Hudson Pacific Properties, Inc.
Q2 2013 Earnings Call Transcript
Published:
- Operator:
- Greetings, and welcome to the Hudson Pacific Properties Second Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kay Tidwell, Executive Vice President and General Counsel. Thank you. Ms. Tidwell, you may begin.
- Kay L. Tidwell:
- Good afternoon, everyone, and welcome to Hudson Pacific Properties Second Quarter 2013 Earnings Conference Call. With us today are the company's Chairman and Chief Executive Officer, Victor Coleman; and Chief Financial Officer, Mark Lammas. Howard Stern, the company's President, is also available to answer questions. 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, August 5, 2013, and Hudson Pacific does not intend and undertakes no duty to update future events or circumstances. In addition, certain of the financial information presented on this call represents non-GAAP financial measures. The company's earnings release, which was released this afternoon 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?
- Victor J. Coleman:
- Thank you, Kay, and welcome, everyone, to our second quarter 2013 conference call. The second quarter was an extremely active period for Hudson Pacific Properties highlighted by key strategic acquisitions, the recycling of capital with the disposition of the City Plaza property and a healthy leasing activity in our core markets. During the quarter, we made significant progress on our strategic growth strategy with the acquisition of a 4-building 836,000 square foot office portfolio in Seattle, which we closed on July 31. We also completed the acquisition of 3401 Exposition Boulevard, a 65,000-square foot redevelopment project located in Santa Monica. And finally, our joint venture with M. David Paul/Worthe completed the acquisition of Pinnacle II in Burbank California. Located in markets that are among the strongest in the country, these properties fit squarely in our strategy of building a high-quality portfolio with an emphasis on catering to media, new media and technology tenants. We announced the pending acquisition of the Seattle office portfolio in early July, which we purchased from Spear Street Capital in an off-market transaction for approximately $368.6 million. This best-in-class portfolio provides us immediate critical mass in the region. With almost 80% of the net rentable square footage located in the South Lake Union and Pioneer Square areas, the 2 premier submarkets in Downtown Seattle. This acquisition represents a unique opportunity for Hudson to gain entry into this exciting market. Included in the Seattle portfolio are 505 First Street and 83 King, which are ideally situated along the waterfront and Pioneer Square. This 2-building, 472,000 square foot property combines a historic brick and timber building with a newly constructed creative office building. Originally renovated and developed by Starbucks, the property is currently 90% leased to high-quality tenants, including Capital One/ING Direct, EMC and Nuance. A third property called Met Park North is located in the South Lake Union, the tightest submarket in Downtown Seattle, with a Class-A vacancy of approximately 2.4%. The property contains 189,000 square feet and is approximately 99% leased, with Amazon leasing 74% of the building through 2023. Rounding out the portfolio is Northview Center located in Seattle's Lynnwood submarket. Considered the premier office building in this submarket, the property contains 174,000 square feet and is 89% leased to high credit tenants such as ADP and FEMA. Seattle has long been a target market for Hudson. The region's underlying economic fundamentals are among the best in the nation, rivaling those of our 2 other core markets, San Francisco and West Los Angeles. According to Colliers International, Seattle's Class-A office vacancy has witnessed 4 consecutive years of net absorption and rental growth, with vacancy currently at 13.6% and Class-A asking rents up 3% year-to-date to $31.73 per square foot. These trends in this portfolio hold all the ingredients for this acquisition to be a strong addition to our existing portfolio. First, this provides us with an opportunity to acquire portfolio of best-in-class assets at a basis below replacement cost and a substantial discount on a price per square foot basis toward similar trades that have recently been executed in the market. Strong portfolio occupancy to high-quality tenants provide stable cash flow over the near term. Importantly, overall portfolio rents are approximately 16% below market and 25% below market at First & King, allowing for NOI growth as leases expire. And finally, there are select value-add opportunities within the portfolio that enable Hudson to create additional long-term value through active management and our strengths in leasing operations in redevelopment/repositioning. On May 22, 2013, we completed the acquisition of 3401 Exposition Boulevard in Santa Monica, California for $24.7 million. Situated at the corner of Exposition Boulevard and Centinela Avenue, in the heart of the Olympic Media Corridor, 3401 is expected to consist of up to approximately 65,000 square feet of state-of-the-art creative office space upon completion of a full base-building renovation, scheduled to be finished by the fourth quarter of this year. With exposed brick and timber, operable window, skylights, a roof deck and easy access to the 10 Freeway and the new Expo Light Rail currently under construction on Exposition Boulevard, the remodeled 3401 Exposition is ideal for tenants seeking creative office space in the competitive Santa Monica submarket. And finally, during the quarter, our joint venture with M. David Paul/Worthe completed the acquisition of Pinnacle II, a 232,000 square foot Class-A office property located in the heart of the Burbank Media District. As previously announced, late last year, we entered into a joint venture with M. David Paul/Worthe to acquire The Pinnacle, a 2-building, 626,000 square foot office property located in Burbank, California. The acquisition of the 394,000 square foot Pinnacle I building by the joint venture closed in the fourth quarter last year. With the M. David Paul/Worthe's contribution of Pinnacle II building to the joint venture, Hudson did not make a capital contribution, but the company's ownership interest in the JV was adjusted to reflect the M. David Paul/Worthe's contribution. As a result, our interest in the joint venture now stands at 65%, with the remaining 35% owned by M. David Paul/Worthe. With the closing of this transaction, the JV owns both buildings for a combined purchase price of $342 million and $0.5 million, subject to a $218 million of project financing. In addition to the aforementioned acquisitions, during the second quarter we also took advantage of an opportunity to sell our City Plaza property in Orange County for approximately $56 million. Proceeds from the disposition were used towards the acquisition of the Seattle portfolio pursuant to a like-kind exchange under the IRS tax code. Overall, we are pleased with the sales price and believe our recent success in leasing upped that property to stabilization significantly improved its market value. Now turning to our leasing activity. Strong momentum continued during the second quarter with significant leases signed in our key markets. In the second quarter, we executed 15 new and renewal leases at our properties, totaling 276,897 square feet. And as a result, our stabilized office portfolio reached 95.2%, up from 94.5% leased as of the end of the first quarter. Highlights of our second quarter leasing activity included the expansion and extension of our leases with the NFL Enterprises for 137,000 square feet at our 10900 and 10950 Washington properties in Southern California. NFL Enterprises is a major tenant at 10900 and 10950 Washington, where it occupies office space and 2 sound stages used exclusively to broadcast the NFL Network. Under the new lease terms, NFL Enterprises increased its occupancy by an additional 22,000 square feet effective of July 2013, completely backfilling space occupied by another tenant that expired in June of 2013, and extended the lease term on the combined 137,000 square feet through the middle of 2017. Prior to these new lease terms, the NFL Enterprises occupied 115,000 square feet with the scheduled expiration of March 2015. Overall, the West Los Angeles office market saw stronger levels of activity compared to the rest of Los Angeles. Although many submarkets are fairly segmented in the recovery cycle, the areas with higher concentration of technology, entertainment and media companies fueled the submarkets that have led the recovery. In the second quarter of 2013, the West side experienced 150 basis point decrease in overall vacancy from the first quarter of 2013 rate of 16.1%. The market has seen landlords tightening concession packages and the increasing asking rates. If West Los Angeles continues to see large demand from users requesting the creative office environment as we anticipate, rental rates are projected to continue to increase in the remainder of '13 and into 2014. Another second quarter leasing highlight was a new lease at our 1455 Market Street property in San Francisco with Uber Technologies, Inc., a leading provider of affordable luxury transportation through an efficient technology-centered approach. The new 10-year, 88,000 square foot lease encompasses the entire fourth floor of 1455 Market and backfills space currently occupied by the property's largest tenant that was scheduled to expire in 2017. Commencement of the lease with Uber is scheduled for the first quarter of 2014. San Francisco market fundamentals remain compelling for landlords like Hudson. According to CBRE, the market-wide vacancy of 8.5% is at its lowest point since the fourth quarter of 2007 on the heels of yet another positive quarter of net absorption. Net absorption for the quarter was a healthy 193,000 square feet, representing a 20 basis point drop in vacancy from the previous quarter and a year-over-year drop of 120 basis points. It should come as no surprise as vacancy has fallen to such a low point after 2.5 years of positive net absorption and strong demand driven by the high-tech industries. The South of Market submarket, home to several Hudson properties and preferred destination for technology tenants has the lowest vacancy rate in the market at 4.4%. In addition to market rate -- asking rates climbing by 2.4% during the second quarter and year-over-year growth has been a strong 18.1%. This increase in rental rates has been largely fueled by a reduction of available space in the market as high-tech tenants continued to expand their footprint across the city. The asking rate for CBD Class-A space climbed 1.7% over the quarter to $55.23, essentially matching the market-wide Class-A asking rate of $55.24. Since the low point of the first quarter of 2010, average asking rents for all classes of space have increased an astounding 71%. Allow me to finally briefly update you on the status of our media and entertainment properties. As expected, tenancy in production activity associated with the Showtime series Dexter curtailed toward the end of the second quarter with a conclusion of its successful run. Lower year-over-year second quarter operating results at our media and entertainment properties largely reflects this lease expiration. At present, our Sunset Gower property has 4 vacant stages. While we have several promising prospects for these available stages, we anticipate a temporary decrease in net income from operations in our media and entertainment segment on account of the current vacancy, with revenues expected to re-stabilize with the re-tenancy of these stages. And now I'm going to turn the call over to Mark Lammas, our CFO.
- Mark T. Lammas:
- Thank you, Victor. Funds from operations excluding specified items for the 3 months ended June 30, 2013, totaled $13.9 million or $0.24 per diluted share compared to FFO, excluding specified items, of $9.5 million or $0.22 per share a year ago. The specified items for the second quarter of 2013 consisted of expenses associated with the acquisition of the Pinnacle II building in Burbank of $500,000 or $0.01 per diluted share. Specified items for the second quarter of 2012 consisted of expenses associated with the acquisitions of 901 Market Street in San Francisco and 10900 Washington Boulevard in West Los Angeles of $300,000 or $0.01 per diluted share, and a onetime supplemental property tax expense of $900,000 or $0.02 per diluted share. FFO, including the specified items, totaled $13.4 million or $0.23 per diluted share for the 3 months ended June 30, 2013, compared to $8.2 million or $0.19 per share a year ago. Net loss attributable to common shareholders was $6.2 million or $0.11 per diluted share for the 3 months ended June 30, 2013, compared to net loss of $5.2 million or $0.13 per diluted share in the same period a year ago. Turning to our combined operating results. For the second quarter of 2013, total revenue from continuing operations increased 21.2% to $47.4 million from $39.1 million a year ago. Total operating expenses from continuing operations increased 9.2% to $40.1 million from $36.7 million for the same quarter a year ago. As a result, income from operations increased 204.1% to $7.3 million for the second quarter of 2013 compared to income from operations of $2.4 million for the same quarter a year ago. I will discuss the primary reasons for the increases in total revenue and total operating expenses in connection with our segment operating results. Interest expense during the second quarter increased 25.9% to $5.8 million compared to interest expense of $4.6 million for the same quarter a year ago. At June 30, 2013, the company had $637.1 million of notes payable compared to $582.1 million as of December 31, 2012, and $350.3 million at June 30, 2012. During the quarter, the company entered into an agreement to sell City Plaza property in Orange, California, for approximately $56 million before certain credits, prorations and closing costs. Accordingly, the City Plaza property has been reclassified as held for sale and its financial results are accounted for as discontinued operations in the 2013 second quarter and 6-month financial statements. The City Plaza property was acquired by one of the entities comprising the company's predecessor in August of 2008. It was contributed to the company upon the consummation of our initial public offering on June 29, 2010, at the predecessor entity's historical cost. As a result, the approximately $5.4 million of impairment in the 2013 second quarter and 6-month financial statements reflects the estimated loss on sale based on the historical cost basis of this property, rather than its value as of the company's initial public offering. The disposition of City Plaza property closed on July 12, 2013. Proceeds from the disposition were used towards the acquisition of the Seattle portfolio pursuant to a life-kind exchange under Internal Revenue Code Section 1031. Turning to our results by segment. Total revenue from continuing operations at our office property segment increased 29.6% to $37.7 million from $29.1 million in the second quarter of 2012. The increase was primarily the result of an $8.1 million increase in rental revenue to $29.3 million and a $700,000 increase in parking and other revenue to $3.1 million, largely resulting from a full quarter of operating results from the 901 Market property acquired on June 1, 2012, and the acquisitions of the Pinnacle I and Pinnacle II buildings on November 8, 2012 and June 14, 2013, respectively. Operating expenses from continuing operations in our office property segment increased 7.8% to $14.1 million from $13.1 million for the same quarter a year ago. The increase was primarily the result of the office property acquisitions described earlier. This increase in operating expenses also reflects a supplemental property tax expense associated with our Technicolor property, which occurred in the 3 months ended June 30, 2012, of approximately $900,000. If the supplemental property tax expense is disregarded, then operating expenses from continuing operations at the company's office properties would have increased by $1.9 million, or 16% over the same quarter a year ago. At June 30, 2013, our stabilized office portfolio was 95.2% leased. During the quarter, the company executed 15 new and renewal leases totaling 276,897 square feet. Total revenue at our media and entertainment properties decreased 3.3% to $9.6 million from $10 million for the same quarter a year ago. The decrease was primarily the result of a $400,000 decrease in rental revenue to $5.4 million, resulting from lower occupancy over the second quarter of 2013 compared to the same quarter a year ago, which was partially offset by a $100,000 increase in other revenue to $200,000, resulting from our acquisition of the Ocean Way recording studio equipment at our Sunset Gower media and entertainment property in January 2013. Total media and entertainment expenses increased 2.2% to $6.4 million from $6.3 million for the same quarter a year ago, primarily resulting from expenses associated with the Ocean Way recording studio, with no comparable expenses compared to the same quarter a year ago. As of June 30, 2013, the trailing 12-month occupancy for the company's media and entertainment portfolio increased to 73.1% from 69.2% for the trailing 12-month period ended June 30, 2012. Turning to the balance sheet. At June 30, 2013, the company had total assets of $1.8 billion, including cash and cash equivalents of $96.3 million. At June 30, 2013, the company had total capacity of approximately $240.6 million on its unsecured credit facility, of which nothing had been drawn. During the quarter, we paid a quarterly dividend on our common stock of $0.125 per share, and we paid a quarterly dividend on our Series B Cumulative Preferred Stock equivalent to 8.375% per annum. Turning to our outlook. In light of the significant transaction activity in the second quarter, the company is revising its full year 2013 FFO guidance from its previously announced range of $0.90 to $0.94 per diluted share, excluding specified items, to a range of $0.91 to $0.95 per diluted share, excluding specified items. This guidance reflects the company's FFO for the second quarter ended June 30, 2013, of $0.24 per diluted share, excluding specified items. In addition, this guidance reflects the acquisitions, financings and leasing activity mentioned on this call and in today's earnings release, along with all previously announced acquisitions, financings and leasing activity. As is always the case, the company's guidance does not reflect or attempt to anticipate for any impact to FFO from speculative acquisitions. The full year 2013 FFO estimates reflect management's view of current and future market conditions, including assumptions with respect to rental rate, occupancy levels and the earnings impact of events referenced in this release, but otherwise exclude any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. Before turning the call back over to Victor, we would like to call your attention to several pages added to our latest supplemental report, detailing the leasing activity in the fourth quarter of 2012 and first and second quarters of 2013. As we've discussed on our previous calls, our company experienced an unusually high level of leasing activity over the previous 3 quarters. Over this time, we signed new and renewal leases totaling approximately 1.2 million square feet or nearly 30% of the total square footage in our stabilized office portfolio in 901 Market lease-up property. Many of these leases have been executed at considerably higher starting rents than corresponding expiring rents for that same space. However, since leases are typically signed several months in advance of their anticipated lease commencement dates and often entail a period of rent abatement, this high level of leasing activity has resulted in an increase in our lease percentage without an immediate corresponding increase in the economic lease percentage. As the executed leases commence and the rental abatement periods expire, we anticipate increases in the economic lease percentage and a corresponding increase in net operating income generated by the affected properties. In an effort to provide further insight into the impact this activity may have on the company's operating performance, management has determined the potential impact to annualized base rents stemming from the leasing activity detailed in the latest supplemental report as follows. As of June 30, 2013, the total annualized unabated base rents from the company's stabilized office portfolio and 901 Market lease-up property were $108.3 million. However, once the leases we have signed during the previous 3 quarters commence and begin to pay rent, the company expects to generate an incremental $18.2 million of annualized base rents as of June 30, 2015, representing an increase in annualized base rents from this leasing activity alone of 16.8%. For further reference, the expected increase in base rents is quantified based on the leases and leasing activity detailed presented on Pages 18, 19 and 20 of our Supplemental Report, exclusive of leases associated with our recently disposed City Plaza property. Also note that these estimates reflect the reduction in annualized base rents associated with the expiring leases identified in the leasing activity schedule, but do not reflect assumptions regarding future leasing activity. Furthermore, these estimates only reflect the stabilized office portfolio of 901 Market lease-up property. Contributions from our Element LA and 3401 Exposition Boulevard redevelopment properties, leasing activity with respect to available space in the company's stabilized office portfolio and 901 Market lease-up property and opportunities to roll expiring rents to higher market rents would contribute incremental revenue. Finally, these estimates do not include the contribution of the recently acquired Seattle portfolio. And now, I'll turn the call back to Victor for some final thoughts.
- Victor J. Coleman:
- Thank you, Mark. Our second quarter was highly productive marked by several key strategic acquisitions, the successful recycling of capital with the disposition of our City Plaza property and strong leasing activity in our core markets. As always, we appreciate your continued support of Hudson Pacific Properties, and now we look forward to updating you on our future progress again next quarter. Now, operator, we're going to turn the call over for questions.
- Operator:
- [Operator Instructions] Our first question is from Vance Edelson of Morgan Stanley.
- Vance H. Edelson:
- Remind us on Pinnacle II, which is already fully leased for the next 8 years, how the inherent value creation opportunity is going to manifest itself. Is it more a great asset at a good price? And you look forward to raising the rents in 2021? Or are there any opportunities before then?
- Victor J. Coleman:
- So no, Vance, it's a stabilized asset. It was part of the balance that we had announced last December when we were buying it, part stabilization of assets and part value-add. And that falls in the stabilization, high-quality asset, great price per pound in a marketplace that we see a lot of growth in. And as tenants roll, we expect the roll-up in rents and continued growth in that portfolio.
- Vance H. Edelson:
- Okay. That's great. And then on the acquisition pipeline, do you feel like you'll slow the pace some, given where cap rates are now and where interest rates might go? Or do you feel like there's a wealth of additional opportunities out there? And in which cities do you anticipate you'll be closing majority of deals over the next year or 2?
- Victor J. Coleman:
- So we're pretty active right now in value-add acquisitions since we've done the last 2 out of the 4 deals and the 2 largest ones have been more stabilized. So the value creation assets are the ones that we are focusing our energy on. The majority of stuff we are looking at right now that falls in that category is here in Los Angeles, but we do have some outlier nonmarket deals in San Francisco that we're actively pursuing as well.
- Vance H. Edelson:
- Okay. Great. And just one kind of housekeeping question, if I may. The tenant whose lease expired in June, allowing the NFL to expand in 10900 and 10950 Washington, that vacancy, which I guess is going to be pretty short-lived with the NFL expanding, does the vacancy show up in the June numbers as vacant, because the lease expired the last day of the month or does that never appear in the reported vacancy numbers?
- Mark T. Lammas:
- It's -- Vance, it's Mark. I think that vacancy is part of what was still considered expiring in the second quarter, right, because it expired in June, right, yes. So anyway, it's not -- if you look at the Q -- the quarterly expirations in the Supplemental, it will not be part of those numbers. The forward quarterly expirations.
- Operator:
- The next question is from Brendan Maiorana of Wells Fargo.
- Brendan Maiorana:
- Victor, so the Seattle acquisition, it seems like you've got it at a pretty reasonable price per pound, but it's a large acquisition and the yield seems low for what you guys have done in the fairly recent past for a portfolio that seems fairly stabilized. Can you kind of talk about maybe what the more near-term upside potential is to bring that yield from what I think is like a 5 on a cash today to maybe a more stabilized number over the next few years?
- Victor J. Coleman:
- Sure. Well, first of all we do have some vacancy. We actually have activity on basically 2/3 of the vacancy we have from existing tenants that are looking to expand. So right when we tied up the asset, we've got a couple of the existing tenants or out for proposals that we hope to expand, so we should get incremental increase on that. Secondarily, we have some near-term rents that are rolling, but as we commented in our prepared remarks when we first announced the deal, the majority of the roll really kicks in from '16 on and all the way to '22 and they're well below, in some instances, 25% below where current market conditions are today, which is why the yield going in is lower than what we would normally have done. The quality of tenant base and the amount of tenant improvement buildout for the tenants who are there, starting '16, we're pretty confident that they're either going to expand and stay or they're just going to stay because of the quality of the buildings and the uniqueness of the assets. So lastly, it's an asset that I think we spoke of in the past. For us to look to do an off-market asset for quality Class-A real estate, which is best-in-class in the area, is sort of our bailiwick. And if we can continually get those kind of deals and then be positioned to grow in a market place like Seattle where we have some follow on one-off assets, it's going to make a lot of sense and synergies are going to help enhance the value of the current portfolio.
- Brendan Maiorana:
- Is that -- that's helpful. Does that -- is that a market where you'd think that you'll allocate more resources to over time? And do you think you'd kind of set up an office? And how should we sort of think about the G&A impact of that as a new expansion market for you over time?
- Victor J. Coleman:
- So the easy answer is in terms of G&A growth and aspects, we're running -- the senior management is going to be running at San Francisco. Drew Gordon is going to oversee the growth there. He's going to be going back and forth. We only have operating offices up there which is property-related. It is a market that we are going to expand into, but we're not looking at any incremental G&A at this time other than maybe leasing-assisted on the ground leasing person that we've sort of allocated to the portfolio and growth going forward. We're seeing some pretty interesting deals in the same markets that we -- the Pioneer Square area, as well as in Bellevue, which is an area that we'd like to expand into as well. I think we will allocate some more investment dollars in that marketplace as we see fit for value creation deals.
- Brendan Maiorana:
- Okay. It's helpful. For Mark, the guidance only raised $0.01, maybe that was a little bit surprising to me, maybe we thought it would have been a little bit more. Can you just kind of go into what were the drivers of the guidance change? And was there anything beyond just the Seattle acquisition hitting that? And I guess 3401 Exposition hitting that?
- Mark T. Lammas:
- Yes. Well, importantly you'll recall we sold City Plaza, right? And we 1031 City Plaza into Seattle, and City Plaza was projected to contribute nearly $0.03 for the balance of the year. And so, it's off and let's say Seattle is contributing with the line of credit draw and the Met Park North loan that we closed on it was contributing somewhere slightly north of $0.05. So there was about a net $0.02 gain for the balance of the year there. That's going to, we think, by 2014, that contribution by Seattle is going to be considerably bigger than what the net effect of City Plaza was. It could be as high as a net impact, again, with the same debt assumptions on it, closer to say $0.14 for the full year. But in any event, I think so we're kind of riding between either $0.01 or $0.02 adjustment. And we were looking at what we thought where the studios may be for the balance of the year and it seemed like rather than sort of tip over to that $0.02 midpoint adjustment, we went to -- we did a $0.01 adjustment at the midpoint.
- Brendan Maiorana:
- Sure. All right, just last one. Can you quantify how much the Dexter impact was on same-store for the media or what same-store would have been x Dexter on the studios?
- Mark T. Lammas:
- Well, you mean if you factored out how sort of the absence of it in the second quarter?
- Brendan Maiorana:
- Yes, exactly.
- Mark T. Lammas:
- I don't -- you really can't because there are so many other factors running through in any particular period, right? And also, even as, say, the production activity may be sort of waning there's still holding footage and so I mean -- I suppose, I didn't for purposes of this call, try to isolate a number. I think it would be pretty harrowing effort to do it anyway because there's so many other factors at play. So I don't know. I mean, maybe we can try to do it, and maybe in the next call, next quarterly call, maybe we could give you some indication on it.
- Operator:
- [Operator Instructions] The next question comes from Craig Mailman of KeyBanc Capital Markets.
- Craig Mailman:
- Victor, I just want to follow up on Seattle. It sounds like you want to put more dollars there. But just curious kind of how you think about the size of that portfolio over time and then sort of a percent of NOI?
- Victor J. Coleman:
- Craig, I don't think we really allocated it that way. It's 1 of our 3 core markets now, being Los Angeles and West Los Angeles and Hollywood specifically and then San Francisco and now Seattle. So I don't think we've really sat down and said with our acquisition team, "Hey, we're going to allocate x amount of dollars to Seattle." It's going to be on a deal by deal basis. But one key to the Seattle acquisition was the quality of assets, the enhancement to the overall portfolio that Hudson currently has. And then for our ability now to look at more one-off assets, which we would never have done in the Seattle marketplace that we saw over the last couple of years because we need sort of a critical mass. Now that we've got that foundation and some great assets in the portfolio, it will lead us to making some more clear decisions as to which assets fit and strategically fit going forward in the portfolio.
- Craig Mailman:
- Okay. And then from what you guys are seeing up there, is there any value-add type opportunities where you guys can get A+ returns or is a lot of it stabilized?
- Victor J. Coleman:
- No. The stuff we're looking at now are specifically value-add stuff and the return hurdle rates are going to be in excess of mid- to high-7s all the way up. And I think we're looking at a couple of specific deals that we think -- we've been earmarking and looking at prior to the Spear Street portfolio that we took down. But now that we've closed the deal, we're gaining a lot of reverse increase in the stuff we've been following.
- Craig Mailman:
- Okay. That's helpful. Then switching to Santa Monica, Exposition, just curious, the incremental dollars that you want to spend there, could you just remind us? And then any tenant activity at that site?
- Victor J. Coleman:
- Yes. So on the tenant activity, we've got -- fortuitously our leasing team is negotiating and transacting paper back and forth with a single-user, which is a credit tenant for the whole property, which should be just fantastic because we could come down to somewhere I think mid- to late third quarter with potentially going into leases if things go well. We've got several multi-tenant users that are interested, but I think if we can make a single tenant deal on that asset, it would be great. Approximately, the size of the single tenant and the kind of TIs and infrastructure that we're going to complete, the construction with, I think it's going to be around $11 million more additional is what my guys are telling me to be all-in in the asset.
- Craig Mailman:
- Okay. What are asking rents there?
- Victor J. Coleman:
- I mean, we're asking -- I think our phase rate right now is 3 50 triple net and my guess is, we'll probably do 3 25 to 3 50 [ph] triple net deal is sort of what we're looking at.
- Craig Mailman:
- Okay. And then just one last one, on Uber, saw reports that you're obviously looking to do another round of capital raising. Are there any expansion rights in the lease they signed or at least indication?
- Victor J. Coleman:
- So both they and Square have -- they have right options for vacant space that comes up and we've got something right now where we've -- I think I should check with Art, but he's gone to them or about to go to them to see if they want the space because we've got a tenant who's looking at some additional space right now. And they may or may not act upon it. It sounds as if they are going to be in an expansion mode and they knew that going in. We've been negotiating that deal really since late winter. And so, they've grown as the requirement has grown. And I think by the time they move in, in the first quarter of next year, they'll be in a position to take down more space. So have to get back to you on that if they're going to expand and what this other tenant does.
- Operator:
- The next question is a follow-up from Brendan Maiorana of Wells Fargo.
- Brendan Maiorana:
- So a couple of other ones. I don't know if this is Howard or Victor. NFL through 2017, is there any reason why there was a longer-term on that renewal and expansion as opposed to just 4 years?
- Victor J. Coleman:
- Well, it's interesting. We went back to them because it was sort of reversing great based upon the fact that the tenant was leaving. So the expansion of 22,000 feet and the fact that they are reviewing some of their existing space and taking on a new expansion space, we went back to them with a pretty aggressive deal. I think we went back to them with 5 years and we ended up on the 4. I'm pretty confident that the NFL, on the 4-year expansion, this is their home for that time frame and more. I think it was a great move on our part, because we got increasing rent, we got additional space. We're going to have the ability for us to also look at where they stand in 2 to 3 years from now and maybe increase this again. And most importantly, the economics on this deal, even though the rent was great, and it was incremental increase for us, the TI is very minimal on this deal.
- Brendan Maiorana:
- Okay, so maybe -- yes, maybe in a few years, it's a longer-term deal with longer-term fit out or something.
- Victor J. Coleman:
- Yes. I think the growth of the NFL has been so prevalent in our property here. I think they'd like to have the whole building is what our guys are telling us eventually. So as some of the expiration sort of filter out and they incrementally take more space, maybe we do a master -- new master lease for 7 to 10, once they get more space.
- Brendan Maiorana:
- Sure. And then I think Stan Tech is up, I think that's the fourth quarter and 901 Market, I think they've got around 43,000 or 44,000 square feet. What's the activity like there, too? I believe they are moving out or there's possibility they may be moving out, so backfill prospects for that building?
- Victor J. Coleman:
- Yes. Hang on. Art will jump in right here. He's sitting here to talk.
- Unknown Executive:
- Stan Tech will be -- they can't fill our rates and they're downsizing. They're going to be moving out at the end of the year. The activity -- we've had anything -- they're in 2 floors. We've had activity single floor and 2-floor activity probably 4 or 5 groups had walked through that would need the space Q2 '14.
- Brendan Maiorana:
- Okay. Great. Then last one, just maybe for Howard. The 4 vacant stages at Gower, what are the prospects like there for -- to find tenants to fill some of those stages?
- Howard S. Stern:
- Yes, Brendan. We're still actively pursuing perspective clients to take a more permanent series. We have been backfilling with sporadic commercials and some pilots and some shorter-term productions. But activity is good, and we continue to be aggressive in looking at different types of users.
- Operator:
- We have no further questions in queue at this time. I'd like to turn the floor back over to Mr. Coleman for any closing remarks.
- Victor J. Coleman:
- Thanks so much and I appreciate your support to Hudson Pacific, and we'll talk to you all if not before next quarter.
- Operator:
- Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Other Hudson Pacific Properties, Inc. earnings call transcripts:
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- Q2 (2023) HPP earnings call transcript
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- Q4 (2022) HPP earnings call transcript
- Q3 (2022) HPP earnings call transcript
- Q2 (2022) HPP earnings call transcript
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- Q4 (2021) HPP earnings call transcript