly how the market hasn't been kind to REITs year to date. So as you guys think about the disposition proceeds, $255,000,000 how do you weigh that about looking at a stock buyback? And then also, just given how the stock has been depressed for the past year, how has this changed your investment hurdles and your thoughts on new capital allocations?

Speaker 2

Great, Alex. Thanks for the question. So as you know, and if you don't, you will recall, we have a stock buyback plan in place. We're authorized to buy back stock at any given levels that we deem appropriate, and that will continue to be in place. And unfortunately, with the blackout windows that have occurred at these substantial downturns, we were not able to execute on that basis.

But we will always continue to evaluate it based on our use of proceeds and the access to capital and what's more accretive for our shareholders, whether it's a development, redevelopment acquisition or the opportunity to buy back stock. And that will never change. It hasn't changed, and they're not dissimilar or mutually exclusive. They're going to be one and the same. That being said, our return hurdles have really not changed much.

I mean, we're buying to or redeveloping and developing to what we perceive to be Alex's team is stabilized seven. That's sort of what we're looking at as a company. That's what our stock ironically I think was at the low point trading to right around a seven cap. So I think they're as I said, they're not going be mutually exclusive and we're going to look at those alternatives and we still are evaluating redeploying capital from the dispositions as well as our existing capital outlay that we have excess capital at right now for opportunities that are going to be very conducive to the existing portfolio.

Speaker 3

But do you think, Victor, at some point that you'd start to weigh more toward I mean, you guys have been reporting in the press as maybe doing a deal out there with another REIT. But do you think at what point do you say, hey, look, buying back stock makes is the better use of capital than a new commitment that given the environment?

Speaker 2

Well, like I said, I think if we're underwriting new deals north of that, it's going to be more compelling to use that capital. If we're not underwriting deals north of that, we will always consider buying back stock. And it's

Speaker 3

always

Speaker 2

it's definitely always on the table.

Speaker 3

Okay. And then the second question is just more of a specific. The Downtown LA project that you said you're going to take a different crack at by breaking up the space, Was that just one of the buildings or is that both? And then how does that impact the economics of the deal if you have to break it up into smaller spaces versus leasing it at bigger blocks?

Speaker 2

So let me take the second question first. On the economic side, it won't change the economic return on the assets. The interesting thing so listen, I think our team should have taken a hit on the Arts District. That's been pretty challenging for the entire team from management through leasing, both internal and external leasing guys. Know what my feelings are some opportunities that we've missed.

A couple of things is the rental rate in that marketplace has not changed, so we've not lost deals off of rate. First part of your question, I think, is related to both assets. At Matteo, we are looking right now, there's an interest level for an entire tenant for the whole building. That's the building that I think we're still going to use a single user. Ironically, our prepared remarks were based on us breaking up the space at fourth and traction.

We've got plans to do spec space, which won't change our game plan to break out from an economic standpoint. And yet, as soon as I mentioned that this morning, we got a call, I found out from a tenant who wants the whole building. So it's based upon the fact that there are less large users out there for Fourth And Traction that we had initially thought. Maybe we waited long to break up the space, but I'm confident with the amount of leasing activity they have for anywhere from 5,000 to 15,000 square foot tenants, there's over 100,000 of them right now. My guys are telling me that I shouldn't be wary.

Think the optimism is on the plus side.

Speaker 3

Okay. Thanks, Victor.

Speaker 2

Thanks, Alex.

Speaker 0

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

Speaker 4

Yeah, good morning, guys.

Speaker 0

Start with regard

Speaker 4

to the Silicon Valley assets and just going back to your comments, I think you said something about 350,000 square feet of exploration, maybe 250,000 square feet of demand. But curious what you're seeing just in terms of kind the need to use the VSP program and how much of that kind of expiration this year in your mind is going to have to be retenanted versus how much you could kind of make ground up on some of the under leased assets in that market?

Speaker 2

Dave, I'm going have Art run through that for you, okay? Yes. So listen, just across the market, I mean, we're seeing an uptick in overall activity. And with our commitment to repositioning the assets that we've outlined and our VSP, which we've been really aggressive at, we're poised to take advantage of the increased market demand. We see that everywhere.

We've started to see this kind of quarter over quarter, and I feel like we've poised ourselves to do that. Listen, we've done 118 VSPs to date. We've leased 70% of those. Most of those are in our kind of our priority assets. And the balance of those, we've got somewhere in the neighborhood of 65% activity on, which means LOIs, proposals or leases.

So we feel good. We feel like we've put ourselves in the right place, and we see a lot of activity.

Speaker 4

And the other part of that was just on the expirations. What type of retention are you looking for in that particular those particular submarkets this year?

Speaker 2

Well, we as every year, we have known vacates that come up. Right now, we're looking at as we sit here in February, we've got probably 16% of our known vacate of our expirations either renewed or backfilled. So 16% already. We've got 32% of those in negotiation, right? And then probably another 30% that are in discussion, some level of discussion.

But we feel good right now where we sit. Yes. I mean just to cut I mean maybe put reassemble that, Dave, it probably looks to shake out around 70% of renewal and backfill relative to the 2018 expirations in EOP portfolio.

Speaker 4

All right, great. And then maybe just a follow-up for Victor and a combination of Mark as well. How much of the asset build proceeds do you plan on kind of putting through the 10/31 versus maybe just kind of putting back into the balance sheet? And when you talk value add, Victor, how deep are you willing to go in some of these projects? Are you willing to convert some retail assets, etcetera, that have been in the news?

Or is this kind of more lease up assets in the office space?

Speaker 2

So on the 10/31, listen, we put it into an accommodator, but we don't have to accommodate. It's really at our option. Mark has managed the balance sheet to a point where these assets that we will not have at the 10:31 if we so choose not to. So that gives us the freedom to use that capital for virtually everything. And we're seeing some very interesting opportunities in Seattle, in the Bay Area and here in Los Angeles on a redevelopment play.

And I'm obviously not going to comment on any deals we haven't announced.

Speaker 0

Our next question is from Jamie Feldman with Bank of America.

Speaker 5

Great. So I appreciate your comments to start the call on Silicon Valley and The Peninsula. And it sounds like you're going to be entrenched there for a while. Just how do we think longer term about your market concentration and how you're thinking about it? And how big you do want Silicon Valley and The Peninsula to be in terms of the whole company?

Speaker 2

Jamie, it's interesting. I think I'll take that a little differently. We've made a pretty clear determination on the office side. Seattle in the markets we're in Seattle, there's ample opportunity for us to grow. In San Francisco and the Valley, there's clearly ample opportunities for us to grow.

And the particular markets that we are in, in Los Angeles, there's ample opportunities for us to grow and get a lot bigger if we so choose to do so in those markets. And there's still, in our opinion, the best markets in the country for a company like ours to invest in and the economics and matrix that we are looking at support that. So we're not afraid of going to the valley to continually buy assets. I mean, we or sell assets in that marketplace to upgrade to find other assets. I mean, we're seeing deals Alex and his team are still seeing deals in Palo Alto that we think are opportunistic, and we just sold in Palo Alto or we're about to close another deal there.

So we will consistently do that in the office portfolio, and I think the depth of those markets are going to show that we clearly have room to grow in those marketplaces, and we're comfortable with it.

Speaker 5

Okay. And then as you think about projects, I mean, large of projects would you go after here in terms

Speaker 2

of like total size of

Speaker 5

your portfolio today in terms of I mean, sounds like you have some redevelopment projects out there. Just what's your appetite for magnitude?

Speaker 2

Well, listen, I think that's kind of I think that's sort of an ambiguous sort of question. It's not the dollar amount, it's going to be the project amount, right? So it's going to be the valuation of the project, the IRR that we think we're going to be able to attain is going to lead. And so that could be $100,000,000 or it could be a $500,000,000 project. I don't think there's a benchmark around that.

Remember, we do have significant joint venture partners beyond our current relationship with CPP and that have come to us with opportunities that they want to share, and we'll evaluate each deal as it sits by itself and evaluate that with also our stock buyback program. So it's a combination of the entire totality of what's the highest and best use of our dollars today. Okay.

Speaker 5

And then Art, you had mentioned six tenants looking at Campus Center that ended up signing elsewhere in the region and a nice pipeline behind that. Can you talk about where the six went and maybe how close they were on Campus Center and maybe what they liked or didn't like?

Speaker 2

I mean I think a lot of it was timing, but it's without getting into specific detail, I mean we can probably do it offline, but it's all greater Silicon Valley. With the again, And timing, I think, was probably at where we're right in the middle of repositioning, which will be finished and we're going to showcase kind of mid March with a huge broker event, as I said, and I think we'll be poised to get a lot of traction.

Speaker 0

Our next question is from Craig Mailman with KeyBanc Capital Markets.

Speaker 6

Hey, guys. Mark, curious, you kind of laid out the full line availability pro form a the dispositions. Just curious what you think your total kind of deployment capacity will be once the assets you have under contract close?

Speaker 2

Yes. I think on a levered basis, it's to stay within kind of the debt ranges that we target. There's about $600,000,000 of total capacity funded on the debt side, either through the line or we have over $200,000,000 of availability on our Gower Bronson facility as well. And we think we end up at a comfortable range at about that deployment level.

Speaker 6

Got it. So, well then maybe a follow-up or a different way to ask Jamie's question. Victor, you laid out that there's a mass that you're looking at in a bunch of different markets. We've referenced some of the bigger repositioning opportunities in LA. Just curious how you kind of bucket stuff from a maybe just an easier lease up or repositioning of an asset versus a longer term redevelopment play that may have a higher magnitude over time?

And kind of how you look at kind of how much you want to deploy today into each type of bucket to not have the balance sheet get to a point where everyone knows you're going need to raise capital with where the stock price is today?

Speaker 2

So let me there's two points that I want to make, one related back to Jamie's. But your last point is, listen, we have zero intent to raise capital at these levels. And we've been very strict in terms of our process and policy. And we raise capital when we need the capital and the stock is at a point where we think it's opportunistic for us to deploy. And that is not clear even remotely at these levels.

Then going back sort of tackling to your point, but first to what I sort of maybe Jamie was going at. Listen, we've talked about building up the diversification in the Seattle marketplace and the Los Angeles marketplace to get those barbells to a point where they're closely more closely aligned to the Bay Area. And if that means we sell more assets in the Bay Area, that's what we do, and redeploy the capital in those markets or if we buy in the Seattle and Los Angeles marketplace to help grow those portfolios. But remember, I mean, our portfolio is going to take a little bit of a change when we have Epic online and when we have Fourth and Traction and four zero five and Harlow online, Q

Speaker 6

is

Speaker 2

coming online now. And so the size of that portfolio will change. And I think the numbers will be determined as to see more weight in those markets. Specifically to the redevelopment development side, we've made it clear, Chris and his team have gone out and filed for the expansion of Sunset Gower for us to get an additional 5,000,000 square feet. That's public now.

That's a multiyear process for us to get done. We're doing the exact same thing at Sunset West Palmis for an additional 450,000 square feet. We're breaking ground on the 100,000 square feet at Harlow, which is a small building, Bill and his team there have already had reverse increase from multiple tenants that want to take that production space. From a redevelopment standpoint, there's some unique opportunities of taking existing assets and repositioning the creative office campus style that we typically look at both in Seattle and Los Angeles. And we're going to continue to look at those based on the yield requirements and the tenant needs.

There's been very little new development and development in the Los Angeles area that have those types of assets, and there's a huge demand and backlog of existing tenants that are looking for space in the next two, three years and beyond. And we've got a pretty aggressive leasing team that knows who those tenants are and when the expiration schedules are in play. And we're going to try to capitalize on that with whether it's Epic or something else that we do.

Speaker 6

That's helpful. And just if you guys were to look at a mixed use, would you I know with KeyArena, there could have been some resi and retail involved. Are you guys comfortable if you find something to do that on your own? Or is that where you bring in more of a strategic partner versus a money partner?

Speaker 2

I think we have full capacity in the development team here to tackle and be extremely successful on the mixed use process. And so we're not going to shy away from it. It's not something that we're looking to do. If it comes with, that's something we'll evaluate at the time. I mean, currently, you referenced the key arena.

That was a unique opportunity with the progress of that was going to be office, and there was going to be some resi, and we would have done that alone with our partner at the time, which was AEG, who has capacity and capabilities that will be aligned both on the capital side. The stuff we're looking at right now, I can only think of one project that has got a mixed use component on it, and we're not even remotely close to doing that deal. So I don't think we're going to cross that bridge right now.

Speaker 0

Our next question is from Rich Anderson with Mizuho Securities.

Speaker 7

Mark, you said in your remarks that there's 547,000 square feet expiring in the office portfolio in 'eighteen. Is that I'm looking at your lease expiration schedule. First part of this question is, I see over 1,000,000 square feet. Is that have you done some stuff already this year to tackle that? Is that the net number?

Speaker 2

Rich, sorry. That I was referring specifically in the prepared remarks to the same store portfolio. You're seeking the numbers exactly right. That is to say it's $1,000,000 portfolio wide. It's just in the 29 asset same store, it's the $547,000,000

Speaker 7

Got you. Okay. Then leading to my next question, maybe as a way to enhance the same store growth profile, to what degree do you think you guys will start looking or going to include early lease expirations, in other words, 2019 and 2020 even expiring leases? I know you do that as a normal course, but I'm wondering how significantly those rents are below market and if there's a chance to see the same store growth profile kind of accelerate as you go through the year because of that dynamic?

Speaker 2

Rich, this is Art. Yes, so in advance of 'nineteen, we're in 'eighteen, so in advance of 'nineteen, we're already talking to some of the large movers that you'll see kind of posted that are coming up. And we've got a lot of traction on those. So yes, I mean, we're out in front of that already, even kind of the late 'eighteen renewals, but kind of go out as far as 1.5 really, especially if they're large tenants, right, multi tenant, always talking to these guys. Rich, it's Victor.

Just a little just to follow on that. I think if you recall, 'nineteen, we have some a couple of fairly larger guys, 'nineteen and 'twenty in Seattle and Technicolor in Los Angeles that are fairly below. And so those are already in conversations now.

Speaker 7

But not considered at this point in your guidance?

Speaker 2

No, no, no, no.

Speaker 7

Okay. In terms of CapEx and specifically that which we would use to derive an AFFO number, do you see that sort of trending down now on a year over year basis? Or where do you think CapEx lands, just maybe up or down versus 'eighteen? Yes. Rich,

Speaker 2

I can't tell you how satisfying it is to get a question we prepared for. Seem like it was not part of our prepared remarks or anything like that. Yes. So just to give you a sense of it, on a year over year basis for recurring PI and commission, that actually it stands to trend down a bit, not quite 10%, somewhere between 910%. On recurring CapEx, that is to say CapEx that has a depreciable life of less than ten years, but is not GI or commission.

That is there's a little bit of a trend upward on that in part associated with some of our bundle projects and some of the other stuff we continue to do to enhance say the GOP portfolio. And on when you but as an overall component, it's not that as much of the overall spend. And so we actually are modeling about being more or less flat year over year on a combined recurring TI commission and CapEx, so down about 1% year over year.

Speaker 7

Okay. And then last question maybe for Victor or anyone, I suppose. But it sounds like maybe a little bit of incremental activity in Silicon Valley and Peninsula. I know that's been an area of frustration for you guys in terms of getting the message out there. But is there a common thread to all this net absorption that you're seeing from tenants?

Is there something maybe systemic or broad based that is causing people to make a move? Or is there anything you'd comment in terms of the conversations you're having with folks about why we're starting to see more activity in those two areas?

Speaker 2

Well, think a couple of things. Rich, first of all, there was a huge movement to large tenant users in the Bay Area, I mean, into the city, and now there's very little space available for them. So they we always talked about the larger users, even though our space was not as conducive, except for campus, to the larger users. And the numbers that Art just gave on the amount of square footage of the 6,000,000 square feet, those are all large users. 2,000,000 have signed, 4,000,000 are still in the marketplace because they can't go in the city, so they're coming back to the marketplace there.

I mean last year was as much as I think people were questioning the Valley, I mean the statistics in the end of the year proved out that the Valley was very strong. I mean the numbers are the strongest what we've seen and we talked about that in our prepared remarks in many years. In some instances, it's been the best statistics that we've seen since before February. The interesting thing is that if you look at the IPO and the venture capital marketplace in the Valley, those are extremely strong. It's the strongest IPOs that started the year so far.

And there is very little change in that coming out. I mean, at the January, companies raised over $8,000,000,000 over 17 deals on that basis. And you don't have names like Dropbox or Spotify there yet. And that looks like it's going to go. And the most important statistic is the fourth quarter had a third straight quarter of $20,000,000,000 plus VC investments.

And it wasn't too long ago that people were questioning us and everybody else about, oh, VC is dead and there's no more VC capital. I mean, statistics are very, very impressive. And 2018 is expected to see the similar level of optimism with VC funding and the gap in the IPO marketplace is starting to shrink. And so I think clearly it's tech related, it's the larger companies we've talked about, they are continuing to grow And they have a vision of not three, four, five years, but it's five and ten years. And we're seeing that with the Amazons and the Googles and the Hulus of the world up in those marketplaces, and you're going to see more of that.

And we're seeing that in the flow of traffic. And so it is it's nice to see that they're not leaving those marketplaces like people kind of perceive them to do.

Speaker 0

Our next question is from Blaine Heck with Wells Fargo.

Speaker 8

Probably for Mark. One of your West Coast peers recently talked about higher utility and payroll costs that were causing a headwind to their same store NOI growth in 2018. Are you guys seeing those same pressures? And just generally, I guess, what's your outlook for expenses going through 2018?

Speaker 2

I mean, we're not seeing it in terms of erosion to margin, which I think is where you would primarily discern it. I mean, union costs are tend to be trending up a bit higher. I'm sort of looking towards Josh to see if he has further commentary on that. Yes. I think overall union labor increases have gone up, but we largely recover these costs.

It hasn't been a material impact. Yes. Answer is, while I don't know that we're seeing anything contradictory to that. I don't think we would note that as a particularly, I don't know, troubling trend or anything.

Speaker 8

Okay. And then on a similar vein, the media margins this quarter were a good amount higher than they were in the fourth quarter last year. Seems like demand from content providers continues to grow. Do you think we should expect better margins from that business as we look forward?

Speaker 2

Yes. I mean, I do I mean, I think as we Bill and his team continue just hit the cover off the ball on pushing rents, maintaining high occupancy, there's a natural opportunity to improve the margins, right? I mean because your bigger expenses have a fixed are fixed, right, property tax, insurance and so forth, largely fixed expenses. And so as we improve that top line, those margins, I think, can steadily improve.

Speaker 8

Ladies

Speaker 0

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

Speaker 2

As obviously apparent, I want to thank the team of people around the table here at Hudson Pacific and the entire company for all the support and all you investors and people who cover us. Thanks for participating today, we look forward to talking to on our next call.

Speaker 0

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