Hudson Pacific Properties, Inc.
Q1 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Greetings and welcome to the Hudson Pacific Properties’ First Quarter 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kay Tidwell, Executive Vice President and General Counsel. Thank you. Ms. Tidwell, you may begin.

[Kay Tidwell:]

Good morning, everyone and welcome to Hudson Pacific Properties’ first quarter 2017 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 Lammas. 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, May 4, 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 would like to turn the call over to Victor Coleman, Chairman and Chief Executive Officer of Hudson Pacific. Victor?

[Victor Coleman:]

Thanks, Kay. Good morning, everyone and welcome to our first quarter call. We have wrapped up another very productive quarter marked by strong leasing activity, the successful disposition of 222 Kearny Street and 3402 Pico Boulevard properties, the announced acquisition of our Sunset Las Palmas studio in Hollywood and a well-received public offering that raised nearly $340 million in proceeds. Starting with leasing, we executed over 525,000 square feet of new and renewal deals this quarter at 63% GAAP and 42% cash rent spreads. Among the leases executed in the first quarter was a 10-year lease with Google for nearly 170,000 square feet at our Rincon Center property in San Francisco. This lease is anticipated to commence in March of ‘18 and will backfill two significant 2017 expirations

[Mark Lammas:]

Thanks Victor. Funds from operations or FFO, excluding specified items for the three months ended March 31, 2017, totaled $71.9 million or $0.48 per diluted share compared to FFO excluding specified items of $63.2 million or $0.43 per share a year ago. There were no specified items for the first quarter of either 2017 or 2016. As of March 31, 2017, our stabilized and in-service office portfolio was 96.4% and 91.2% leased, respectively, in line with last quarter and up from 95.8% and 90.7% a year ago. Victor highlighted the strong activity and tremendous cash and GAAP spreads on first quarter leasing activity. I would add that the strength of leasing activity is further underscored by the steady improvement of our stabilized and in-service lease percentages even as we faced 335,499 square feet of expirations in Q1 ‘17, again a testimony to the continuing resilience of our core market and a credit to our leasing team. Net operating income with respect to our 34 same-store office properties for the first quarter increased by 23.4% on a cash basis and 5.4% on a GAAP basis. The cash basis increase includes Cisco’s payment of $10.4 million in early termination fees. Ignoring that amount, net operating income with respect to our same-store office properties would have increased by approximately 7% on a cash basis. Moreover, as we highlighted to you last quarter, the cash basis net operating income will continue to be muted for the first three quarters of this year by the September 2016 commencement of a lease amendment with Weil Gotshal at Towers at the Shores Center that contain both rent and square footage reductions. The amendment itself was signed in December 2014, several months before we acquired the property from Blackstone. We estimate that the first quarter same-store office property net operating income would have increased approximately 13.2%, ignoring both Cisco’s early lease termination payment as well as the impact of the lease with Weil Gotshal in both periods. The trailing 12-month occupancy for our media and entertainment property has increased to 90.3% from 89.1% as of the end of last year and 81.6% a year ago. You may note a fairly significant decrease in net operating income during the first quarter, which fell by 17.1% on a cash basis and 20.3% on a GAAP basis. While significant on a percentage basis, the decline represents only an approximately $1 million decrease in first quarter net operating income contributed by our media and entertainment properties compared to last year and amounts to approximately 1% of total same-store net operating income. The decrease largely resulted from a combination of unusually high production activity by a stage user in the first quarter of 2016, the temporary use by Netflix of the stage for storage purposes as they moved into ICON and higher operating expenses associated with higher occupancy at both studios. As Victor touched on earlier, in early March, we completed the public offering of 9.775 million shares of common stock at a public offering price of $36 per share. The net proceeds from the offering were approximately $337.8 million. We used a portion of the proceeds to fully repay a $255 million balance under our credit facility with the remaining proceeds used for general corporate purposes. We subsequently re-borrowed $150 million under our facility to complete the acquisition of Sunset Las Palmas Studios on May 1, 2017. The remaining amounts required to fund the acquisition of Sunset Las Palmas came from the 3402 Pico sales proceeds, pursuant to a 1031 like-kind exchange. As for the offering, we would like to thank both our existing and many new investors for supporting what by every measure was an extremely successful transaction. Turning to guidance. We are increasing our full year 2017 FFO guidance from its previously announced range of $1.90 to $2 per diluted share, excluding specified items, to a revised range of $1.92 to $2.02 per diluted share, excluding specified items. The guidance reflects the company’s FFO for the first quarter ended March 31, 2017 of $0.48 per diluted share as well as the transactional activity referenced in this press release and in earlier announcements. For the sake of clarity, the early lease termination paid by Cisco toward the end of the first quarter had no material impact to first quarter FFO. While Cisco remains obligated to pay rent at our Campus Center property through the remainder of the current year, in addition to receiving that rent, this guidance also includes the amortization beginning with the second quarter of this year of approximately $1.5 million per quarter of income, reflecting Cisco’s payment of $10.4 million in termination fees, reduced for GAAP purposes by the write-off of approximately $5.9 million of non-cash items, namely straight line rent receivable and above and below-market rent lease adjustment associated with the early termination. The 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 in this press release, but otherwise excludes any impact of future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. There can be no assurance that the actual results will not differ materially from this estimate. One final word about guidance. You will find that we have introduced additional information to our earnings press release, outlining various assumptions supporting our guidance estimates, including same-store office and same-store media and entertainment cash NOI growth estimates, non-cash revenue and expense estimates, G&A and interest expense estimates and other amounts. I believe you will find the additional information to be comparable to that by – that provided by many of the most seasoned of our office peers. But as this marks the first quarter of providing such information, as part of our routine filings, we encourage any feedback you may have. And now I will turn it back to Victor.

[Victor Coleman:]

Thank you. In closing, I would like to reiterate that we continue to see consistent, strong demand and excellent leasing momentum throughout our entire portfolio across all of our markets. As always, I’d like to thank the entire Hudson Pacific team, especially our terrific senior management for all their hard work this quarter and the quarters to come. And to everyone in this call, we appreciate your continued support of Hudson Pacific Properties, and I look forward to updating you next quarter. Operator, with that, I will turn it over to you for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Jamie Feldman from Bank of America/Merrill Lynch. Please proceed with your question.

[Jamie Feldman:]

Great, thank you. Mark, can we start with you on the guidance? So, it looks like looking at the amortization impact of the termination fee, it adds about $0.028, $0.03 or so to your numbers versus the prior range. I think you raised it $0.02 to the midpoint. Can you just talk about what the moving – other moving pieces might be in the model?

[Mark Lammas:]

Yes. I mean, I think we gave you the – I mean, first of all, your number is right, Jamie. It’s slightly below $0.03. If you looked at the prior guidance, our midpoint was $1.95. I think maybe at the root of your question would be a clarification around that $1.95. That was a soft $1.95. That is to say, it was a mid $1.94 number that was rounding to $1.95. When we brought in the early term fee on a GAAP basis, that’s slightly below $0.03, so the combined impact actually takes you to a mid $1.97 number, but that’s a weak $1.97. So, I suppose we could have guided to a mid $1.97 number. We don’t tend to guide to a $0.005 number. I know some will do it. We don’t do it. So at any event, that’s what’s underlying that $1.97. As it relates to other factors, I mean, I hope you think that the metrics we outlined in the press release give you a lot more information to go by. I mean, I think it’s got all of the other key items that one would normally look to, to try to get a handle on what’s going through the number. If there is anything else that you have a question about that’s not on that list, I could try to give you some insight on it, but that’s effectively what’s going on from the last guidance to the current guidance.

[Jamie Feldman:]

Okay. So I guess just thinking about the core business outside of the termination fee, I mean, things are just kind of inline as you expected. Is that the right way to think about it? Are there any...

[Mark Lammas:]

Yes, I think so. I mean, that midpoint same-store of 7, taking out those two items, I hope you agree that’s also maybe the most helpful way to look at the impact of those 34 assets. I mean, of course, you can see even in our footnotes, we try to provide variations on it by providing it without those two items. We provided it with the two items. You could run variations with one in and one out and certainly have those numbers as well. We thought that this one was the one that has the most sort of shelf life in that those two items are both temporary in nature. That is to say two quarters from now with that Weil Gotshal impact on a same-store comparison basis will no longer be relevant. I suppose we could have not put in the Cisco fee left, Weil Gotshal in and then it would have muted that same-store number for the time being. And then – but then next year, when we blew it out of the water, because Weil Gotshal would no longer be impacting it, everyone would be asking it what it would look like if Weil Gotshal was still in there. So we hope that you agree this has the nicest, longest sort of – and adds the most clarity from a same-store basis. But bottom line is I think the same-store – that same-store number, core stabilized number at the midpoint of a 7 is in line with our expectations.

[Jamie Feldman:]

Okay. That’s helpful. And then, I guess, just bigger picture on Silicon Valley and the Peninsula and you talked about in Seattle, tech companies are really growing aggressively there. We have seen very good numbers – earnings from tech and media companies. Can you just frame like where growth in Silicon Valley fits versus we are seeing some good leasing in CBD San Francisco and in Seattle as we look forward?

[Victor Coleman:]

Yes. Jamie, I mean, listen, if you look at what’s happened in the last quarter alone – I will just give you some of the highlights. I mean, Amazon took 500,000 feet in a couple of projects. Applied Materials took 120,000 feet in Sunnyvale. Bosch took 104,000 feet in Sunnyvale. I think Adobe is rumored to be in San Jose for 300,000 to 400,000 feet. Google still has their San Jose requirement that is rumored out there for 1 million feet. I mean, the activity and numbers are very strong. If you looked at my prepared remarks, if you looked at what’s coming online this year, 90% is already pre-leased. And next year through – I am sorry, through ‘18 70% plus is pre-leased. So maybe the temperature around San Francisco with a few deals that are announced seems to be a little bit more popular for people to sort of get their arms around, but the numbers are pretty strong and – more than pretty strong, I think they are exceptionally strong in the Peninsula, in a lot of the areas. And I think you are going to see a lot of that continue with those large users, Microsoft – I am sorry, Amazon, Facebook, Google and Apple in that marketplace. And then you are going to see a bunch of small deals done too, which don’t get the same kind of credit and that’s part and parcel of our VSP program that we are seeing and we are executing on.

[Jamie Feldman:]

Okay. And then just following up, last question, but what do you think it will take to get rents moving again in either San Francisco or Silicon Valley?

[Victor Coleman:]

Moving again. What do you mean, beyond where they are right now? I mean...

[Jamie Feldman:]

The rents are flat. Do you see – if there is a certain amount of space that needs to get taken down before you could start seeing upward pressure on rents?

[Victor Coleman:]

Well, I think – listen, I think they are flat statistically because that’s we are seeing from the CB reports and the other market leaders reports. I would say – I am looking at Art here, and he can jump in and comment on it. In terms of our deals that are done, we have had consistently a pipeline – as you know, it’s been very strong; and secondarily, 0 pushback on rent. So I think we are pushing rents and still seeing it. Overall, the 5% to 6% movement in rents and 3% to 4% of the value a little bit, we are seeing that. But I think can achieve greater than that in the stuff that we own. Right, Art?

[Arthur Suazo:]

Yes. Jamie, this is Art. In the CBD in San Francisco, literally, we don’t have any more space there. But the last few pieces or bid blocks that we have had, as Victor said, we have pushed rates really beyond what our expectations were. So it’s really hard to answer your question about where we can move into when we have just done that.

[Jamie Feldman:]

Alright, thank you.

[Victor Coleman:]

Thanks, Jamie

[Operator:]

Our next question comes from the line of Rich Anderson with Mizuho Securities. Please proceed with your question.

[Rich Anderson:]

Thanks. Good morning. So on the Campus Center redevelopment, the effort will get you to what you are assuming right now as a rent level below what Cisco was paying. I am just curious how much did that kind of conclusion alter the amount by which that you are going to spend? $11.5 million seems like kind of a doable number. It could have been much more, I suppose. So is this just enough to sort of keep your head above or just – I am just wondering how you can just describe your pulse of the situation there and how that impacted your redevelopment plan?

[Victor Coleman:]

Sure, Rich. So listen, I want to temper the conversation because I know that you and your brethren are all going to be very fixated on Cisco. We just got the game plan in place and so our initial $24 a foot repositions the existing 4.75 to that $11 million. That’s what the broker community is telling us. We need to sort of de-Cisco by the assets at the end of the day. I think it’s – this is a price-sensitive marketplace in Milpitas. We are a low cost provider. I think it’s more than just getting our head above water. The activity that we have seen, as I mentioned in our prepared remarks, is even surprising to us to our standpoint. I think there are – right now, we have toured or had conversations with 6 users that are 125,000 square feet and greater. We are talking about a stabilized deal January 1 of ‘19. So you are talking – sorry, starting rent deal of January 1 of ‘19, stabilized at the end of ‘19 approximately, so you are over 2 years away. I can’t tell you that our number in rent is going to hold up. I think we are conservative in that process. That’s where the roll to market is, which is slightly below. I think we are also conservative in the CapEx. If we have a couple with whom we are talking about who want to go on and build the entire second phase, that recapitalized number is going to be reflected to a higher rent and, therefore, more capital improvement dollars put to this project.

[Rich Anderson:]

Okay, fair enough. And then maybe more broadly to the area, what’s the explanation about the 80 basis point lease percentage loss in the Blackstone portfolio?

[Mark Lammas:]

I mean, you may run the math, you might be – are you looking at the – just the lease-up component of those – the 8 Redwood assets or realty assets that we were referring to, Rich?

[Rich Anderson:]

Yes.

[Mark Lammas:]

Yes. So actually, if you do the math, you would see – what you would see is – so last quarter, we ended at 80.9% on the lease of assets, but that included 555 Twin Dolphin, which moved up to the non-same-store stabilized. And you will see there that, that assets only – almost 93% leased. If you adjust for the fact that it’s an apples and oranges comparison that to say its 8 assets versus 9 last quarter, it’s actually on a – if you add back 555 Twin Dolphin to that pool of asset, you are actually at 80.6%, which is actually only a 30 basis point decline. You can see right away, if you do a comparison, the main reason for that is Palo Alto Square. Morgan Lewis rolled out of almost 60,000 feet at Palo Alto Square. So we have got a fairly large roll-down in lease percentage there. That was a known vacate. By the way, it couldn’t happen practically in a better asset in our portfolio, right? Because – I mean, in fact, both are backfilled quickly and at a probably significantly higher rent. So that’s what’s going on there. Really, it’s the combination of 1 asset moving into stabilize, which was helping that average and one asset that saw an expiration that we knew was coming.

[Rich Anderson:]

Okay. Last question for me is the choice of asset sales, 222 Kearny and then the Santa Monica asset, two of your maybe somewhat priced submarkets. I am curious what was it that flipped the switch there for those two decisions and could we be – expect to see some more monetization in Santa Monica and/or – well, maybe not Santa Monica, or downtown San Francisco?

[Victor Coleman:]

So, to answer the latter part of the question, the answer is no. I mean, these two assets – I think Richard, you recall, 222 Kearny was on a ground lease. It was two buildings. It was in our portfolio. I think we had a 40% return. We had a great up-market number from a potential buyer we ended up closing. The issue – and there was a heavy capital issue going to that asset in the next 1 to 3 years that was on our budget. And so it was just a perfect storm moment for us to sell that. 3402, as I have mentioned in the past, I mean, we just completed the reno. We were talking to two tenants to lease it and a third tenant came who was an owner-occupier. And as opposed to doing a long-term lease with them with an option to buy, we just chose to sell it. It’s a smaller asset. It’s not indicative of our business plan.

[Rich Anderson:]

Okay, that’s well drafted. Thanks.

[Operator:]

Our next question comes from the line of Nick Yulico from UBS. Please proceed with your question.

[Nick Yulico:]

Hi, everyone. Couple of questions. First, on the same-store NOI guidance, I know you guys gave a couple of different versions of it. If you just remove the lease term benefit but keep the Weil impact, just trying to run some numbers on this, looks like it’s about 4%, 4.5%?

[Mark Lammas:]

You got it. I mean, your notes had it right. You are at 4% to 4.5%, it’s like basically 400 quarter.

[Nick Yulico:]

Okay great.

[Mark Lammas:]

By the way, if you want to just see it in the other direction, in case you want to round out your scenarios here, if you take Weil, Gotshal out and leave Cisco in, it’s 11.2%.

[Nick Yulico:]

Okay, alright. Lot of different options. And then just going back to the lease-up portfolio and specifically the EOP assets, I guess, what I am wondering is, is part of – how much of this is due towards having some high lease expirations still in the portfolio versus sublease space being more competitive for what you are trying to – and then also what seems like it’s been demand maybe being a little bit less overall in the market, in the Valley this year than last year?

[Victor Coleman:]

Yes. Well, I mean – look, I mean, every asset, to some extent, tells its own story. So I think – and you can tell, I mean, they are spread out throughout the Peninsula and Silicon Valley. So there is really no one-size-fits-all explanation for what’s going on within that set of 8 assets. I can tell you, we steadily move the lease-up portfolio as a whole into stabilization. As you saw just from the last quarter, one of the assets that we are in last quarter has already moved in and it’s fair to expect that we will see more of that as the year unfolds. Just as a sort of – maybe it’s the most obvious indicator of that. When we bought the portfolio, we had 26 assets. Now, 4 of those have been sold. 17 of them were lease-up assets. We are now down to 8. Palo Alto Square saw a recent expiration. But suffice to say, with reasonable downtime and buildup, that one is going to go move to stabilization pretty quickly. Other assets will continue to chip away at. So we have made steady inroads on Metro Center. If you recall, that asset has the largest pockets of vacancy in it. That’s where Sony was housed. They vacated prior to buying the portfolio. We have undertaken a VSP program. That’s had some very positive impact. That will steadily improve. Likewise, Gateway Center has really only just seen the benefits of a fairly sizable reposition plan. We are seeing good absorption there. And in fact, we are ahead of our original underwriting in terms of occupancy there. And we could go on and on about these, but little by little, we are going to – we expect to see these assets begin to not only improve in occupancy, but begin to spill into the stabilized portfolio.

[Nick Yulico:]

Okay, that’s helpful. Just last one, Victor, going back to Seattle and the arena possibility. I know you said there is not a ton you could say. But can you give us a feel for what could be the ultimate office and multifamily square footage opportunity that you are pursuing there?

[Victor Coleman:]

So Nick, right now, we are not at liberty to get into it, because its way early on and I understand the desire here. What we are doing is trying to expand the company’s footprint in our media and entertainment and ancillary field like we did with the studio businesses. And we are doing this at a venture and a partnership with the world’s leader in this who virtually never partnered with anybody. So the surrounding area, we will control. There will be office. There will be retail. There will be multifamily opportunities that we will control and nobody else will. Plus, the revenue stream in the arena alone and the structure around that will also be very enhancing to the company overall. And thirdly, it’s going to be an opportunity for us to do other things with AEG in other markets that are similar. But for us to get into the details at this time, it’s like you are asking me, we are bidding on an asset in San Francisco, what’s going to happen when you get the asset? And my response is, hey, we are bidding on it with others. And when we get it, we will let you guys know what the responses are. And you will have ample time and ample information to decipher it and how it’s positively affecting the company.

[Nick Yulico:]

Thanks, guys.

[Victor Coleman:]

You got it. Thank you.

[Operator:]

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

[Blaine Heck:]

Thanks. Good morning out there. Not to pile on, Victor, but I think some of the confusion with regard to the Valley involves the fact that a lot of the reports we are seeing and discussions we are having with brokers point to a softening market in the Valley, especially with regard to increasing sublease space. So, I guess, is it just that you think your portfolio can outperform the market or do you think the reports or perception of the report is too negative at this point?

[Victor Coleman:]

Listen, Blaine, I am not saying that we are going to – our portfolio is so good, we are going to outperform the market. I think we have a solid team on the ground and they have a directive that is going to be indicative of what they’ve done in the past. I mean, if you look at what we have done with Redwood, we have sold $360 million at a 15% profit relatively 12 months after we have owned those assets. We have leased a portfolio albeit it is not the same-store portfolio as it was, because those assets are sold from low 80s to basically to the 90s – to the high 80s or low 90s. We have increased NOI there 42% on a cash basis in the last – less than 2 years. We rolled over Qualcomm, which that the market perceived us to lose those guys. We rolled them over early at a 44% rent bump. We have executed 225,000 feet on our VSP plan. That’s going to be a 400,000 to 500,000 or 600,000 square foot plan. All of that takes time, energy and effort. Not to say that the market is indicative of how it runs by Hudson. I think the market is the market and Hudson does what we do best. And there will be assets that will perform better than others. I do think that the bencher around sublease space, the bencher around the slowness in the Valley is more related to the quality of assets that are available versus the tenants that are available. These tenants are high commodity tenants who are looking for space in specific markets. When those markets aren’t available, they will look at other markets. Fortuitously for us, we have been fortunate enough that they come to our assets and I think the quality of our portfolio speaks for itself.

[Blaine Heck:]

Okay, that’s helpful. Shifting gears on the development pipeline, sorry if I missed this, but you guys have talked about hopefully breaking ground on a couple of projects early this year, including EPIC. So just wanted to clarify whether that is kind of fully entitled and ready to go at this point and get some commentary on when you expect to break ground there and any pre-leasing requirements to start?

[Victor Coleman:]

Sure. Well, EPIC is going to be approximately 300,000 feet. It’s a unique number in that it’s got some outdoor space that we are looking to evaluate currently today whether we are going to get rents on that space. So that number may move. It is fully entitled. It’s designed – I believe, we could break ground on that asset as early as August of this year. We have engaged in the same brokerage team who did ICON and CUE. They are fielding tours to our marketing suite, which is fully up and running right now on our Sunset Bronson lot that looks at that asset, where we have had inquiries by multiple tenants for all or part. Answering your question if we are going to pre-lease it before you break ground, I can’t really state that at this time. I think we would like to. I do think that the perception between our project in Columbia and some of the other Hollywood projects that have been successful in the last several years on a pre-leasing basis is not the norm. LA is not typically a pre-leasing marketplace, but the large tenants are growing and there is a lot of interest in the media-related tenancy. And we are getting a ton of increase on long-term leases on the studios with the office and studio component. So I am not ruling out a pre-leasing component. I think it’s more going to be a temperature read as to how the market sits and what kind of leasing numbers our team can generate before we break ground. But my anticipation is by the beginning of next year, we will have started construction at the latest.

[Blaine Heck:]

Okay. Thanks, Victor.

[Victor Coleman:]

Thanks, Blaine.

[Operator:]

Our next question comes from the line of Vikram Malhotra from Morgan Stanley. Please proceed with your question.

[Nick Stelzner:]

Hi. This is Nick Stelzner filling in for Vikram. My question is, can you provide any color on your mark-to-market or occupancy expectations for the balance of the year?

[Mark Lammas:]

Well, I mean I would – I think we expect our in-service lease percentage to improve probably modestly by the end of the year. It’s already fairly high at 91.2%. But I don’t think we expect to see any significant change in that. And I would say that’s not going to be a result of any slowdown in leasing activity. It’s just that we have a fair amount of expiration that we, on the horizon, not the least of which is 470,000 feet that expires at the end of the year, right. So there is an inherent danger to pinpoint a number as of the moment in time because there is – of the expirations we have on the horizon here, there is – our two largest expirations happened on this last day of the year. So – but I do think you will see healthy activity and accounting for the fact that we will get those two sizable spaces back at the end of the year. I would expect the lease percentage to sort of stay more or less intact with the existing level. What’s the second question?

[Victor Coleman:]

Mark-to-market.

[Mark Lammas:]

Mark-to-market. Yes, I mean, you saw our current mark-to-market for the quarter. I think in light of the ‘17 – the composition of ‘17 lease expirations, the – that cash and GAAP number is probably pretty indicative of what we will see for the balance of the year. I mean, our bigger expirations, as I mentioned, going into the year happened in San Francisco. One of them has been backfilled with AIG. The other one is BofA. At the end of the year, we will see what we can do during the year to get ahead of that expiration. That could be a very significant mark-to-market. But I think every quarter is going to be a reflection of what the actual expirations in that particular quarter are – quarter is. But over the year, I think you will see something along the lines of that kind of 40%-ish mark to market in cash.

[Nick Stelzner:]

Great, that’s helpful. And then just one other question, I know you disclosed on the Hollywood Studio acquisition, but could you talk about what other investment opportunities you are seeing in the markets there?

[Victor Coleman:]

Yes. Listen, the stuff that we are looking at, it’s been the same to same sort of process, as I think we have been successful in the past. Off-market deals lead the way for us. There is a lot less of them that we are looking at right now. And the stuff that we are looking at, that is packaged bid stuff. We bid on a couple of deals that we lost. We are looking at a couple now that we are in the process of evaluating that will be in the middle of. And I think it’s a steady flow. I think if you look in LA, there is a lot less product in LA than there is in Seattle on a pro rata basis. And so those are the two markets that we said we are going to focus a lot of attention on. And so I think we are going to execute in both those markets, but maybe more in the LA market – Seattle marketplace than the LA marketplace from what just is sort of on the surface. The Bay Area, I don’t see a ton of stuff that’s of interest to us right now. There is a couple of deals that are going to be announced that we were in the mix in, but we are not going to be the successful bidders on.

[Nick Stelzner:]

Great, that’s helpful. Thank you for taking the questions.

[Victor Coleman:]

You’re welcome.

[Operator:]

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

[Dave Rodgers:]

Yes. Hey Victor, I wanted to ask about the acquisition you just closed at Hollywood Center, I know you have got a couple of development parcels there, so following-up on an earlier question, I know one of those is entitled, one isn’t, what’s the demand that you are seeing for that and is there any lockup on any of the studio space that would inhibit that from moving forward pretty quickly?

[Victor Coleman:]

Yes. Absolutely Dave, so first of all, it’s now – the name is now Sunset Las Palmas. So it falls in the Sunset family in the media portfolio of Hudson. And so we are re-branding it right now as we speak, new signage and the likes of that. We closed just on Monday. Our team is on the ground and in place and the efficiencies are already kicking in. We have seen a tremendous upswing in interest. I can get Bill sitting here. He can sort of give a quick snapshot as to what he is seeing in terms of the tenant issues today, there is really no tenant in place that we can’t get rid of in a very expeditious time. Preponderance of them are 30 day notices and Bill has had a number of conversations with extending and blending some of those guys and then bringing new guys in. So I will let him jump in on that. But before he does that, we are entitled for 100,000 feet. We are entitled for 300 parking spots roughly. And we have got an additional 400,000 to 500,000 feet that we could build. We have not even started the master planning around that 300,000 to 400,000. There are some outlying parcels that we are entertaining that’s going to sort of match out. But the demand is high. Bill, why don’t you just jump into that?

[Bill Humphrey:]

Yes. So as Victor said, we are going to be converting the short-term leases at Sunset Las Palmas to longer term leases. Our objective is to really look for multistage, multi-year deals similar to the type of deal we did with Netflix last year. We have a pipeline right now of both traditional networks like ABC and CBS, branded networks like Amazon and – I mean, brand networks like HBO and Comedy Central, MTV and VH1 and streaming networks like Amazon and that who are interested in basically a combination of office and stages for us right now. And we are in the middle right now of actually negotiating. I can’t go into details, some rather large deals at Las Palmas from our pipeline.

[Dave Rodgers:]

Great. And then maybe one last for me, Victor or for Art, could you talk a little bit about the activity you are seeing at Fourth & Traction, I think that’s just coming up on completion now?

[Arthur Suazo:]

Yes. So we are seeing – we have definitely seen an up-tick in activity. We are negotiating on a preponderance of the space in the building with both retail and office users. And those office users are made up of – have been made up of not just entertainment and technology tenants, but consulting firms. And there is actually a law firm in the mix. So we are definitely feeling good about the activity right now.

[Dave Rodgers:]

Great. Thanks.

[Victor Coleman:]

Thanks Dave.

[Operator:]

Our next question comes from the line of Tom Catherwood from BTIG. Please proceed with your question.

[Tom Catherwood:]

Thank you. Just had a few cleanup questions here Mark, appreciated your commentary on the media and entertainment portfolio, same-store rolled down in the quarter, makes sense comping to a challenging 1Q ‘16, but if we look at the back end of the year, your midpoint of cash same-store guidance for the media and entertainment portfolio is 6.4%, which suggests a pretty strong ramp, is this kind of a recovery that’s going to kick in, in 2Q or is this kind of going to ramp throughout the rest of 2017?

[Mark Lammas:]

Yes. That’s typically the dynamic of the studios. That is to say we typically see second quarter tends to come in line with – fairly consistently year-over-year. Third quarter tends to ramp up, because that’s when production is really in full swing. And that carries over into the early part of the fourth quarter and doesn’t really starts to taper off again until the holiday season starts to slow production down again. And so yes, I think the first quarter is anomalous for the reasons we outlined, because it happened to have a really strong production quarter last year that just wasn’t replicatable. Netflix took some stage space. It wasn’t doing production in that they were getting – doing their movie in the first quarter. Those will subside. Those types of factors will subside. I think we will see a normalization into 2, 3 and 4. So yes, that’s why we’re confident that our same-store growth is higher than what you saw in the first quarter.

[Tom Catherwood:]

Got it, I appreciate that. And the last one for me, going back to Campus Center, obviously 470,000-plus square feet of office there now, it sounds like though, in the $24 a square foot you guys are allocating to the asset, you are only going to end up refreshing 100,000 square feet of the office, help me understand kind of what the allocation plan is there?

[Mark Lammas:]

Yes. No, that’s an all-in number. I mean that’s the reposition cost. We were trying to give you a TI or a commission number, right, that will fall on from whatever deal gets struck. Well, we wanted to give everyone was a clear understanding of what we need to do to bring the asset sort of back to kind of the quality it needs to be relative to the market to attract the tenants we are looking for. So that’s things like common area upgrades, exterior improvements, lobby improvements, various amenities that tenants in the marketplace are looking for. So think of that as sort of a base building reposition spend.

[Tom Catherwood:]

And I get that. I think that makes complete sense. What I was more focusing on is you also made the comment that it’s 100,000 square feet of…?

[Mark Lammas:]

That’s – we are going to target, sorry about that. We are going to target some of the space for – like VSP, so it’s move-in-ready space. So part of that spend is just to get 100,000 feet of it kind of ready to go as pre-spend. There might be some incremental spend even on that 100,000 feet depending on what incremental TIs need to be done. But yes, that’s to enhance some of that space, so it’s more move-in ready.

[Tom Catherwood:]

Got it, that makes sense. That’s it for me. Thanks guys.

[Victor Coleman:]

Thank you, Tom.

[Operator:]

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

[Craig Mailman:]

Hi guys. Just Victor, earlier you had pointed out that regardless of what happens in Seattle, maybe there is some other stuff you could partner up with AEG on, I am just curious as you guys have always had this entertainment piece of the studios, just if you were to do other potential opportunities with AEG, how big would you want the non-office piece of the portfolio to get to?

[Victor Coleman:]

I mean listen, Craig, I don’t know. It’s going to be based on a deal by deal, return by return. I do think that if we have the opportunity, the numbers will prove themselves out to be a unique and a market share position for our standpoint. We are not going to enter into a transaction with a partner lightly. So we cherish the opportunity and we will see what transpires in this one and then potentially what it will lead down the road to others.

[Craig Mailman:]

How far out of your kind of West Coast focus would you guys go for opportunities in this segment, the entertainment piece?

[Victor Coleman:]

I think right now our focus is West Coast.

[Craig Mailman:]

And then just Mark lastly, a follow-up on Cisco, so you guys have some TIs built into the 100,000 of pre-build. So as we think about it, we still only have about – if we wanted the big TIs on to the $11.5 million, it should only be on that 300 – whatever 300,000 and change square feet remaining?

[Mark Lammas:]

Yes. I think that’s fair as a modeling assumption.

[Craig Mailman:]

Great. Thanks, guys.

[Mark Lammas:]

Thank you, Tom.

[Operator:]

There are no further questions in the queue. I’d like to hand the call back over to management for closing comments.

[Victor Coleman:]

Thank you so much for the participation and support of Hudson. We look forward to talking to you all next quarter. Have a good day.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.