Hudson Pacific Properties, Inc.
Q3 2013 Earnings Call Transcript

Published: 5 Nov 2013

[Operator:]

Greetings and welcome to the Hudson Pacific Properties Third 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' Third 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, November 4, 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 in 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 third quarter 2013 conference call. This past quarter was another important chapter in the growth of our company. I'm very pleased that during the third quarter we successfully closed our previously announced acquisition of the approximate 836,000 square foot office portfolio in Seattle. As I mentioned on our last call, this high-quality portfolio gives us meaningful presence in the region, with a significant foothold in the top submarkets in Downtown Seattle. Also during the quarter, we completed the previously announced disposition of our City Plaza property and used the proceeds from the disposition towards the acquisition of the Seattle portfolio pursuant to a like-kind exchange under the Internal Revenue Code Section 1031. Third quarter leasing activity remained active. In addition to the 43,122 square feet of new and renewal leases that we executed at our office properties during the quarter, we also successfully negotiated a 12-year lease with Deluxe Entertainment Services Inc., a leading provider of services and technology for the global digital media and entertainment industry, for our entire 63,400 square foot 3401 Exposition Boulevard property in Santa Monica, California. This lease was executed on October 22, 2013, a mere 5 months following our acquisition of this exceptional renovation property. As you may recall, we completed the acquisition of 3401 Exposition Boulevard during the second quarter for $24.7 million. Situated at the corner of Exposition Boulevard and Centinela Avenue in the heart of the Olympic Media Corridor, 3401 Exposition is currently undergoing a full base-building redevelopment. The structure has been stripped to its core framing and has been structurally reinforced. Significant upgrades include, new exterior facades, a new roof, and new mechanical and electrical systems. The renovation process is on schedule and on budget and is expected to be complete by the first quarter of '14. The Watt is expected to commence the tenant improvements within the next 60 to 90 days in time for an early third quarter 2014 lease commencement. In addition to our efforts at 3401 Exposition, the redevelopment of our Element LA project in West Los Angeles is on track to deliver one of Southern California's premier creative office campuses. Toward the end of the quarter, we successfully purchased a building immediately adjacent to our Element LA project, and with the addition of this fifth building, the 12-acre campus will now include approximately 285,000 square feet of creative office space, along with a 5-story, 830 stall parking garage. The building is located on Bundy Avenue, along with the parking structure, remaining on schedule to be completed during the second quarter of 2014, with the Olympic building scheduled to be completed during the third quarter of 2014. To date, we've had over 1 million square feet of tours from prospective tenants, which primarily consist of entertainment, media, technology and social media companies, the same industries that have been driving growth in the Los Angeles office market. Turning to our Sunset Bronson Studio development project, I'm pleased to report that we've achieved an important milestone during the quarter with the receipt of Planning Commission approval, without appeal, of our 14-story, 315,000 square foot office tower; a 5-story, 9,000 square foot production facility and a 9-level, 1,635 stall parking structure. We've commenced design drawings and other preconstruction efforts subject to pre-leasing, expected to be in position to commence construction as early as the fourth quarter of 2014. In terms of leasing trends in Los Angeles, we remain encouraged by improving conditions, particularly in West Los Angeles. Overall, the West LA office market saw stronger levels of activity compared to the rest of the market. In fact, the 2 largest leasing transactions were recorded in West Los Angeles and Santa Monica, with the third largest transaction in Burbank, all submarkets where Hudson has been focused its energy and investment strategies. Third quarter net absorption levels in Greater Los Angeles were strong, with 570,000 square feet of positive net absorption during the quarter, more than 75% of which was recorded in West Los Angeles. Overall asking rates in Greater LA also showed growth, improving 2.4% over the last 12 months, led by West Los Angeles, which improved by 4.8% over the same period. Although many submarkets are fairly segmented in the recovery cycle, the areas with higher concentration of technology, entertainment and media companies continue to fuel the submarkets that have led the recovery. These companies tend to prefer a more creative style of building. As West Los Angeles continues to see large demand from users requesting creative office environment, we expect that landlords such as Hudson will continue to have the ability to tighten concession packages and continue to increase asking rental rates. Turning now to San Francisco, the office market fundamentals remain very healthy, largely fueled by strong high-tech demand. Office gains in the third quarter outpaced the entire first half of the year, largely driven by pre-leasing on recent completed projects, which accounted for 420,000 of the 737,000 square feet of net absorption for the quarter. Year-to-date absorption through the third quarter totaled 1 million square feet. While much of this growth has been organic as tech companies citywide add jobs and expand their space requirements, there is also evidence that growth is increasingly being fueled by outside tenants moving into the marketplace. In the third quarter alone, over 400,000 square feet of space was leased by tenants from outside the market. As a result, even with 151,000 square feet of unreleased vacant space added to the market by the recently completed projects, the vacancy rate declined 30 basis points to 8.2% from last quarter's 8.5% vacancy rate. Rent growth over the third quarter also continued its upward march, growing at 3.5% rate over the last quarter, and year-to-date, rents have increased market-wide by more than 10% or $5.01 per square foot. With 500,000 square foot-plus tenants expected to lease in the fourth quarter, net absorption for '13 appears to be on pace for 1.3 million feet, comparable to that of last year. Allow me to briefly update you on the new construction in San Francisco's 7 projects totaling 2.3 million square feet that are currently under construction. Nearly 60% of the new construction has already been pre-leased. Approximately 1.5 million feet of this new construction is scheduled to be delivered in the first half of 2014, at which time, a significant slowdown in new deliveries is expected until at least the middle of 2015. Assuming demand remains healthy over this period, we expect that the lull in new deliveries will continue to support market conditions characterized by tightening availability and market-wide pressure on rents. Turning now to Seattle, boasting a 5.2% unemployment rate, 210 basis points below the national average, Seattle's diverse economy continues to outperform nearly every other major metropolitan marketplace. The most recent employment forecast from the Puget Sound Economic Forecaster calls for an employment growth of 2.8% in 2013, substantially outpacing the 1.6% national average. Employment growth is expected to continue an impressive 2.3% in 2014. In terms of trends in our submarkets, Class-A vacancy in the Pioneer Square/Waterfront submarket, where our First & King property is located, dropped by an astounding 45%, from 17.1% as of the end of the second quarter to 9.6% at the end of last quarter. Rents, likewise, improved nearly 6%, from $30.22 to $32.01. Similarly, the already tight Class-A vacancy in our the Lake Union market, where our Met Park North project is located, also witnessed an exceptional quarter, dropping 60% from 5% as of the end of the second quarter to 1.9% as of the end of the last quarter. Rent likewise improved 1.2%. Our supplemental report filed this afternoon includes a schedule of annual lease expirations as of the end of the quarter. As indicated in that schedule, 253,950 square feet or approximately 4.8% of our total office portfolio square footage is scheduled to expire by yearend. Nearly 70% of that space has been backfilled or renewed and another 10% is under a letter of intent or in negotiation, leaving less than 60,000 square feet or 1.1% of our total office portfolio square footage left to backfill or renew. If you recall, that heading into 2013, nearly 18% of our total office portfolio square footage was scheduled to expire this year, the vast majority of which we have now successfully backfilled or renewed. And looking ahead to '14, you'll note that only 131,374 square feet or approximately 2.5% of our total office portfolio square footage is scheduled to expire over the next calendar year and of that, we've already backfilled or renewed 25%. In short, our leasing efforts have either backfilled, renewed or result in a lease negotiations with respect to nearly 80% of the remaining 2013 expirations, with inroads on 2014 expirations already underway and in most instances, at considerably higher starting rates than corresponding expiring rents for the same space. Now let's turn to briefly update you on the status of our media and entertainment properties. And last quarter, we reported that our Sunset Gower property had 4 vacant stages, largely stemming from the conclusion of the Showtime series, Dexter, toward the end of the second quarter. We were cautiously optimistic at the end of -- at that time about quickly backfilling the available stages, but anticipated a temporary decrease in the net income from operations on account of that vacancy and related lull in the production activity. As expected, production activity over the third quarter slowed compared to the prior year. And that said, we also successfully backfilled most of our stages available over the quarter. And at present, we have 1 vacant stage at our Sunset Gower property with promising prospects for that stage currently. With that, I'm going to turn the call over to Mark our CFO.

[Mark T. Lammas:]

Thank you, Victor. Funds from operations, excluding specified items, for the 3 months ended September 30, 2013 totaled $14 million or $0.24 per diluted share, compared to FFO, excluding specified items, of $10.5 million or $0.21 per share a year ago. The specified items for the third quarter of 2013 consisted of expenses associated with the acquisition of our office portfolio in Seattle, Washington of $500,000 or $0.01 per diluted share. Specified items for the third quarter of 2012 consisted of expenses associated with the acquisition of the Element LA campus in West Los Angeles of $500,000 or $0.01 per diluted share. FFO, including the specified items, totaled $13.5 million or $0.23 per diluted share for the 3 months ended September 30, 2013, compared to $10.1 million or $0.20 per share a year ago. Net loss attributable to common shareholders was $5.7 million or $0.10 per diluted share for the 3 months ended September 30, 2013, compared to net loss of $3.4 million or $0.07 per diluted share for the same period a year ago. Turning our combined operating results. For the third quarter of 2013, total revenue from continuing operations increased 31.5% to $53.3 million from $40.6 million a year ago. Total operating expenses from continuing operations increased 33.7% to $48.2 million from $36 million for the same quarter a year ago. As a result, income from operations increased 14.1% to $5.2 million for the third quarter of 2013, compared to income from operations of $4.5 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 third quarter increased 62.2% to $7.3 million, compared to interest expense of $4.5 million for the same quarter a year ago. At September 30, 2013, the company had $891.2 million of notes payable compared to $582.1 million as of December 31, 2012, and $359.5 million at September 30, 2012. Turning to our results by segment. Total revenue from continuing operations in our office property segment increased 47.2% to $43.5 million from $29.6 million in the third quarter of 2012. The increase was primarily the result of an $11.5 million increase in rental revenue to $33.6 million, a $1.5 million increase in tenant recoveries to $6.5 million and a $900,000 increase in parking and other revenue to $3.4 million, largely resulting from the acquisitions of the Pinnacle I and II buildings by our joint venture with MDP/Worthe on November 8, 2012 and June 14, 2013, respectively, and our acquisition of the Seattle portfolio on July 31, 2013. Operating expenses from continuing operations in our office property segment increased 37.3% to $16.8 million from $12.2 million for the same quarter a year ago. The increase was primarily the result of the office property acquisitions I mentioned a moment ago. At September 30, 2013, our stabilized office portfolio was 95.5% leased. During the quarter, the company executed 8 new and renewal leases totaling 43,122 square feet. Total revenue at our media and entertainment properties decreased 10.7% to $9.8 million from $11 million for the same quarter a year ago. The decrease was primarily the result of a $1.3 million decrease in other property-related revenue to $3.2 million, largely resulting from lower production activity compared to the same quarter a year ago. Total media and entertainment expenses decreased 11.5% to $6.1 million from $6.9 million for the same quarter a year ago, primarily resulting from the lower production activity compared to the same quarter a year ago. At September 30, 2013, the trailing 12-month occupancy for the company's media and entertainment portfolio increased to 71.5% from 71% from the trailing 12-month period ended September 30, 2012. Turning to the balance sheet. At September 30, 2013, the company had total assets of $2.1 billion, including cash and cash equivalents of $29.3 million. At September 30, 2013, we had approximately $237.3 million of total capacity under our unsecured revolving credit facility, of which $80 million 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 3/8% per annum. In addition, we completed several important financing transactions during the quarter. In connection with the acquisition of the Seattle portfolio, on July 31, 2013, we closed a 7-year loan totaling $64.5 million, secured by out Met Park North property. The loan bears interest at a rate equal to 1-month LIBOR plus 155 basis points. The full loan is subject to an interest rate contract that swapped 1-month LIBOR to a fixed rate of 2.1644% through the loan's maturity on August 1, 2020. Proceeds from the loan were used towards the purchase of the Seattle portfolio. On August 14, 2013, we closed a 5-year loan totaling $95 million, secured by our First & King property. The loan bears interest at a rate equal to 1-month LIBOR plus 160 basis points. Proceeds from the loan were used towards the repayment of amounts drawn on our unsecured credit facility in connection with the Seattle portfolio acquisition. Finally, effective August 22, 2013, the terms of our loan secured by our Sunset Gower and Sunset Bronson media and entertainment properties were amended to increase the outstanding balance from $92 million to $97 million, reduce the interest rates from LIBOR plus 350 basis points to LIBOR plus 225 basis points and extend the maturity date from February 11, 2016 to February 11, 2018. The company is revising its full year 2013 FFO guidance from its previously announced range of $0.91 to $0.95 per diluted share, excluding specified items, to a revised range of $0.93 to $0.97 per diluted share, excluding specified items. The revised guidance reflects the company's FFO for the third quarter ended September 30, 2013 of $0.24 per diluted share, excluding specified items. Stronger-than-expected operating results on our media and entertainment properties and interest savings from the recent amendment to the loan secured by the media and entertainment properties largely account for this upward revision. In addition, this guidance reflects the acquisitions, financings and leasing activity referenced herein and all previously announced acquisitions, dispositions, financings and leasing activity. As is always the case, the company's guidance does not reflect or attempt to anticipate 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 rates, occupancy levels and the earnings impact of events referenced herein, but otherwise exclude any impact from future unannounced or speculative acquisitions, dispositions, debt financings or repayments, recapitalizations, capital market activity or similar matters. And now I'll turn the call back over to Victor.

[Victor J. Coleman:]

Thanks so much Mark. Our third quarter was highly productive, marked by the closing of key strategic acquisitions, the successful disposition and important progress on our redevelopment and development projects. We appreciate, as usual, your continued support of Hudson Pacific Properties, and we look forward to updating you on our progress again next quarter. Now operator, we will open the call for any questions.

[Operator:]

[Operator Instructions] Our first question is from Craig Mailman of KeyBanc Capital Markets.

[Craig Mailman:]

Victor, on the -- getting the kind of the public permits you guys need on the potential studio development, to get started in 4Q of '14, how much pre-leasing would you need? Are you talking to tenants? Kind of what do you guys envision there on potential spend?

[Victor J. Coleman:]

So Craig, thanks for calling in. We are fully entitled, and we have permits right now. We're going through working drawings. And after we announced that we were fully entitled, we received a lot of activity from tenants that are looking at the same sort of calendar timeframe where our occupancy can come into play. We've got 2 unsolicited tenants at 50,000 feet and greater that are looking right now. So I don't know if I have a specific number that says, we needed to be pre-leased at x, but 25% to 40% range for us to be pre-leased I think is what Mark and I have talked to you about. That's the comfort level right now.

[Mark T. Lammas:]

And then Craig, on the spend, we're right around $400 a foot before land or financing cost.

[Craig Mailman:]

Okay, what type of yield would you guys be looking at for this type of development?

[Victor J. Coleman:]

Stabilized yield is like an 8.5%.

[Craig Mailman:]

Okay. And then just moving over to Santa Monica. How did that lease come in relative to underwriting?

[Victor J. Coleman:]

So we achieved, I think it's about $0.10 or $0.15 a foot per month. I think we underwrote it at 3 15 [ph], and I think we did the deal at 3 35 [ph] , net. That's net.

[Craig Mailman:]

Okay. And then just lastly, I mean, you guys touched on, you guys are 95% leased or over that. You really don't have many expirations through '14, even a little bit beyond that. I mean your biggest year is going to be in 2017. Kind of what's the catalyst from here? What are you guys seeing in terms of value-add acquisitions that will give you just more product to lease?

[Victor J. Coleman:]

So we currently -- I mean, listen, as you well know, you've followed us since the beginning, we've sort of went like 60-40 stabilized to a value-add, then we sort of shifted to a 50-50 model on the acquisition of new assets, and now with, I think, our future development opportunities coming in late '14 development and then we have another project that were on the books for late '15, probably 12 months thereafter. Just stuff that we are looking at now, and that we're seeing the market is much more value-add since the portfolio is relatively stable, and we haven't brought it online yet, the development projects that we're currently working on or the value-add projects that we have in our ownership.

[Operator:]

The next question is from Brendan Maiorana of Wells Fargo.

[Brendan Maiorana:]

Victor or Howard, of the 1 million square feet of tours [ph] at Element LA, can you give us a sense of, maybe a little bit more of what the -- how likely it is that you get some tenant signed sometime over the next couple of quarters? And maybe what your view is for when that project is likely to stabilize.

[Victor J. Coleman:]

Well, we've got pretty stable activity right now in the portfolio in all our markets in general. But specifically to Element, we've got 3 tenants that are looking at substantially a fair amount of the space. And so we are pretty confident that our team is in conversations with multiple tenants right now, where we can lease up that asset. In terms of stabilization, this is a huge project. We'll be done with the parking structure first quarter, maybe late first quarter, early second quarter of '14. We'll be done with the majority of the capital improvement work on the Bundy stuff late second quarter of '14, and then the second building probably sometime around summer of '14. We could stabilize, my guess is, if the activity continues at the feverish rate that it is currently right now, early '15 fully stabilized. And I'm hopeful that we'll have a lot of lease negotiations sometime in the next several months.

[Brendan Maiorana:]

And do you feel good about the rent levels given -- and can we look at the 3401 deal as any kind of proxy for rents that you're likely to get at Element?

[Victor J. Coleman:]

So typically what we did is, we underwrote initially for Element. And this is still on per square foot per month, triple net number was $3.25. And I think we are talking about substantially higher than that, where the market has moved and the quality of the portfolio and the tenant mix that we're looking at there. And so I would not look to the 3801 (sic) [3401] deal as a benchmark. I think we're going to be higher than that.

[Brendan Maiorana:]

Okay. And then for Mark, the capital dropped off, the capital spend dropped off a lot this quarter. Is that more just a timing-related and can you kind of give us an update on, if we look to the major capital projects between 1455, 901, Rincon and maybe Element and 3401, kind of what's left to spend that you know you're going to spend on those projects?

[Mark T. Lammas:]

Yes, it's timing, right? I mean, it tends to come in a bit lumpy. On the spend for the balance of 2013, we have construction financing and other financings that lift a lot of this load, but right now the total net spend, including fourth quarter dividends, but with TIs and CapEx and everything, it's somewhere about $60 million for the balance of the year. I don't know if that will -- all of that will make it in before the end of the year, but that's what's budgeted and then for 2014, it tapers off quite a bit and it's closer to about $50 million for 2014.

[Operator:]

[Operator Instructions] Our next question is from Vance Edelson of Morgan Stanley.

[Vance H. Edelson:]

Back on the Deluxe lease, could you just walk us through the back and forth in negotiating when it came to lease duration versus the rate. Were you able to get a longer term by offering a lower rate? Or if you can't answer specifically for 1 tenant, maybe just tell us what the overall market environment is like in that regard? Is that the type of negotiation you're having? Or is pricing power such that you really don't have to give up much now?

[Victor J. Coleman:]

Vance, thanks for the question. This is Victor. So on that deal, we had multiple tenants looking at it. It's a very unique asset because it was -- we always marketed that asset as 100% occupied, single-tenant asset. It's a creative office to its fullest extent. As I mentioned in my prepared remarks, this is completely gutting the space and having an open indoor or outdoor space and full utilization. We didn't have to give up, as I mentioned earlier, rate. We pushed rate from our initial underwriting and up to $0.20 off what we started with. We got annual increases. We pushed term on this as well. This is a 12-year term. It was initially a 7-year term, and we pushed it to 12. We got increases across the way. The only thing that is still required for something like this is free rent. We did have to give up free rent, but the overall yield is substantially higher than when we initially underwrote it at. And I think the TIs are lower than what we initially looked at. I think our going-in yield is still much higher than we originally anticipated here. So I think I'm going off of memory, but you can -- Mark can verify this. I think it was like underwriting, somewhere, stabilized 7.25%, and I think we ended up getting an 8-plus on this thing.

[Mark T. Lammas:]

That's right.

[Victor J. Coleman:]

So it worked out to be a good deal in that form and function. And just in general, as I was saying, to have a single tenant asset in Santa Monica, the demand is pretty high in the tenant marketplace, for something like -- for somebody to control their own destiny. It's also right across the street from the light rail line, so the public transportation access is going to be phenomenal.

[Vance H. Edelson:]

Okay. That's very helpful color. And then maybe for Mark, what are you seeing most recently in terms of interest rates? You had the loan from Union Bank in late July at LIBOR plus 155 and a couple of weeks later with Wells Fargo, a little bit higher. What kind of rates do you think we'd be looking at today?

[Mark T. Lammas:]

Yes, so on a stable -- we saw the floating rate market really pickup sort of on the heels of rate volatility following March 20 -- May 21. And I mean, we're not actively pricing a loan right now, but I think on stabilized product, you could expect to see pricing right around that. For floating rate debt, right around that LIBOR 155 to 160. And obviously, the asset's set up differently, but that pricing probably still holds. I don't think that -- if anything, rates have come in a bit since we were last in the market looking at fixed-rate financing. So hard to say for sure, but the last fixed-rate financing we did came in just shy of 4%. I think if you were going to price a stabilized asset in the fixed-rate market, my guess is you'd be somewhere in the low-4s.

[Operator:]

And the next question is from Jamie Feldman of Bank of America Merrill Lynch.

[James C. Feldman:]

I was hoping you could talk about what you're seeing across the L.A. submarkets in terms of rent growth. I guess on a net effective basis, where are you seeing rents really start to move and where are they not moving so much?

[Victor J. Coleman:]

Well, I imagine -- first of all, so let's sort of take it -- it is sort of the haves and the have-nots. I mean, the marketplaces that my prepared remarks were sort of referring to or the sub stuff that we're in. And so we've seen overall rent growth. And you can take the quarter, right, Santa Monica, West LA, Brentwood, Westwood, Century City, Beverly Hills, West Hollywood, Hollywood. In that quarter, you've seen rent growth consistently quarter-over-quarter. And most recently, I mean, those markets have really supported and fueled the overall rent growth, which I think I referred to as like 2.4% over the last 12 months, but that's the greater area. Those markets you are seeing a much higher rent growth. And it's just indicative of the leases that we're doing and the activity that we're seeing on our space. That -- the lack of space that we currently have, of the space that we have that's vacant. I mean, it's 2.5% to 3% a quarter growth for at least the last 3 or 4 quarters and maybe even more so. So specific to those markets, if you go outside those marketplaces and you go to the West San Fernando Valley. You go to -- you go south even past Playa Vista, Culver City, all the way down to Orange County. You don't have that kind of rent growth. And you don't have that kind of activity and the vacancy factors have obviously being altered. So there is really the haves and the have-nots. I am optimistic of the tenant mix and the activity, and where we're seeing growth that we're going to continue to see that in these markets. And people who are looking to move realize that there's a lack of product. I mean, as you well know, the number of new startup commercial office sites for new sites even on the Westside, all the way through Hollywood is at all-time low. When you typically have a 2% to 4% of the product coming online, you got sub-1%. And we've had that, less than 0.5% for several years now. So I'm still pretty optimistic on the rent growth.

[James C. Feldman:]

Okay. And then I guess sticking with the supply story. How are you thinking about competitor supply in Hollywood? It seems like there's a lot going up. Where does your product fit in of what's leased and what you're thinking about building?

[Victor J. Coleman:]

I think our product's the best. I may have to say that, right? So I think our product relative to the marketplace, there's some pretty good projects out there. We're very optimistic of what we're seeing. We're very optimistic of what the market is out there in terms of the demand. The demands are very, very high. I do think that you got 2 other projects that are commercial, but most of the fact out there is residential that you're seeing. And that's where -- I mean, you drive out there. The number of cranes, it's almost exploding for residential development. It's got to be, per capita, the most cranes at anywhere else in the country where you're seeing that development and virtually all of it is residential with the exception of 2 other projects, ours and 2 others. So there is a lot of room in that marketplace. And there's a lot of tenant demand and expansion and primarily revolving around media and social media and entertainment.

[James C. Feldman:]

Okay. And then just thinking about Seattle, what's the acquisition pipeline look like there? And then how do you feel about your investment firepower today, just the capital you could put to work without having to raise any more?

[Victor J. Coleman:]

So listen, the Seattle marketplace, as I mentioned, is extremely strong right now and the activity and growth of some of the core companies in terms of ground job growth there is at an all-time high. The demand for the high-quality labor force is at an all-time high. I think we see some pretty interesting value-add market deals that are going to help mix in the portfolio in the specific areas we're looking at and help us look at those deals accretively throughout the portfolio. In terms of our powder and ability to acquire those kind of deals, those are average-size deals and I'm comfortable at the ability of our balance sheet and our credit facility that we can get a couple of these things done on a very comforting level. And I think we're seeing some pretty interesting opportunities. And the business plan that we set out at the beginning of this year is really coming to fruition.

[Operator:]

The next question is from Rich Anderson of BMO Capital Markets.

[Richard C. Anderson:]

So on Seattle, just to follow-up on that, what was the impact on guidance from the deal being that you bought it at a sub-5 lease initially, realizing there's upside, but what was the weight relative to the increasing guidance that you have announced today?

[Mark T. Lammas:]

Right. So we closed on it on July 31, and when you factor in the borrowing associated with it, the impact on full year 2013 guidance of just Seattle plus the debt associated was about $0.03. The -- just to be sort of complete about the explanation though Rich, we sold City Plaza, right, and deployed proceeds from City Plaza. So City Plaza accounted for about $0.02 before it was sold so the net impact of the Seattle acquisition on the full year guidance was about a net of $0.01 impact.

[Richard C. Anderson:]

$0.01 positive?

[Mark T. Lammas:]

Positive, yes.

[Richard C. Anderson:]

Positive?

[Mark T. Lammas:]

Positive, yes, right, because of the $0.03. Yes, because of the financing, right.

[Richard C. Anderson:]

And then, when you look at those 3 assets, if I were to pecking order them, I guess first in King, one; Met Park, two; and then the suburban asset, three. What is your interest level in building a portfolio in the Seattle suburbs?

[Victor J. Coleman:]

Right now, we're focused -- our intention is to primarily focus on your pecking order 1 and 2.

[Richard C. Anderson:]

Is that something that you turn around and sell, I guess, right?

[Victor J. Coleman:]

You mean the third asset?

[Richard C. Anderson:]

Yes, the Northview Center.

[Victor J. Coleman:]

I mean, yes, we would entertain selling that probably I think after a stabilized hold of 24 months.

[Richard C. Anderson:]

Right. This is pre [indiscernible] guideline [ph] , I guess right?

[Victor J. Coleman:]

Correct, yes.

[Richard C. Anderson:]

In terms of San Francisco, would you say now that the kind of the special investing opportunity is almost entirely gone there?

[Victor J. Coleman:]

No, I don't think so. Listen, I think the office market fundamentals are still relatively very healthy and the strong tenant demand. As I mentioned, I mean there's a series of large tenants out there looking to find a home. I do think that the number of deals we've seen has gone down, but a lot of that marketplace has traded hands in the last 2 to 4 years, so to speak. So those guys aren't going to necessarily sell those assets. I think we're still seeing though, Rich, at the end of the day, some pretty interesting assets. And I think you've got to be very disciplined in your ability to buy those assets. The opportunities are nowhere near where they were, but I still think we're going to be active there.

[Richard C. Anderson:]

Okay. And then just on guidance, you mentioned media entertainment's outperformance was a component to that. Yet, you had the whole Dexter thing. Is that more or less just a reversal of a conservative expectation you had going into the quarter.

[Mark T. Lammas:]

I don't think that's an unfair way of looking at it. We did reset guidance on after the Seattle deal and looked at where we thought media was going to perform for the balance of the year. And our revised guidance reflects what is basically a $0.01 better performance for Q3 than we had forecasted for that quarter. And I don't know that you would say it's conservative. It's rather that we did the best we can to forecast absorption of the stages and we did really well on those stage absorption.

[Victor J. Coleman:]

And just one more note because I concur with Mark, except you have to remember, it was nonseasonal when they left. They extended beyond the season timeframe, therefore, the gap was a non-nominal season where we didn't have access to the shows and the flow of shows that typically come in spring, which is normal. They left later. And so as a result of that, we didn't know we could have that kind of activity and it was just a pleasant surprise.

[Richard C. Anderson:]

And then my last question, Victor, a lot of occupancy up, market rent's up, good leasing statistics as you often report, but where do you think the bottom 10% -- 5% or 10% of the portfolio is today? And where you might be looking now that City Plaza is gone? You might be looking to trim or maybe you're not in the market to be a big time seller at this point.

[Victor J. Coleman:]

I mean, listen, I think as you know our portfolio relatively well, the fortunate thing about our current portfolio is that we have -- our roll up is substantially in almost every single asset in the portfolio. So at least it's roll. Even though we have a little amount of leasing to do, they're all rolling up. And so I don't think there's anything glaring in the portfolio that we're going to sort of trim at the end of the day. I mean, maybe if we were to look at an asset that you were sort of holding my feet to the fire a little bit, I'd say, San Diego, because that asset has stabilized. I'm not so sure we can get a lot more juice out of that at the end of the day. But I don't think there's anything really standing in the portfolio that says, hey, we got to trim it for us to take advantage of where the market is. There's still a lot more juice in the existing portfolio on a roll up basis. And so we're pretty comfortable with the way we've sort of outlined the portfolio as it sits.

[Operator:]

We have no further questions in the queue at this time. I'd like to turn the call over to Mr. Coleman for closing remarks.

[Victor J. Coleman:]

Great. Thank you so much for participating this quarter. And we look forward to chatting with you all again next quarter. Have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.